As we approach the end of the year, there are a series of events that many college-bound students and their parents will be facing. This can be a very stressful time for many, and the best college decision needs to include a proper analysis of academic programs, campus environment, and financial aid.
Over the past few years, the increased cost of college has made the issue of college affordability a growing concern for many families. At the same time, paying for an education has become more complex. It is one of the most complicated financial decisions parents and students will make in their lifetime.
To lower a family’s cost of education, you need to bring together the financial aid process, merit aid opportunities, college saving plans, education tax strategies, various financing options, and student loan repayment. Due to increased complexity, college financial aid offices are legally unable to answer some of the questions a family may have about maximizing their financial resources, but here are a few strategies that may help you avoid costly mistakes and make college more affordable.
Thinking beyond the EFC
The Expected Family Contribution (EFC) is an important number for creating a college funding strategy. Many parents forfeit other cost-saving opportunities because they don’t understand the details of their EFC, but a broader financial view will help them identify other college saving opportunities that would contradict the normal EFC theories. For example, taking all the assets out of the child’s name is not always a good recommendation. Depending on the parent’s part of the EFC calculation and the cost of each school, a family may not want to liquidate the student’s assets. If the parent’s part of the EFC calculation is higher than the cost of the college, removing the asset will have a zero impact on their financial aid position. This decision has both legal and tax consequences, and parents need to plan for the liquidation since it is legally the child’s money.
Timing is critical
The school’s financial deadlines are important, but there are three major timing issues in the college affordability process: financial aid positioning, family timeline, and FAFSA submission.
When the school year and tax year do not match, it can be a very confusing issue for many families going through the financial aid planning process. The best time to review a family’s financial aid position is when the student is in his or her second semester sophomore year and first semester junior year. This is the last tax year before the financial information is used to complete the FAFSA.
If the family has multiple children, the college affordability issues can be more important. By creating a family timeline, you can see how having multiple children in college will affect your financial aid position. By matching this with the various colleges’ gifting policies, a more expensive college may become affordable due to the change in a student’s financial need. This is another reason to create a four-year plan. Properly planning for the financial outcome of the education is often overlooked in the college planning and decision process.
The last timing concern is the FAFSA submission process. With the new FAFSA/IRS verification process, colleges are able to verify financial information much more easily. By late February, entering freshman and transfer students should try to have a final FAFSA submitted with actual tax information. This minimizes the family’s risk of the financial award letter changing after the verification process. Parents should be aware of this risk early on so that they can properly plan for the FAFSA submission.
For families where there is a divorce or separation, having the student on the correct tax return is important. The student should be on the tax return of the parent who is submitting the financial aid forms. Now that FAFSA form and the IRS information are linked, colleges are better equipped to find inconsistencies in the financial aid forms. It is also important for the parents to have different addresses if they are separated or divorced.
There’s still an area of uncertainty for non-traditional families. Since the financial aid process is highly dependent on the IRS system, financial aid submission will vary based on the state such families live in.
Maximizing a family’s resources
The increased cost of education has created a need for a variety of financial strategies that can help families find better ways to pay for college. These strategies vary by family and depend on their financial strength and the colleges the student is considering. For middle- and upper-income families, these strategies can generate the most benefit since they are expected to pay the most for college.
Proper planning with the use of tax strategies, college savings plans, and various financing options can save families thousands of dollars per year. These strategies are relatively new due to the changes in the tax code and investment options. It's just a matter of finding the proper financial advice.
Maximizing a family’s resources requires an understanding of the financial aid process and other personal college funding strategies. Mr. Amrein’s website, College Affordability.com, has more than 50 free videos that may help you through this process.