One of the worst fears for middle-class parents is making too much money to qualify for meaningful college financial aid, yet not having enough disposable income to avoid loans.
That anxiety bedevils American families particularly at this time of year, but you should know several things about the aid process that could put your mind at ease.
As the Federal Application for Student Aid (FAFSA) filing season began Oct. 1, you still have time to piece together a picture of your family’s finances to gauge your chances of getting aid.
While it helps to obtain-- your actual cost after all discounts, grants and scholarships are applied -- you shouldn’t worry about several things when applying for aid.
College financial aid is not a “what you see is what you get proposition.” You could have plenty of wealth on paper, but it may not affect your chances for aid.
Let’s walk through what the FAFSA asks you for and what really matters.
Other than basic information about the student and family, dependency status is important. A student living independently or with a single parent may get treated much more favorably than one residing in a two-parent, double-income household.
The size of the household and number of students in college simultaneously is also critically important. Having a large family or three siblings in college will increase chances for aid.
I know one family that’s going to be sending triplets to college next year. I think they’ll get a generous aid package.
What the FAFSA birddogs most is income or assets in a student’s name. If a student has trusts set up or receives large cash payments from relatives prior to attending school, that will diminish the amount of aid in most cases.
The good news for families is that the FAFSA doesn’t care how much home equity you have. So you could have a half-million-dollar home and it may not matter. The government knows that for the vast majority of families, a home will not be sold to pay for college.
Retirement accounts are also off limits: You could have a million dollars or more in your IRAs and 401(k)s. Again, the government doesn’t expect you to liquidate retirement funds to pay for college. Family business value is also exempt.
Here’s a financial planning caution for parents at this point: Don’t take out a home-equity or make a 401(k) loan or withdrawal to pay for college.
That will put you into debt, and it will be difficult to make up that savings because you (parents) will have less time to do it. You also have to pay back 401(k) loans in full if you switch jobs, and you may pay a hefty penalty and federal income taxes if you don’t.
By contrast, your son or daughter will have decades to pay off loans -- if that’s the financing you choose.
Another key number for the FAFSA is adjusted gross income. This is what you net after all deductions are subtracted. So if you have several exemptions for dependent children, high medical expenses and large retirement contributions, that will help increase your chances for aid.
One note on assets that are generally off limits in the FAFSA formula: Private colleges may require that you also fill out a CSS Profile, which asks for more information on your total wealth. That means the more select schools may scrutinize your home equity and investments more closely in the aid process.
If I were to boil down what the FAFSA most cares about in determining aid, it’s liquid cash and assets on hand. If there’s income flowing into the family kitty and it’s not being directed into retirement, that’s what will be eyed first.
Yet you can always provide more financial details to any college in a written, “professional review” to appeal for more aid. Loss of income or employment and high upcoming medical expenses can all be disclosed to sweeten an aid offer.
The bottom line is that the FAFSA is only a rubric for a family’s perceived ability to pay, which is broken down to a “estimated family contribution.” While this isn’t the same as how much a family eventually pays, it’s a good starting guideline.
You also may qualify for college-provided or “institutional” aid and merit aid, which is reserved for above-average students regardless of financial need.
I wish I could say there’s one “magic number” for income that would qualify families for generous aid packages, but so many variables are at play that the best advice is to keep as much income and assets out of your student’s name, continue to save for retirement and don’t worry about the rest.
One of the best resources for FAFSA filers is the free ebook “File the FAFSA.” I read it twice before I filed our first FAFSA. It walks you through the process.
I also like the articles on savingforcollege.com, which provide some useful details on how to work through the FAFSA process.
Don’t let fear stand in the way of getting the most college aid your student is entitled to.