My daughter is wrapping up her sophomore year in high school. Words like SAT, ACT, AP exams, dual credit, college counselors, campus tours and FAFSA are starting to creep into our daily conversations when planning for these last few years of high school. One of the most common questions we get when meeting with our clients who have children entering college is whether or not they should complete the FAFSA.
What is the FAFSA?
FAFSA stands for Free Application for Federal Student Aid. It is a free form submitted to the Department of Education to apply for federal financial aid to pay for college. It is also used by many states and public and private colleges to determine your eligibility for additional aid in the form of loans, scholarships, and grants.
When completing the FAFSA, not all assets are reportable. Non reportable assets include qualified retirement plans, including 401(k), Roth 401(k), 403(b), IRA, Roth IRA, Simple SEP, Keogh, profit sharing and pension plans. Your primary residence is also non-reportable along with personal possessions such as household goods, furniture, electronics, appliances, cars, boats and other personal possessions. Small businesses that have less than 100 full time employees that are owned by the family are also excluded from the FAFSA.
The government uses the information from the FAFSA to determine your expected family contribution (EFC). The EFC is calculated based on a formula and is the number used by each school to determine how much financial aid you are eligible to receive. Your financial need is calculated by subtracting the EFC from the cost of attendance.
Don’t we make too much, how much do parents’ assets affect FAFSA?
We frequently hear this common misconception. There are multiple reasons not to skip filling out the FAFSA! You just never know what you’ll be eligible for. Let us set the record straight here…There are NO income limits for completing the FAFSA. It merely establishes your expected family contribution (EFC) for needs-based federal financial aid. It is true that most wealthy families will not qualify for this type of needs-based aid. Where the potential lies is with discretionary funds called merit based aid. But to be considered for merit-based grants, you have to complete the application. This is one way to offset the cost of tuition.
Merit scholarships are typically awarded based on a student’s academic or extracurricular achievements but can also be given for students in STEM programs, minorities, community service, religious affiliations, musical ability, or leadership skills. It is not uncommon for colleges to give merit scholarships to students from families who do not otherwise qualify for needs-based aid. Higher education institutions are aware of the high sticker prices, and it has become a competitive environment, so they use discretionary funds to attract the top students with merit-based grants.
Do colleges target wealthier households with more merit-based funds?
College is a big business. Just as students are competing for the top universities, universities are also competing for those high achieving or top tier students. Wealthy families are high value targets. Universities are ranked annually based on academic success, high SAT scores, and graduation rates. They want those high performing students to boost rankings. The hope is these affluent students become alumni and eventually give back generous donations to their alma mater.
Additionally, out of state universities will often offer more competitive pricing and aid packages to entice students from other states. Similarly, private universities who have large endowments will offer more non-needs-based aid to be comparable in price to a public university. State schools do not have as big of a pot to distribute from which can sometimes make it cheaper to attend a private school. Giving wealthy students a ‘discount’ on the out-of-pocket costs helps tip the scales to their favor. Colleges are concerned if they don’t give out enough discounts, not enough students will commit to their school.
We have the resources, why take on student loans?
Final reason for completing the FAFSA for affluent families is to be able to apply for direct unsubsidized Stafford loans through the university. This gives your emerging adult an opportunity to have some skin in the game. It can be used as an introductory tool to the world of credit and responsible borrowing. The interest rates on these loans are low (3.73% undergraduate fixed rate as of 5/2022) and they are not based on financial need. Comparatively, private education loan rates can be as high as 13% which makes them the least favorable option. Stafford loans are granted through the university and have a maximum borrowing rate of $20,500 per year. Taking out a loan in the name of the student will build their credit once they start making regular payments and can also potentially generate a tax deduction on the interest paid once they are financially independent enough to file their own taxes. You could also consider taking out a loan to supplement a portion of the cost of school instead of liquidating your portfolio or to bridge a gap if you anticipate an upcoming liquidity event In case your child decides to go to a more expensive school than planned, Stafford loans are another way to narrow the difference between what you’ve saved in your 529 and the more expensive school. If you decide to utilize this resource, ultimately the student is responsible for paying the debt back. It is important to have a conversation with your child so they understand their role and responsibility and together you can come up with a plan as to how best to pay the debt back.
When do we start the financial aid process?
Navigating the college financial game can be tricky. It is best to start your college of choice research during the sophomore year of high school and consider enlisting the help of an independent college counselor. The deadline to complete the FAFSA is June 30th. It opens again on October 1st for the 23-24 school year. Be sure to complete your FAFSA as soon as possible so colleges can put an aid package together which may include funds that are only available on a first come first serve basis. Don’t give up on those dream universities that you feel are out of reach due to the hefty price tag. You never know what they are willing to offer for your student!
If you have additional questions about applying for FAFSA or any other topic please contact one of our financial advisors in Austin so we can help!