Last week, the Department of Education released the FAFSA Formula Guide for the coming FAFSA. Before I give you that link, I want to share some basics about the FAFSA. I’ll also break out each section of it in depth in the coming weeks– hopefully before the new FAFSA arrives on Oct. 1.
First and foremost, what are the FAFSA and the FAFSA formula? Let’s start with what they are not: They are not Santa’s sleigh or the tooth fairy. Nor are they an arsonist trying to torch your family’s financial security. They do not bring or deny financial aid awards. Rather, the FAFSA is a tool that allows a school to evaluate a family’s financial strength and allocate aid dollars equitably across their student population. It is an imperfect tool, it is a blunt instrument, it does not even attempt to understand your situation, but it’s the tool you need to work with if you want need-based financial aid or to borrow through the federal student loan program.
From a financial aid perspective, it’s far more important to understand what the schools do with your FAFSA and EFC than to manage the data going into the calculation. Many families invest untold hours in restructuring assets to minimize their EFC only to learn that their top-choice school does not meet full need and starts their aid package with a direct student loan. So if your student has some schools in mind already, the net price calculator is going to be far more helpful cost estimator than the FAFSA.
On the other hand, parents of freshmen, sophomores or middle schoolers who are trying to get their arms around the cost of college would benefit from spending some time understanding the FAFSA, both in order to plan for FAFSA years and to get a sense of whether they’re on the need-based or merit aid path to college.
With all that behind us, let’s get into the basics of the formula. Parents tend to focus on assets, but that is only one of the four FAFSA “buckets” (and the one with the least impact overall for most families). Everything that a student and her parents earn, own or might spend for college goes into one of these buckets:
- Parent income: Besides after-tax income, this includes add-backs such as pre-tax retirement contributions, untaxed income such as child support, Roth IRA distributions, tax-exempt interest and nontaxable pension distributions. Net of a few adjustments such as taxes paid and an exemption based on family size, income above a certain threshold is assessed at progressive rates ranging from 22% to 47%, a bit like federal income tax brackets. Income for the coming FAFSA is based on 2018 data.
- Parent assets: Nonretirement liquid and illiquid assets are valued as of the date of the family’s FAFSA filing. Liquid assets include checking, savings, brokerage and 529 accounts (for all children in the family, not just the student). Illiquid assets include the net value (market value less outstanding debt) of vacation or investment properties but not the family’s primary residence. It also includes the value of larger (>100 employees) family-owned businesses. Excluded are retirement assets, life insurance policies and the family’s primary residence. Assets above the Asset Protection Allowance (between around $5,000 and $9,000 for most families) are first assessed at 12%, then added to income and subject to the graduated income assessment rates of up to 47%. (The figure you’ve heard of 5.64% of assets counting towards EFC is 12% x 47%.)
- Student income: This bucket likewise includes income net of taxes. In addition, any third-party money– distributions from a grandparent-owned 529 or payments made by a non-custodial parent, for example– is also added to student income. Earnings from a work-study job are excluded from student income since they’re counted as financial aid. Students receive an income protection allowance of $6,840 on this year’s FAFSA; everything above that is assessed at 50%. And again, for this year’s FAFSA it’s 2018 income.
- Student assets: Unlike parents, students do not receive an asset protection allowance and their assets are assessed at 20%. So while $1,000 in a 529 would add somewhere between $0 and $56 to the family’s EFC, that same $1,000 in the student’s checking account would add $200.
If you got through all of that and are still reading, here’s your reward: the 2020-2021 EFC Formula Guide.
There are 12 comments
Thanks for the article I’ve found net price calculators less than helpful. Too many of them use cost data that is two or three years old, and some are just flat wrong. See my article, “The University of California gets this math problem wrong,” at https://openlooks.blogspot.com/2019/07/the-university-of-california-gets-this.html
They can be a mixed bag, especially when families don’t understand the inputs. We see this issue with people for example not adding back their 401k contributions. My personal experience with my own kids applying was that the financial aid offers they received were all very much in line with what the net price calculators told us. But yes, parents who don’t know that “kids in college” refers to the actual college year will get very different results.
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The 2020-2021 EFC Formula Guide has dozen of references to “FAFSA/SAR” with no definition of what that is. For instance, on page 9 it says Untaxed Income and Benefits is the “total of FAFSA/SAR #92a through 92h.” I’ve looked all over but cannot find any explanation of what that means. Help, please!
That’s a great question. Part of the complication right now is that the FAFSA itself is unavailable. That’s always the case from June 30-Oct. 1. SAR is Student Aid Report, which you receive upon filing the FAFSA. The line #s are specific lines within the FAFSA itself. You can see the details on last year’s FAFSA.
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I just found your article and have already submitted the FAFSA for both my kids. If I read your article correctly, it’s better to include 529 accounts on my financial info rather than the kids. If that is correct, can I make changes to the FAFSA now that it’s already been submitted?
That’s correct, 529s are a parent asset and therefore get more favorable treatment in the formula than if they were the student’s asset. But remember that you need to include all of your 529 accounts, not just the one for the student for whom you’re filing. You may be able to correct your FAFSA but at this point you probably need to reach out to the school(s) directly to correct this.
Is it ok to transfer the 529 ownership to the grandparent and then transfer back to the parent in the final years of college before distribution is taken? Is that even advisable when filing the CSS profile? Also, how would the student income (under $6500) affect the FAFSA and CSS profile?
I believe that’s possible but I’d suggest you check with both the 529 plan and your tax advisor. Depending on the value of the account there may be gift tax implications, and filing a gift tax return– twice potentially– might cost more than what the 529 would add to your EFC. Transferring it from the parents to grandparents would take it off the parents’ balance sheet as an asset, but then if money were needed from the account, a distribution would be reported as student income which would cost you far more in EFC terms. As long as a distribution is taken after January of sophomore year of college, it wouldn’t be reported anyway due to the prior-prior year income reporting. Keep in mind that one Profile “optional” question that most Profile schools tend to use is “Is anyone else saving for college on your behalf?” So that would require you to report the grandparent-owned 529. Students receive an income protection allowance; that level of income would not affect either. Note that the Profile computes a student contribution regardless of whether the student has reportable income.