It’s not unusual for different strategies to be more helpful at different points in the college savings/funding process. Retirement contributions are a perfect example.
For many families, it’s beneficial to use Roth contributions in FAFSA years because the additional taxes paid reduce EFC. Taxes paid are subtracted from available income, so a family in the 22% tax bracket who maxes out Roth IRAs instead of traditional IRAs for both spouses would see their EFC reduced by $1,240. ($12,000 x 22% marginal tax rate x 47% marginal EFC income assessment rate = $1,240.)
However, if that family is approaching the income limit for the American Opportunity Tax Credit (MAGI of $160,000 for married filing joint in 2019), then contributing to Roth IRAs in a year in which their student is in college might leave them unable to claim the AOTC. The AOTC is worth up to $2,500 per year, per student, so it’s often worth more than the EFC savings. But there may be circumstances where parents want to do additional analysis, such as if the student is at a financial aid “threshold” amount where adding $1,200 to their EFC would result in a larger loss of aid. This might be the case for a student receiving a subsidized loan, for example.
For families looking at this situation, the key piece is whether they’re receiving need-based aid or on a need-based aid path for subsequent students. If the student is receiving need-based aid, it’s worth a conversation with the school’s financial aid office to confirm that you are not shooting yourself in the foot if you change your retirement savings contributions to maximize AOTC eligibility. And for those with additional children approaching college age, it’s a good practice to try out some net price calculators at schools of interest to determine the impact.
Worth noting: Although a student attending college for four years will have college expenses in five tax years, the AOTC can only be claimed for four years. Given the FAFSA and Profile using prior-prior year incomes (i.e., the FAFSA families complete for the 2020-2021 school year will use 2018’s income), there are a maximum of two potential years of overlap per child between AOTC and EFC. Families with multiple students will have more such years.
I get tons of questions about strategies for reducing EFC, especially those related to the Asset Protection Allowance. And there are plenty, but sheltering assets is typically the lowest bang-for-the-buck strategy out there: Every $1,000 you shelter will only reduce your EFC by $54. And that assumes that the school will meet your full need. Here are some better options: Continue reading Better EFC Strategies
What do the numbers $7,000, $42,000, $44,000, $56,000, $58,000, $72,000 and $81,000 have in common? Each is a net price estimate (rounded) that we received from a different college, using the same data inputs. That’s one example of why one might reasonably argue that Expected Family Contribution (EFC) is of marginal significance. Continue reading Net Price Matters More
When you start looking at specific colleges, net price calculators are the best tool to figure out how much the school will actually cost– especially since they will show the aid package including self-help aid (loans and work study). Anyone who has gone through this process knows that the net price tends to differ quite a bit from EFC. And only the FAFSA provides an EFC, so you’re definitely going to get a different cost from a school that requires the CSS Profile. Which begs the question, does EFC matter? Continue reading Does EFC Matter?
Last month– as it does every May– the Department of Education released its Needs Methodology for the coming FAFSA. The Higher Education Act of 1965 requires that the Income Protection Allowance, Adjusted Net Worth of a Business or Farm, the Education Savings and Asset Protection Allowance, and the Assessment Schedules and Rates be updated annually for inflation. Continue reading What to Expect in the 2020-2021 FAFSA
If you’re among the 2/3 of families that will borrow to pay for college, you may be looking at private student loans as one of your options. Unlike federal direct student loans, private student loans typically require a co-signer. It’s vital that parents and others asked to co-sign understand what they are actually doing when co-signing a student loan. Continue reading Co-Signing Student Loans
Every year, about 1/3 of FAFSAs filed are selected for validation, which could be described as FAFSA’s version of an audit. Some FAFSAs are chosen at random for verification, whereas some schools– especially those funding need-based aid out of an endowment– will verify every application. Because verification goes through the school, it’s not unusual for students to first learn about their verification status when they receive an acceptance and financial aid award. Being selected for verification does not typically mean that you’ve done anything wrong, just that you need to provide additional information. Continue reading FAFSA Verification
Many people asked, after my last post, how EFC gets calculated or divided with multiple children in college. It’s not a strict 50/50 division; some adjustments get made first. Continue reading EFC for Multiple Children
I gave a financial aid talk to college and career center volunteers at our high school recently. One question stood out: “This is a lot of information to absorb at once. Can you break it down into some specific suggestions by grade?” Two ideas are important here: College planning is a process that should start well before senior year, and there are things that can be done at any point to make things go more smoothly when the time comes to start applying. So here goes. Continue reading College Prep by Grade
Pell Grants are one of the largest federal gift aid programs, with over $28 billion going to students with high financial need in the 2017-2018 school year. While that is certainly a lot of money, the program is in fact fairly limited. Continue reading Pell Grants