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.
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?
As conditioned as we are to thinking about college as a seller’s market where schools have all the leverage, the NACAC College Openings Update, published every May, serves as a reminder that for the majority of schools, students are in the driver’s seat. Continue reading NACAC College Openings Update 2019
Students who are waitlisted at their top-choice school should understand how waitlists work, because they can a little bit like Lloyd in Dumb and Dumber: “So you’re telling me there’s a chance!”
Here is a great article explaining how waitlists work. The key takeaway from a money perspective: Waitlists tend to be “need-aware” so waitlisted students who require financial aid to attend should instead focus on the schools at which they’re already accepted. Remember that in addition to the likely lower aid package, you will have to pay a nonrefundable deposit– typically in the $500-$1000 range– at your backup school to retain your spot there since waitlisted students typically are not notified of their acceptance until after May 1.
Of his two college choices, my son is leaning heavily towards the more expensive one. (Good news: it’s not as much more expensive as we had originally thought, but still around $4,000-$5,000 more for freshman year, including transportation– not exactly chump change.) We tasked him with finding some ways to bring his costs down and we’ve been pleasantly surprised with what he’s learned. Continue reading Finding Money
David Leonhardt at the New York Times points out that the enrollment scandal all over the news this week would not happen but for the outsize role that athletics plays in college admissions. To summarize: admissions decisions give preferential treatment to excellence in a variety of areas beyond academics– music, art, social service, research activity, athletics. They also boost admissions chances for other groups including low-income, underrepresented minority, and legacy students. However, by far the biggest admissions boost went to recruited athletes, who were “30 percentage points more likely to be admitted than a nonathlete with the same academic record.” Continue reading Athletics and Admissions
A friend whose son is my twins’ age was surprised recently when I told her some of the colleges my daughter was applying to. She thought they seemed unlikely choices given my constant messaging of finding affordable schools. Her son was interested in some of the same ones and the net prices they found were quite high. The answer: we have the benefit of two children in college all four years. That means our EFC gets divided between then and in many cases, this yielded lower likely net costs. Good news for my Continue reading Planning for All Four (or More) Years
(Or: Why You Should Talk to Your Kids About Money Before Applying)
My son applied to two schools: In-State-U and an Out-Of-State-U-With-A-Scholarship. I’m fairly certain that a big reason for applying to OOSU was that his sister is applying to a number of schools and he felt like maybe he’d be doing something wrong if he didn’t. He wants to attend a big school; he loves sports and wants a D-1 sports program to be part of his college experience. His GPA isn’t fabulous but he did really well on the ACT, so he did some research and discovered that OOSU has a big scholarship for out of state students that’s based solely on test scores. Continue reading A Tale of Two Acceptances
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