Remind Your Clients About These 10 Things Before Completing the FAFSA
Many NICCP members may remember me from years past. I’ve worked with Ron Them and Rick Darvis as well as many other financial advisors/college planners for 10 years as their marketing consultant and have attended a few of the NICCP annual conferences in Las Vegas. My company is now handling the recent facelift of the NICCP and is collaborating on the Answers4College.com project.
Hanging around Ron and Rick for so long has made me familiar with most of the pitfalls of paying for college - or so I thought until I filed the FAFSA financial aid form for my daughter last year.
Since I just went through this, and this is the time of the year where all your clients have the FAFSA and paying for college on their minds, I thought I would compile a list of 10 key points that, as a parent, I think other parents should be aware of prior to completing the FAFSA and/or the CSS PROFILE financial aid application forms.
1) Spend Time Researching a Career Direction
Every student planning to attend college should have a real good idea of what they want to be when they grow up. I know what you’re thinking - how can any kid know their career intentions at 17 years old. Listen up - regardless of how you complete the FAFSA or CSS PROFILE and how much financial aid you get, every family will end up owing the college some money, usually a minimum of $20,000 a year. So changing majors, and sometimes changing colleges, can add a couple more years to your tuition bill. Before you ever submit the FAFSA or CSS PROFILE - the student should have a good idea of a career direction.
2) Involve the Student in Developing a College Budget
Every family should work together to develop a college budget before you submit the FAFSA or CSS PROFILE. To do this you need to calculate your Expected Family Contribution (EFC). The EFC is the amount of money the college will expect you to contribute to your college tuition, before they even consider giving you financial aid (meeting your financial need). Public colleges are over $25,000 per year and private colleges are $40,000 per year and up. What good does it do to get the student all excited about getting accepted to their ideal college, if your budget cannot handle the cost. More family arguments have resulted from lack of planning in this area. You can calculate your own family contribution by hand using this 2014-2015 EFC Formula Guide:
3) Apply to Schools Where the Student is in the Top 20% of the Freshman Class
Every student looking for financial aid to help pay for college should apply to schools where they are in the top 20% of the incoming freshman class. Students in the top 20% tend to receive more free scholarship and grant money and less student loans. So if you want to increase your chances of receiving grants and scholarships, then make sure you apply to schools where you are in the top 20% of the freshman class. You can access this information from each school’s Common Data Set.
4) Apply to Schools That are Generous with Financial Aid
Once you’ve applied to schools where you are in the top 20% of the incoming freshman class, you then need to determine if those schools will come close to meeting your financial need. In other words, if you do qualify for financial aid, will they give you 100% of your financial need. You can calculate your “Financial Need” by subtracting your Expected Family Contribution (EFC) from the Total Cost of Attendance (COA) of each college that you plan to attend. Your EFC will always stay the same, but as the cost of college rises, so does your financial need. Once you calculate your financial need amount for each school, you then need to determine which of those schools will meet a higher percentage of your need with gift aid (free money). Ideally, you should pick schools that meet 75%-100% of your financial need with at least 75% gift aid (free money).
The following 2013-2014 College Listings database provides the financial statistics on over 2,000 colleges, including the in-state, out-of-state, and private college costs, plus the financial need and gift aid percentages for each of those schools. You can use this College Listings database to determine if the colleges you plan to attend are generous, or not:
5) Recognize the Schools that Benefit Small Business Owners
Did I mention there are two financial aid forms that schools use to calculate your Expected Family Contribution (EFC) and financial need? Some schools may have their own institutional form, but the FAFSA and the CSS PROFILE application forms are the two key forms used in the financial aid process. All schools require the FAFSA form, but if you own a business, you absolutely need to know which schools require the CSS PROFILE form. Here’s why. The value of a small business or farm with under 100 employees is not included on the FAFSA, but the CSS PROFILE has a special Business/Farm Supplement form that scrutinizes your business/farm income and assets in great detail. Here’s a sample of the form to give you an idea of the detail they require:
CSS PROFILE Business-Farm Supplement
Bottom line: if you own a small business or farm you can qualify for a lot more aid if you apply to colleges that only require the FAFSA application form. Here’s a list of the schools that require the CSS PROFILE form:
6) Recognize the Schools that Benefit Divorced/Separated Families
Are you from a ‘Blended Family’? If so, you darn well better know the rules and regulations involving divorced/separate families when it comes to completing the FAFSA/PROFILE application forms.
The question that everybody asks is, “Which parent’s financial information needs to be on the FAFSA in a divorced/separated family?” First of all, it does not matter which parent in the divorced scenario reports the student as a dependent on their taxes. That’s not even taken into consideration. It’s actually the parent that the child lives with the most during the year (custodial parent) that is looked at first. However, if the child lives an equal amount of time with both parents, then the parent that provides the most financial support must complete the FAFSA using their financial information. And what if that parent has since remarried? Then the step parent must include their financial information too. I know that’s not fair, but rules are rules.
The CSS PROFILE however, is a different animal. Not only do PROFILE schools require both the custodial parent and stepparent, but they also request financial info from the non-custodial parent and stepparent (if remarried). Here is a sample of the Non-Custodial Parent form that the Profile schools request.
CSS PROFILE - Non-Custodial Parent Form
There are several strategies that divorced/separated families can use to increase their eligibility for financial aid. You can find the in the NICCP LEARNING LIBRARY in the Quick Answers section, or in the CCPS Reference Manual.
7) Understand the Benefit of Being a Small Business Owner
Everybody knows that colleges will ask for your income and assets on the FAFSA and CSS PROFILE financial aid forms, but did you know that income is assessed at 47% and assets are assessed at only 5.6%? I learned this one from Ron & Rick and it’s a goldmine for a small business owner who can postpone taking income, or at the very least move income to a future year. This is especially true for small business owners (with less that 100 employees) that have most of their assets tied up in their business because business assets are exempt from valuation if you are only applying to schools that require the FAFSA form. Here is a sample of the financial aid formula that details exactly how colleges look at business assets on the FAFSA form:
8) Understand the Nuances of the Financial Aid Formulas
Did I mention that your income is assessed more heavily than your assets on the FAFSA? That is true ONLY if you are reporting your adjusted gross income on line 85 of the FAFSA. The income you report line 85 should be as small as possible. However, lines 88 & 89 of the FAFSA ask for the amount of income earned by both the mother and the father. The income you report on these lines should be as large as possible. I know what you’re thinking - this is a bit deceitful - and yes it is, but these two line items are used to calculate “social security tax” which is a deduction from income. Bottom line: the higher the income reported on these two lines, the more financial aid you can potentially receive. Check out TABLE 2 of the EFC formula guide for confirmation:
9) Consult a College Financial Expert Before You File Your Aid Applications
One of the top strategies to get more financial aid than you thought possible is to move your assessable assets into non-assessable asset accounts. Yes, assets are only assessed at a 5.6% rate, but if you have $100,000 in assets - that’s $5,600 less financial aid you qualify for each year you attend college. That’s not chump change.
So what is considered a non-assessable asset account. For schools that require the FAFSA only, the list includes 1) business and farm assets, 2) the family residence, 3) qualified retirement accounts (401k, etc.), 4) annuities and 5) cash value life insurance. The list is much shorter for schools that require the CSS PROFILE, which exempts only qualified retirement accounts (401k, etc.) and cash value life insurance from being assessed.
Sheltering your assets into non-assessable accounts can be tricky, but this was one area that I was fortunate because I consulted Ron & Rick first, before I filed the FAFSA. They showed me a combination annuity/cash value life insurance strategy that allowed me to pull my money out when I wanted it with no early penalties. In addition, there were very low investment costs and expenses. Word to the wise - get an expert to help you in this area - even if you think you know what you’re doing.
10) Always Ask For More Money - But Do It The Right Way
Once you complete and mail in your financial aid form(s) and you travel through the maze called the ”financial aid process”, you will begin to receive financial aid award letters from colleges in March or April. Word to the wise - be prepared to be disappointed.
Though dozens of colleges claim to meet 100% of the student’s financial need, financial aid awards can vary greatly. Only a handful of colleges offer 100% of financial aid in the form of free money that does not have to be paid back. Most financial aid packages include a mixture of grants, low-interest loans, and work-study opportunities. But the real surprise every unsuspecting family will discover is that most every college also includes PLUS (parent) loans as part of the award package, even though this has nothing to do with “student aid”. Congratulations parents - you’ve just been awarded debt! I found this out the hard way.
To counteract this semi-deceitful maneuver, I learned this following strategy from Ron & Rick. Apply to 6-8 different colleges, even though you NEVER intend on attending most of them. Why? The strategy here is to pick your ideal school and then also apply to competing colleges that have a high probability of giving you a decent amount of financial aid. Then use those award letters to appeal to your ideal college to give you even more money. There is a step by step procedure for accomplishing this strategy in the CCPS Reference Manual here.
There are also sample letters of appeal in the Documents library here:
Sample - Financial Aid Appeal Letters
Well, that it. My top 10 strategies that, as a parent, I think other parents should be aware of prior to completing the FAFSA or the CSS PROFILE application forms. However, my best advice would be consult a college financial expert to guide you through this complex and convoluted process - or as the old saying goes, “A fool and his money will soon part.”