Observations

Looking Out for Your Financial Future

23 - Jan 2020

A Short Guide to Financial Aid

The financial aid deadlines for a lot of universities are soon approaching. Now is the time to fill out and submit the Free Application for Federal Student Aid (FAFSA) form for the upcoming school year if you have not already done so. Even if you think your child will not qualify for any sort of need-based financial aid, it is still a good idea to fill it out for the upcoming school year, even if you think you make too much money to qualify. While this might be true for need-based scholarships, the FAFSA could help your child qualify for other forms of financial aid.

What is FAFSA?

You must complete the FAFSA to have access to these important sources of college funding: grants, scholarships (both need- and merit-based), work/study opportunities, and access to federal student loans.

How is student aid eligibility determined?

The FAFSA collects personal and financial data for your family and uses a formula based on income/assets for both the student and parents to come up with an Expected Family Contribution (EFC). The EFC is then sent to each school, which subtracts that number from the school’s cost of attendance to come up with a financial aid package for the student. You can expect to contribute 50% of a student’s income and between 22%- 47% of parents’ income to the upcoming school year.

This does not mean you will have to contribute 47% of all the money you make toward college, though. A general rule of thumb is that you should expect to contribute about 20% of your annual gross income toward the cost of college for the upcoming year.

It is important to know that not all assets are treated equally. The expected contribution from students’ assets (20%) is much higher than from parents’ assets (5.64%). Parents are also shielded from including some assets in the calculation; none of the child’s assets are excluded. This means it is important to hold as many assets as possible in the parent’s name.

These are assets you may exclude from your calculation:

  • The equity in your home
  • UGMA and UTMA accounts for which you are the custodian, but not the owner. These are accounts that have been set up in the child’s name, but the parent still controls the assets.
  • Value of life insurance
  • Retirement plans (401(k), pension funds, annuities, non-education IRA’s Keogh plans, etc.)

Many people mistakenly include these assets, since the form does not specifically note these exclusions. By including these assets, they may drastically increase their EFC and miss out on thousands of dollars in financial aid.

What are the deadlines?

The FAFSA for the 2020-2021 academic year became available on October 1, 2019. Each school and state has its own posted deadline for submission, so it is important to review deadlines for your target schools, but a lot of schools’ deadlines are sometime in the winter prior to the upcoming academic year. Most grants and scholarships are filled on a first-come, first-served basis; submit your form as early as possible to improve your chances at these funds. The official deadline for FAFSA is June 30, 2020, for the 2020-2021 academic year.

A special note about student loans.

Student loans can be a key piece of the college funding puzzle for many families. Even if you do not plan to use student loans in the first couple of years of college, you might consider taking them out anyway. Doing so could help lower the overall cost of college you and your child pay.

Many people do not realize that there is a lifetime cap for Stafford loans. These loans are guaranteed by the federal government and usually have lower interest rates and better terms. Although the lifetime limit for Stafford loans is $31,000, they are capped each year and are a “use it or lose it” arrangement.

Annual Limits:

Freshman Year:$5,500
Sophomore Year:$6,500
Junior Year:$7,500
Senior Year:$7,500

Many people save early for college and decide to pay the first couple of years with other sources only to realize they do not have enough funding for the later years. This forces them to take out Parent Plus Loans, which are student loans that parents take out for their child, and private student loans. These types of loans usually have higher interest rates and less favorable terms. Even if you do not need funds in the early years, having access to those more favorable sources might be beneficial in later years.

Funding college is a challenge for every parent. Keeping the FAFSA deadlines in mind, understanding how to maximize your financial aid opportunities, and using student loans most effectively can make it easier.

Please don’t hesitate to contact me to talk about the FAFSA or college funding options in general.

A.J. Kratz, CFA

Author:

A.J. Kratz began his career as a loan officer for various mortgage lenders and banks, then transitioned into accounting, eventually producing sophisticated analysis of economic trends and investment options, which is what he does in his current role at Telarray. He joined the firm in 2012, and is a Chartered Financial Analyst (CFA).

Kratz graduated from the University of Tennessee with a degree in Economics, and when he’s not working, he enjoys golf, scuba diving and coaching Little League baseball.