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It’s time to consider financial aid for college! Exploring merit-based financial aid is probably the single biggest thing you can do to optimize your bottom line in 2020. Learn about the FAFSA, CSS PROFILE, merit aid, loan and grant programs.

The FAFSA (Free Application for Federal Student Aid) for the 2021-2022 year opens on October 1, 2020. The FAFSA is a prerequisite for federal student loans, grants, and work-study. In addition, colleges typically require the FAFSA before distributing their own need-based aid and, in some cases, merit-based aid.

Students must submit the FAFSA every year to be eligible for financial aid (along with any other college-specific financial aid form that may be required, such as the CSS PROFILE). It is a good idea to file the FAFSA as early as possible in the fall because some aid programs operate on a first-come, first-served basis.

Colleges have their own deadlines for filing the FAFSA, generally in the spring.

Typically, first-year students have earlier deadlines than returning students. Check with your child’s college for exact timetables.

Private colleges typically require both the FAFSA and the standard PROFILE form or their own financial aid form, which you’ll need to submit by each individual college deadline. The PROFILE form is generally submitted in late fall or winter, but is often required earlier if your child is applying early decision or early action.

Institutional methodology for financial aid

The institutional methodology is an alternative to the federal methodology.

It is administered by the College Scholarship Service (CSS), a private company that provides educational services to colleges and the public. The institutional methodology is used by some 3,000 colleges to calculate your expected family contribution when the college’s own private funds are being distributed.

So, a college may use the institutional methodology to distribute its own funds and the federal methodology to distribute any federal financial aid funds at its disposal. You submit your information for the institutional methodology on the PROFILE form application rather than on the FAFSA.

In some instances, a college will not use the institutional methodology when distributing its funds, but will use its own individual formula. In this case, you will need to obtain the college’s particular financial aid application form.
There are differences in the way the expected family contribution is calculated under the federal methodology vs. the institutional methodology. As a general rule, the institutional methodology digs deeper into a child’s financial background than the federal methodology because colleges want to make sure that their own funds go to the neediest students.

How does the FAFSA calculate financial need?

The FAFSA looks at a family’s income, assets, and household information to calculate its expected family contribution (EFC). The expected family contribution is the amount of money a family is deemed able to pay (afford) for college. All financial aid packages are built around this number.

When quantifying your income, the FAFSA uses information in your tax return from two years prior. This year is often referred to as the “base year” or the “prior-prior year.”

The 2021-2022 FAFSA will use income information in your 2019 tax return, so 2019 would be the base year or prior-prior year.

When quantifying your assets, the FAFSA uses the current value of your assets. Some assets are not counted and do not need to be listed on the FAFSA:

  • home equity in a primary residence,
  • retirement accounts (e.g., 401k, IRA),
  • annuities, and
  • cash value life insurance.
Financial Aid

Student assets are weighted more heavily than parent assets – students must contribute 20% of their assets vs. 5.6% for parents.

Your income, assets, and household information are run through a formula to arrive at your expected family contribution.  The formula is known as the federal methodology; generally here’s how it works:

  • Parent income is counted up to 47% (income equals adjusted gross income or AGI plus untaxed income/benefits minus certain deductions);
  • Student income is counted at 50% over a certain amount ($6,840 for the 2020-2021 school year);
  • Parent assets are counted at 5.6% (home equity, retirement assets, cash value life insurance, and annuities are excluded); and
  • Student assets are counted at 20%.

Financial aid and your expected family contribution

Your expected family contribution remains constant, no matter which college your child attends. The difference between your expected family contribution and a college’s cost of attendance equals your child’s financial need.

Because tuition, fees, and room-and-board expenses are different at each college, your child’s financial need will vary depending on the cost of a particular college.

You fill out the FAFSA and your EFC is calculated at $35,000. College A costs $60,000 per year and College B costs $50,000 per year. Your child’s financial need at College A is $25,000 and $15,000 at College B.

Once your expected family contribution is calculated, the financial aid administrator at your child’s school will attempt to craft an aid package to meet your child’s financial need by offering a combination of loans, grants, scholarships, and/or work-study.

Just because your child has financial need doesn’t necessarily mean that colleges will meet 100% of that need. In fact, it’s not uncommon for colleges to meet only a portion of it. If this happens to you, you’ll have to make up the gap, in addition to paying your EFC.

How do I submit the FAFSA?

The fastest and easiest way to submit the FAFSA is online.

To do so, you and your child will each need to obtain an FSA ID, which you can also do online by following the instructions.

Once you have an FSA ID, you can use the same one each year.

There is no cost to submit the FAFSA.

Before filling out the form, you might want to gather your 2019 tax return, financial papers and account records. In most cases the FAFSA is able to import information from your tax return directly into the form using its built-in IRS Data Retrieval Tool, saving you time and reducing the chance for mistakes.

After your FAFSA is processed, you will receive a Student Aid Report with your expected family contribution, which is typically designated like this: “EFC36000”.

Translation: your EFC is $36,000

If you submit the FAFSA online, you will receive your report immediately via email; if you submit a paper FAFSA, your report will take longer to arrive by mail. Any college you list on the FAFSA will also get a copy of the report.

Should I file the FAFSA even if my child is unlikely to qualify for need-based financial aid?

Even if you don’t expect your child to qualify for need-based financial aid, there may be two reasons to submit the FAFSA.

First, all students attending college at least half-time are eligible for a federal unsubsidized Direct Loan each year, regardless of financial need.

“Unsubsidized” means the borrower, rather than the federal government, pays the interest that accrues during school and during the grace period and any deferment periods after graduation.

If you want your child to be eligible for this federal loan, you need to submit the FAFSA.

And don’t worry, your child won’t be locked in to taking out the loan. If you submit the FAFSA and then decide you don’t need or want the federal unsubsidized loan, your child can decline the loan through his or her college financial aid portal before the start of the new school year.

Second, colleges typically require the FAFSA when distributing their own need-based aid and, in some cases, merit-based aid. So filing it can give your child the broadest opportunity to be eligible for college-based financial aid.

A word about college-based financial aid

Colleges often use favorable merit aid packages to attract certain students to their campuses, regardless of their financial need. The availability of college-sponsored merit financial aid tends to fluctuate from year to year and from college to college as schools decide how much of their endowments to spend, as well as the specific academic and extracurricular programs they want to target.

As a family researching college options, exploring college merit aid is probably the single biggest thing you can do to optimize your bottom line.

If you want to get an estimate ahead of time of how much financial aid (need-based or merit) your child might qualify for at a particular college, visit the college’s website and fill out its net price calculator, which all colleges are required to have on their websites.

Net price calculators ask for parent and student income and asset information, and they take anywhere from 5 to 15 minutes to complete.

Besides colleges, a wide variety of groups offer merit scholarships to students meeting certain criteria.

There are websites where your child can input his or her background, abilities, and interests and receive (free of charge) a matching list of potential scholarships.

Comparing financial aid awards

Sometime in late winter or early spring, your child will receive financial aid award letters that detail the specific amount and type of financial aid that each college is offering.

To compare offers, first determine your out-of-pocket cost, or net price, for each school by subtracting any grant or scholarship aid (which doesn’t need to be repaid) from the total cost of attendance.

Next, look at the loan component of each award to see how much, if any, you or your child will need to borrow. Then compare the net price and loan amounts across all colleges.

If you’d like to lobby a particular school for more financial aid, tread carefully. A polite letter to the financial aid administrator followed up by a telephone call is appropriate. Your chances for getting more aid are best if you can document a change in circumstances that affects your ability to pay, such as a recent job loss, unusually high medical bills, or some other unforeseen event, such as the Coronavirus pandemic in 2020.

Common federal financial aid programs

Here are some names you’ll be hearing as you navigate the world of financial aid:

  • Direct Loan: The most common student loan for undergraduate and graduate students. For the academic year 2020-2021 (loans disbursed July 1, 2020, through June 30, 2021), the interest rate is 2.75% for undergraduate students and 4.30% for graduate students.
  • Perkins Loan: A student loan for undergraduate and graduate students with the greatest financial need. The interest rate is currently fixed at 5%.
  • Direct PLUS Loan: A loan for parents of dependent undergraduate students and graduate students. A separate application is required, though filing the FAFSA first is a prerequisite. Parents can borrow the full cost of their child’s education, minus any financial aid received; the only criteria is a good credit history. The interest rate is currently fixed at 5.30% for loans disbursed in the 2020-2021 academic year.
  • Pell Grant: A Pell Grant is available only to undergraduate students with exceptional financial need.

The financial aid treatment of 529 plans

Under the federal methodology, 529 plans – both savings plans and prepaid tuition plans – are considered an asset of the parent if the parent is the account owner.

In this case, the value of the account is listed as an asset on the FAFSA. Under the federal formula, a parent’s assets are assessed (counted) at a rate of no more than 5.6%. This means that every year, the federal government treats 5.6% of a parent’s assets as available to help pay college costs.

There are a few points to keep in mind regarding the classification of 529 plans as a parent asset:

  • A parent is required to list a 529 plan as an asset only if he or she is the account owner of the plan. If a grandparent is the account owner, then the 529 plan doesn’t need to be listed as an asset on the FAFSA (this doesn’t seem fair, but grandparent-owned 529 accounts are counted in a different way, discussed below.)
  • Any student-owned or UTMA/UGMA-owned 529 account is also reported as a parent asset if the student files the FAFSA as a dependent student. A 529 account is considered an UTMA/UGMA-owned account when UTMA/UGMA assets are transferred to a 529 account on behalf of the same beneficiary.
  • If your adjusted gross income is less than $50,000 and you meet a few other requirements, the federal government doesn’t count any of your assets in determining your expected family contribution. So your 529 account wouldn’t affect your child’s financial aid eligibility at all.
Withdrawals from a parent-owned 529 account that are used to pay the beneficiary’s qualified education expenses aren’t classified as either parent or student income on the FAFSA the following year.

What about grandparent-owned 529 accounts?

Grandparent-owned accounts are not listed as an asset on the FAFSA. However, withdrawals from a grandparent-owned 529 account are counted as student income on the FAFSA the following year. Student income is assessed at 50%, which means that a student’s eligibility for financial aid could decrease by 50% in the year following the withdrawal.

Grandparents may want to wait until the spring of their grandchild’s junior year of college to make a withdrawal if they are concerned about the potential impact on financial aid.

Regarding the institutional methodology, 529 plans are generally treated the same as under the federal methodology. But check with your child’s individual college for more information.

Be sure to contact your tax preparer and financial advisor for further guidance about your particular situation.

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