We’ve all read headlines that highlight the soaring costs of attending college. Naturally, our clients are concerned about helping their children and grandchildren to cover this cost, and the rising costs only increase this concern. Planning ahead by using a 529 plan to save for college can be a great option, but navigating the financial aid landscape can be equally important. We came across the article below and wanted to share an excerpt because it is a very helpful guide.
Source: How Assets Hurt College Aid Eligibility on FAFSA and CSS Profile, Forbes 2/14/14
Two College Aid Forms: The FAFSA And CSS Profile
The process of applying for need-based financial aid for college begins by students and parents completing one or two financial aid forms, the FAFSA (Free Application for Federal Student Aid) and/or the CSS Profile. Any college or university that awards federal student aid must require that students complete the FAFSA in order to determine eligibility for federal aid (it works for most state aid too). Most colleges and universities nationwide use the FAFSA as their sole application for need-based financial aid. Students applying for aid at those colleges only need to complete the FAFSA. However, there are about 300 colleges, which require that the CSS Profile be completed in addition to the FAFSA. Those colleges use the CSS profile to assess the student’s eligibility for their own institutional aid dollars.
Typically, “Profile” colleges are very selective private colleges, including the Ivies, but the University of Michigan at Ann Arbor, Georgia Institute of Technology and the University of North Carolina at Chapel Hill are examples of flagship state universities that require the Profile, not just the FAFSA.
There is also a group of 26 colleges that make up what is known as the 568 Presidents’ Group, which was formed by the presidents of those institutions for the purpose of assessing students’ ability to pay for college using a “consensus” methodology. The 568 Presidents’ Group schools also require students to complete the CSS Profile, but they treat students’ assets and parents’ home equity different (more favorable to families) than the institutional methodology does. Thus, there are two financial aid forms but three methodologies of calculating a student’s expected family contribution (EFC).
Three College Aid Formulas
Need-based aid eligibility is based on the formula (Cost of attendance – Expected Family Contribution (EFC) = Need). Expected family contribution (EFC) is the minimum amount the family is expected to contribute toward the cost of college and is calculated using three different methods: Federal Methodology (FM), Institutional Methodology (IM) and Consensus Methodology (CM). All three EFC calculations are based on the income and assets of the parents and student as reported on the two financial aid forms, the FAFSA (FM) and the CSS Profile (IM and CM).
Which Assets Count
Retirement assets such as 401k, 403b, IRAs, SEP, SIMPLE, Keogh, profit sharing, pensions and Roth IRAs are not included in the calculation of EFC under any of the three EFC methodologies. Assets that aren’t in retirement accounts — balances in checking, savings, CDs, brokerage accounts, money market, investment real estate, stocks, bonds, mutual funds, ETFs, commodities and 529 college savings and prepaid plans—do get included in the EFC formulas. Trust funds must be reported regardless of whether or not the funds are currently available to you or your child. On the FAFSA, if only interest or principal will be available, the present value should be calculated by the trust officer and reported accordingly.
Parents’ total reportable assets will vary depending upon the EFC methodology, and from the reportable asset value, a savings (emergency reserve) allowance of about $30,000 to $50,000 is subtracted to arrive at an available asset value. Parents are expected to use up to 5.64% (Federal) and 5% (Institutional and Consensus), of those available assets each year in college. Family-controlled small businesses with fewer than 100 full-time employees, home equity and non-qualified annuities are not counted in the FM, but they are in the IM and CM, although, under the CM home equity is capped at 1.2 times the parent’s adjusted gross income.
Retirement assets do not get counted, but your prior year’s contributions to qualified retirement accounts do get counted as untaxed income, and are added back to your adjusted gross income in the income portion of the aid formula. Life insurance cash values are not counted under any of the formulas, but a few highly selective colleges will ask about policy cash values in their supplemental questions on the CSS Profile. Personal assets like cars, clothes and household items do not count under any of the formulas, but collectibles do.