Award letters will soon appear in your mailbox. But, what’s next? Do you accept the offer? Do…
It’s only natural for family members to want to help to alleviate the financial burden of paying for college. Conventional wisdom dictates that every little bit helps. However, when it comes to paying for college and applying for financial aid, conventional wisdom does not always win the day. Here’s some advice to navigate high income families paying for college.
How High Income Families Paying for College Can Actually Hurt
I’m sure it feels contradictory to hear that having more money could actually be a detriment when trying to pay for college. To understand this contradiction, you have to know a little about how financial aid works.
It’s actually a common misconception that wealthier families receive no benefit from filing for financial aid (confused yet? Hang in there). The sticker price of your child’s university is unlikely to be the actual number you’ll be on the hook for. Even wealthy families should always fill out the Free Application for Federal Student Aid (FAFSA), as it is unlikely that you will receive nothing. Your financial aid reward is determined by assessing your assets and income as well as your child’s assets and income to determine how much aid you need, and how much you’ll have to come up with yourself – a figure known as your Expected Family Contribution or EFC. The rub is that these assets and incomes are not assessed equally. The income and assets of your child are assessed at a much higher rate and can increase your EFC much quicker. 50% of eligible student income is factored into your EFC (after the protected $6,260). Whereas parent’s income is only assessed at 22 – 47% (after the protected $30,000 – $42,000 for married couples and $7,000 – $9,400 for single parents). This is why it’s also unwise to create a college fund in your child’s name.
Here is where Grandma comes in. Even if you wait until after you’ve received your award letter for the year; if Grandma, Grandpa, an Ex-spouse, friends, or anyone else contributes to help pay that years EFC either by giving money to your child or paying the school directly, that contribution will be considered Student Income and will raise your EFC by 50% of that income for the next year.
This same problem can persist with 529 plans. A 529 plan is essentially a college saving account that either you, the parent, or the grandparents can set up that offers tax advantages. While money in a 529 plan isn’t factored into financial aid as income, once the money is withdrawn and put towards payments, if it is in the name of anyone other than you or your student, it is assessed as student income and will again raise the EFC by 50% of the income. The 529 can be transferred from the grandparent’s name into your name, allowing any withdrawals to be assessed as parent income, however, this can be done only in some states. These 529 plans are extremely helpful in the later years of college when aid eligibility is no longer a factor.
How Help Paying for College Can Actually Help
I hope I haven’t totally demoralized you. Assistance from family, friends and college funds are not detrimental in and of themselves. It’s just very important how you manage these forms of assistance. By all means start a college fund for your child – just keep it in your name. It will be still assessed and somewhat increase your EFC, but at a much lower rate than it would be were it in your child’s name.
Of course, if Grandma and Grandpa can pay the entire bill for all 4 (or more) years, by all means, don’t stand in their way. If not, encourage them to consult with you before they unintentionally do something that might adversely affect your EFC later.
Know the Rules
Two families with the same amount of money to work with, paying for the same school, could end up paying wildly different amounts depending on how they organize their funds. The whole process can feel like a dubious shell game designed to cheat the system. But remember, there’s a big difference between cheating and knowing the rules. Doing everything you can within the rules to lower your EFC isn’t cheating, it’s the height of prudence.
Financial aid officers know the rules, but it’s in their best interest to not help you. Visit My College Planning Team for a free consultation to learn even more legal loopholes and money managing tips to put all of your preparation to the best possible use.
Make sure to warn grandparents or anyone else wishing to offer help paying for college about these pitfalls. They are easy to fall into and can do some pretty considerable damage despite the best of intentions.