Further proof that when you take our advice and follow our system, you get fantastic results…
The College Money Guys is pleased to announce that our final scholarship numbers for our class of 2015 students have just been finalized. We were able to help last year’s Seniors achieve over $10,151,330.00 in free money for college! That’s an average of over $150,000.00 PER STUDENT for 2015. This is grant and scholarship money and does not include any loans (which only make college more expensive).
In addition, we are over the Five Million dollar mark for our class of 2016 Seniors and not even half of our 2016 class have reported yet.
Thanks to our students and their families for another record year!
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Mayor Annise Parker and Brannon Lloyd
Following one of our college planning workshops in Clear Lake. Mayor Annise Parker stopped by to talk with Brannon Lloyd, CEO of The College Money Guys, and spent some time discussing the high cost of sending a student to college. If you’d like to come to one of our free workshops and let us show you how to get more free money for college (grants and scholarships, not student loans), click here to get more information.
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If you’re thinking about joining a 529 plan, or if you’ve already opened an account, you might be concerned about how 529 funds will affect your child’s chances of receiving financial aid. Of all the areas related to 529 plans, financial aid is perhaps the most uncertain, and the one most likely to change in the future. But here’s where things stand now.
First, why should you be concerned?
The financial aid process is all about assessing what a family can afford to pay for college and trying to fill the gap. To do this, the institutions that offer financial aid examine a family’s income and assets to determine how much a family should be expected to contribute before receiving financial aid. Financial aid formulas weigh assets differently, depending on whether they are owned by the parent or the child. So, it’s important to know how your college savings plan account or your prepaid tuition plan account will be classified, because this will affect the amount of your child’s financial aid award.
A general word about financial aid
Financial aid is money given to a student to help that student pay for college or graduate school. This money can consist of one or more of the following:
- A loan (which must be repaid in the future)
- A grant (which doesn’t need to be repaid)
- A scholarship
- A work-study job (where the student gets a part-time job either on campus or in the community and earns money for tuition)
The typical financial aid package contains all of these types of aid. Obviously, grants are more favorable than loans because they don’t need to be repaid. However, over the past few decades, the percentage of loans in the average aid package has been steadily increasing, while the percentage of grants has been steadily decreasing. This trend puts into perspective what qualifying for more financial aid can mean. There are no guarantees that a larger financial aid award will consist of favorable grants and scholarships–your child may simply get (and have to pay back) more loans.
The two main sources of financial aid are the federal government and colleges. In determining a student’s financial need, the federal government uses a formula known as the federal methodology, while colleges use a formula known as the institutional methodology. The treatment of your 529 plan may differ, depending on the formula used.
How is your child’s financial need determined?
Though the federal government and colleges use different formulas to assess financial need, the basic process is the same. You and your child fill out a financial aid application by listing your current assets and income (exactly what assets must be listed will depend on the formula used). The federal application is known as the FAFSA (Free Application for Federal Student Aid); colleges generally use an application known as the PROFILE.
Your family’s asset and income information is run through a specific formula to determine your expected family contribution (EFC). The EFC represents the amount of money that your family is considered to have available to put toward college costs for that year. The federal government uses its EFC figure in distributing federal aid; a college uses its EFC figure in distributing its own private aid. The difference between your EFC and the cost of attendance (COA) at your child’s college equals your child’s financial need. The COA generally includes tuition, fees, room and board, books, supplies, transportation, and personal expenses. It’s important to remember that the amount of your child’s financial need will vary, depending on the cost of a particular school.
The results of your FAFSA are sent to every college that your child applies to. Every college that accepts a student will then attempt to craft a financial aid package to meet that student’s financial need. In addition to the federal EFC figure, the college has its own EFC figure to work with. Eventually, the financial aid administrator will create an aid package made up of loans, grants, scholarships, and work-study jobs. Some of the aid will be from federal programs (e.g., Stafford Loan, Perkins Loan, Pell Grant), and the rest will be from the college’s own endowment funds. Keep in mind that colleges aren’t obligated to meet all of your child’s financial need. If they don’t, you’re responsible for the shortfall.
The federal methodology and 529 plans
Now let’s see how a 529 account will affect federal financial aid. Under the federal methodology, 529 plans–both college savings plans and prepaid tuition plans–are considered an asset of the parent, if the parent is the account owner.
So, if you’re the parent and the account owner of a 529 plan, you must list the value of the account as an asset on the FAFSA. Under the federal formula, a parent’s assets are assessed (or counted) at a rate of no more than 5.6 percent. This means that every year, the federal government treats 5.6 percent of a parent’s assets as available to help pay college costs. By contrast, student assets are currently assessed at a rate of 20 percent.
There are two points to keep in mind regarding the classification of 529 plans as a parental 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, other relative, or friend is the account owner, then the 529 plan doesn’t need to be listed on the FAFSA. Similarly, if the student is considered the account owner (as may be the case with a “custodial 529 account,” which results when UGMA/UTMA assets are transferred to an existing 529 account), then the 529 plan doesn’t need to be listed on the FAFSA.
- 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 EFC. So, your 529 plan wouldn’t affect financial aid eligibility at all.
Distributions (withdrawals) from a 529 plan that are used to pay the beneficiary’s qualified education expenses aren’t classified as either parent or student income on the FAFSA.
The federal methodology and other college savings options
How do other college savings options fare under the federal system? Coverdell education savings accounts, mutual funds, and U.S. savings bonds (e.g., Series EE and Series I) owned by a parent are considered parental assets and counted at a rate of 5.6 percent. However, UGMA/UTMA custodial accounts and trusts are considered student assets. Under the federal methodology, student assets are assessed at a rate of 20 percent in calculating the EFC.
Also, distributions (withdrawals) from a Coverdell ESA that are used to pay qualified education expenses are treated the same as distributions from a 529 plan–they aren’t counted as either parent or student income on the FAFSA, so they don’t reduce financial aid eligibility.
One final point to note is that the federal government excludes some assets entirely from consideration in the financial aid process. These assets include all retirement accounts (e.g., traditional IRAs, Roth IRAs, employer-sponsored retirement plans), cash value life insurance, home equity, and annuities.
The institutional methodology and 529 plans
When distributing aid from their own endowment funds, colleges aren’t required to use the federal methodology. As noted, most colleges use the PROFILE application (a few colleges use their own individual application). Generally speaking, the PROFILE digs a bit deeper into your family finances than the FAFSA.
Regarding 529 plans, the PROFILE treats both college savings plans and prepaid tuition plans as a parental asset. And once funds are withdrawn, colleges generally treat the entire amount (contributions plus earnings) from either type of plan as student income.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in the issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
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Let’s face it. Financial aid information is probably not on anyone’s top ten list of bedtime reading material. It can be an intimidating and confusing topic. There are different types, different sources, and different formulas for evaluating your child’s eligibility. Here are some of the basics to help you get started…
These days, it’s hard to talk about college without mentioning financial aid. Yet this pairing isn’t a marriage of love, but one of necessity. In many cases, financial aid may be the deciding factor in whether your child attends the college of his or her choice or even attends college at all. That’s why it’s important to develop a basic understanding of financial aid before your child applies to college. Without such knowledge, you may have trouble understanding the process of aid determination, filling out the proper aid applications, and comparing the financial aid awards that your child receives.
What is financial aid?
Financial aid is money distributed primarily by the federal government and colleges in the form of loans, grants, scholarships, or work-study jobs. A student can receive both federal and college aid.
Grants and scholarships are more favorable than loans because unlike loans, they don’t have to be repaid–they’re free money. In a work-study program, your child works for a certain number of hours per week (either on or off campus) to earn money for college expenses. Obviously, an ideal financial aid package will contain more grants and scholarships than loans.
Need-based aid vs. merit aid
Financial aid can be further broken down into two categories: need-based aid, which is based on your child’s financial need, and merit aid, which is awarded according to your child’s academic, athletic, musical, or artistic merit.
The majority of financial aid is need-based aid. However, in recent years, merit aid has been making a comeback as colleges (particularly private colleges) use favorable merit aid packages to lure the best and brightest students to their campuses, regardless of their financial need. However, the availability of merit aid tends to fluctuate from year to year as colleges decide how much of their endowments to spend, as well as which specific academic and extracurricular programs they want to target.
Sources of merit aid
The best place to look for merit aid is at the colleges that your child is applying to. Does the college offer any grants or scholarships for academic, athletic, musical, or other abilities? If so, what is the application procedure? College guidebooks can give you an idea of how much merit aid (as a percentage of a general student’s overall aid package) each college has provided in past years.
Besides colleges, a wide variety of private and public companies, associations, and foundations offer merit scholarships and grants. Many have specific eligibility criteria. In the past, sifting through the possibilities could be a daunting task. Now, with the Internet, 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. Then it’s up to your child to meet the various application deadlines. However, though this avenue is certainly worth exploring, such research (and subsequent work to complete any applications) shouldn’t come at the expense of researching and applying for the more common need-based financial aid.
Sources of need-based aid
The main provider of need-based financial aid is the federal government, followed by colleges. States come in at a distant third. The amount of federal aid available in any given year depends on the amount that the federal budget appropriates, and this aid is spread over several different financial aid programs. For colleges, need-based aid comes from a college’s endowment, and policies may differ from year to year, resulting in an uneven availability of funds. States, like the federal government, must appropriate the money in their budgets.
The federal government’s aid application is known as the FAFSA, which stands for Free Application for Federal Student Aid. The federal government and colleges use the FAFSA when federal funds are being distributed (colleges are responsible for administering certain federal financial aid programs). When colleges distribute their own financial aid, they use one of two forms. The majority of colleges use the PROFILE application, created by the College Scholarship Service of Princeton, New Jersey. A minority of colleges use their own institutional applications. The states may use the FAFSA or may require their own application. Contact your state’s higher education authority to learn about the state aid programs available and the applications that you’ll need to complete.
The FAFSA is filed as soon after January 1 as possible in the year your child will be attending college. You must wait until after January 1 because the FAFSA relies on your tax information from the previous year. The PROFILE (or individual college application) can usually be filed earlier than the FAFSA. The specific deadline is left up to the individual college, and you’ll need to keep track of it.
How is my child’s financial need determined?
The way your child’s financial need is determined depends on which aid application you’re filling out. The FAFSA uses a formula known as the federal methodology; the PROFILE (or a college’s own application) uses a formula known as the institutional methodology. The general process of aid assessment is called needs analysis.
Under the FAFSA, your current income and assets and your child’s current income and assets are run through a formula. You are allowed certain deductions and allowances against your income, and you’re able to exclude certain assets from consideration. The result is a figure known as the expected family contribution, or EFC. It’s the amount of money that you’ll be expected to contribute to college costs before you are eligible for aid.
Your EFC remains constant, no matter which college your child applies to. An important point: Your EFC is not the same as your child’s financial need. To calculate your child’s financial need, subtract your EFC from the cost of attendance at your child’s college. Because colleges aren’t all the same price, your child’s financial need will fluctuate with the cost of a particular college.
For example, you fill out the FAFSA, and your EFC is calculated to be $5,000. Assuming that the cost of attendance at College A is $18,000 per year and the cost at College B is $25,000, your child’s financial need is $13,000 at College A and $20,000 at College B.
The PROFILE application (or the college’s own application) basically works the same way. However, the PROFILE generally takes a more thorough look at your income and assets to determine what you can really afford to pay (for example, the PROFILE looks at your home equity and retirement assets). In this way, colleges attempt to target those students with the greatest financial need.
What factors the most in needs analysis? Your current income is the most important factor, but other criteria play a role, such as your total assets, how many family members are in college at the same time, and how close you are to retirement age.
How does financial need relate to my child’s financial aid award?
When your child is accepted at a particular college, the college’s financial aid administrator will attempt to create a financial aid package to meet your child’s financial need. Sometime in early spring, your child will receive these financial aid award letters that detail the specific amount and type of financial aid that each college is offering.
When comparing awards, first check to see if each college is meeting all of your child’s need (colleges aren’t obligated to meet all of it). In fact, it’s not uncommon for colleges to meet only a portion of a student’s need, a phenomenon known as getting “gapped.” If this happens to you, you’ll have to make up the shortfall, in addition to paying your EFC. College guidebooks can give you an idea of how well individual colleges meet their students’ financial need under the entry “average percentage of need met” or something similar. Next, look at the loan component of each award and compare actual out-of-pocket costs. Remember, grants and scholarships don’t have to be repaid and so don’t count toward out-of-pocket costs. Again, you would like your child’s need met with the highest percentage of grants, scholarships, and work-study jobs and the least amount of loans.
If you’d like to lobby a particular school for more 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. Also, your chances improve if your child has been offered more aid from a direct competitor college, because colleges generally don’t like to lose a prospective student to a direct competitor.
How much should our family rely on financial aid?
With all this talk of financial aid, it’s easy to assume that it will do most of the heavy lifting when it comes time to pay the college bills. But the reality is you shouldn’t rely too heavily on financial aid. Although aid can certainly help cover your child’s college costs, student loans make up the largest percentage of the typical aid package, not grants and scholarships.
As a general rule of thumb, plan on student loans covering up to 50 percent of college expenses, grants and scholarships covering up to 15 percent, and work-study jobs covering a variable amount. But remember, parents and students who rely mainly on loans to finance college can end up with a considerable debt burden.
BTW – Another excellent source of information is Finaid.org*
*Note – I send you to this site even though they HAVE AN ENTIRE SECTION dedicated to reasons why you shouldn’t hire firms like mine. 🙂
Actually, the advice is solid even in that regard. There are a LOT of businesses out there claiming to do what I do. Do your research before hiring anyone. If they’re legit they won’t mind you poking around a bit…
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