Financial Solutions For Families

Transcription

1 COLLEGE LITERACY ACADEMY The True Story On Who Will Qualify For Financial Aid A Family Guide On Paying For College Financial Solutions For Families

2 (Sixth Edition) Copyright 2006, 2007, 2008, 2009, 2010, 2011 By: Educational Literacy Center All Rights Reserved No part of this publication may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For More Information Contact: Chuck Moore, CCFC, CAMC, CAFC Louisville, Ky Ph Cell This publication is general in nature and is not intended to give legal, accounting or investment advice. Before incorporating any ideas in this publication the reader should consult with their financial advisor, guidance counselor, or tax professional. Some of the information provide in this publication is from Federal Financial Aid System and other resource material

3 The True Story On Who Will Qualify For Financial Aid Families of all income and net worth levels will benefit by applying for financial aid. Here are a few benefits of applying for financial aid: Lower income families could receive grants and need-based scholarships or other financial aid from the federal and state governments and possibly the college. Middle-income families could receive grants and scholarships or other financial aid from the federal and state governments if the student attends a private college or university. Upper income families could receive student loans at very low interest rates from any college & scholarship incentives if a student attends a private college. Every family should apply for financial aid, regardless of income. Even students from wealthy families can take advantage of a low cost Unsubsidized Loans. Few families cannot afford to pass up the opportunity to borrow money for college at these low rates. Most students that attend college are eligible to receive some form of financial assistance. Considering that there is a wide variety of financial aid that can be obtained, there are plenty of opportunities that are available for families and their students. Here s a brief outline of how the financial aid system works: General Rule of Thumb Families with incomes less than $40,000 a year will most likely qualify for some form of need-based financial aid in the form of grants, scholarships, loans, and work-study if the student attends a four-year public or private college or university. Families with income between $50,000 to $85,000 a year will most likely qualify for some form of need-based financial aid in the form of grants, scholarships, loans, work-study if the student attends a four year private college or university. If the student attends a public university, they will most likely qualify for non-need based aid in the form of loans or campus work-study.

4 Families with incomes of $90,000 to $125,000 could qualify for some form of needbased financial aid from private colleges. If the student attends a public college or university the student will qualify for non-need based federal aid in the form of loans. How The Student s Need Is Calculated Financial aid is awarded in two forms MERIT and NEED. Merit Based Financial Aid is given out to students with a high grade point average while in high school, high ACT/SAT test scores or to students who have a special talent or skill (such as an athlete, musician, etc.) This type of financial assistance normally is in the form of scholarships. Need-Based Financial Aid comes in the form of Federal/State and college grants, scholarships, loans, and work-study and is based on the students financial need. Needless to say Merit Based Financial Aid is the most appealing, because most of the award is in the form of FREE money. Need-Based Aid must be calculated by using a formula that was set-up and passed by the Federal government. First the financial aid administrator of the college establishes the cost of attending their college or university. Once the family completes the Free Application For Student Aid (FAFSA), the administrator subtracts the Expected Family Contribution (EFC) that was calculated by the federal formula to come up with the financial NEED of the student. Cost of Attendance Outside Resources (money not give by the federal, state or colleges) - Expected Family Contribution = Financial Need What Is Cost of Attendance (COA) The COA used for the Financial Need calculation is considered the full Cost of Attendance, which includes: Tuition & Fees Room & Board Books & Supplies Transportation Personal Expenses

5 Let s Define What Is Called Your Expected Family Contribution or (EFC) The EFC calculation is computed using the parents and student s income and assets. It also includes the number of family members in the household, the number of students in the family attending college (parents are not included), the amount of taxes paid by the family and various living allowances that are available to the parents and student. The Expected Family Contribution will remain constant, regardless of the Cost of Attendance (COA) of the colleges. As a result, the family s financial need increases as the price of the college increases. IMPORTANT Normally the first form of financial aid is filled with student loans. The college will fill the remaining need with work-study, grants and scholarships or leave the family with the obligation to pay the balance. Just because you qualify for financial aid does not mean the college is able to fill 100% of your need. Let s Look At The Financial Aid Process The first step of the financial aid process for every family is to determine the EFC. The EFC is determined after the family completes the Free Application for Federal Student Aid (FAFSA). There are three important points that families must understand when completing the FAFSA financial aid form. 1. The FAFSA cannot be filed until after January 1 of the student s senior year of high school. Furthermore, it must be filed each year the student is seeking financial assistance while in college. 2. The Federal Methodology Formula that calculates the family s EFC is based mainly on the parents and student s income and assets. Income of the parents and student is assessed heavier than their assets. Once the family completes the FAFSA, it is sent to the Needs Analysis Company to calculate the EFC and the result is reported to both the colleges and the family on what is called a Student Aid Report (SAR). A paper copy of the SAR is then sent to the student s home address about thirty days after the FAFSA has been completed. How Can We Increase Our Financial Aid Eligibility Let s be realistic, everyone regardless of income wants Financial Aid. Many families have been told through financial aid seminars, that by lowering your income (which is very difficult to do with normal wage earners) or hiding assets, will qualify them for scholarships and grants. This is TOTALLY false and very misleading. According to the College Board most financial aid comes in the form of low interest LOANS not scholarships and grants.

6 Since ALL families, regardless of income, can qualify for low interest rate loans, WHY do most families think they can reduce or manipulate their income and assets to a point they will qualify for NEED-BASED grants and scholarships. When families try to manipulate the financial aid system they normally end up costing themselves more money than the student could receive in financial aid. This is especially true if the student will be attending a public university. Most strategies that are recommended by some so-called college consultants may not be appropriate to the family s individual financial situation and in many cases the only one benefiting is the person that is trying to sell a produce to hide assets from the financial aid calculation. If these strategies could help in reducing the family s out-of pocket expenses they should be done several years in advance of the student attending college, not in the student s senior year in high school. The family should also thoroughly evaluate the appropriateness of each strategy, taking into consideration the following: Will a particular strategy restrict my access to investments or funds needed to pay college expenses? Will changing my finances cause a negative side effect; such as, tax penalties, increase in tax liability, or otherwise defeat my family s financial goals for the future? Is the implementation of a particular strategy practical in my circumstance? Any strategy could have a different consequence on your family s personal circumstances. You should consult your own financial professional, accountant, or other financial consultant for help. By now, everyone who has talked to high school guidance counselors have been told Assets in the student s name are assessed at a higher rate than assets in the parents name. The student s assets are accessed at a flat 20% rate and the parents assets are assessed at a rate of 5.65%. If (and I mean a big IF), your family will qualify for need-based financial aid in the future, you may want to avoid saving for college in the student s name. But, with that said, let s look at what some parents are persuaded to do when approached by an unethical college financial planner.

7 Bob and Mary earn approximately $86,000 a year and with the help of their daughter s grandparents have saved $30,000 in a custodial account that is owned by the student and becomes her asset when she reaches age 18. Bob and Mary s daughter, (Betty) has a GPA of 3.2 and scored a 24 on her ACT test. She will be attending a four-year state supported university in the fall at a cost of $15,300 a year. Bob and Mary were concerned about the cost of Betty s education, because they have one other student, (Bill) to educate as well. Bob and Mary decided to attend a financial aid seminar in the hopes of learning how to get more financial aid for their daughter. During the seminar they learned that assets in a student s name would reduce the student s financial aid eligibility by 20%. The presenter at the seminar told parents that if they had assets saved in the student s name to get the money out of the account and put it in the parents name. This made total sense to Bob and Mary. So they set up an appointment to talk to the advisor. The financial planner told them if they leave the assets in the student name it will decrease their student s financial aid by $6,000 ($30,000 X 20%) and they needed to move the assets over into their names since the assets will only be accessed at a 5.65% rate or $1,695. The planner also told Bob and Mary, they needed to put this money into an annuity so it will not be counted in the financial aid calculation, because it was a retirement account and retirement account assets are not counted on the financial aid formula. Therefore, the annuity will hide the assets and increasing the student s financial aid eligibility. By moving the asset, the advisor told them they would not have to use the $30,000 to pay for Betty s education because of the increase in financial aid. The $30,000 could then be used to help pay for their other student s educational cost when he is ready for college. The parents thought WHAT A GREAT IDEA and incorporated the suggestion. Betty s mutual fund had an investment base of $5,000 (this is the original investment). Therefore, the mutual fund had a gain of $25,000. Bob and Mary transferred the ownership of the mutual funds over to their names and liquidated the assets into cash. They then invested the cash into the annuity that the advisor recommended. The advisor then walked away with a commission of $1,500. Three months later, Bob and Mary completed the Free Application for Federal Student Aid. About 30 days later they received Betty s Student Aid Report and were SHOCKED. The Student Aid Report indicated that their Expected Family Contribution was $16,124. They realized this was more than the total cost of the college that Betty will be attending and they would not qualify for financial aid.

8 WHAT HAPPENED TO THE FINANCIAL AID? Their EFC was $16,124. Needless to say Bob and Mary were very upset. They contacted the advisor and asked him what had happened. The advisor told them he had no control over what the college financial aid officer would give them in financial aid. Then he hung up the phone. During that time, the college contacted Bob and Mary and asked them to submit to a verification process. This is like a mini college audit. The verification process is checking to see if all the information on the FAFSA was correct. During the investigation, the college learned Bob and Mary invested into the annuity. Even though retirement accounts are not included as assets in the financial aid calculation, the yearly contribution is counted. So, Bob and Mary had to claim the annuity contribution in the financial aid calculation. This is not the end of this story. Things got even worst. Bob and Mary realized they would now need the $30,000 to help pay for Betty s educational costs. They found out if they cashed the annuity in, they would pay a 10% withdrawal penalty from the insurance company, which would cost them $3,000. So they decided to leave the money in the annuity and borrow the money to pay for Betty s education. When tax time rolled around they were surprised again. Since they cashed in the mutual fund assets, they had to claim $25,000 in capital gains and pay $3,750 in additional income taxes. The moral of this true story is: Education is important for a young college student, BUT lack of education of the parents could cost thousands of dollars. As you have seen in the above example, assets are not the biggest factor when it comes to receiving financial aid IT IS INCOME. Since income is the major factor when it comes to financial aid, families must be cautious of the timing of one-time income gains and losses from the sale of investment assets. The timing of a gain or loss from the sale of an investment can affect your financial aid in a big way. For example, if you sell an asset that results in a capital gain, the gain can reduce your financial aid eligibility. However, a loss on the sale of your investment can increase your financial aid eligibility. Consult your financial advisor on the appropriate timing of selling your investments. If you are self-employed or run a part-time home based business, there are many tax planning strategies that can reduce your tax liability and provide additional dollars (Tax Scholarships) to cover educational expenses. Always get proper guidance from a tax professional.

9 IMPORTANT NOTE Be aware of exempt assets. Insurance products, such as cash value life insurance contracts, annuities and other retirement assets are not taken into consideration in the financial aid formula. Do not include the values of retirement accounts on the FAFSA financial aid forms. Note: Even though you do not have to count the total value of a retirement account (401-K, Simple IRA, Keogh, etc.) as an asset on the FAFSA, any contributions that you make during the financial aid year to retirement accounts either withheld from your paycheck and directly paid into the account, will be treated as untaxed income in the financial aid formula.