If you’re a parent of a high school student, make a resolution to gain a better understanding of how colleges determine their financial aid packages. Unlike what a typical financial aid information evening at your child’s high school may lead you to believe, there are a lot more complexities that go on behind that financial aid package offer.
It will be to your advantage to structure your finances as early as your child’s fall semester in their sophomore year to set up the best possible financial package. Parents of college bound students need to understand that tax years and school years do not match up. FAFSA forms use information from a family’s previous year’s taxes. For example – a high school senior, entering college in the Fall of 2017, will need to fill out a FAFSA in October of 2016, and that information is based on the family’s tax year of 2015 when the student was a second semester sophomore and first semester junior.
“For parents with high school sophomores and juniors, you need to understand that any financial decision you make in the tax year that ends in December of your child’s junior year, will have an impact on your position for getting the best possible financial aid package when your child is a college freshman. And this thinking goes on not just for the first year, but for four years and beyond,” said Fred Amrein, founding principal of Pennsylvania-based www.collegeaffordability.com. A father of three college graduates and the first financial advisor to be approved by the Higher Education Consultants Association, Fred’s fee-only financial firm advises his clients to look at financing college as one would a well-planned four-year business plan.
With the right guidance and some end-of-the-year tax strategies, you can come away with the lowest possible Estimated Family Contribution number, or EFC, when you and your child sit down in early October and complete a Free Application for Federal Student Aid form, or FAFSA. Families with the lowest incomes may have an EFC of 0 – meaning no ability to pay for college – and the wealthiest families may have an EFC above $100,000. There are financial aid strategies for both these scenarios, and everyone in between “if you know how to play the game,” said Amrein.
How Is Your EFC Determined?
A completed FAFSA form will calculate your EFC (expected family contribution) number. This number determines if – and how much – you qualify for need-based financial aid. While many families complete the FAFSA on their own in a little over an hour, it might be worth a consultation this time of year with a financial planner, who specializes in educational funding, to figure out which assets to liquidate or which funds to transfer for tax purposes to leverage the best EFC outcome.
The Federal Method EFC Calculation takes into consideration four main areas:
- Parent Income
- Parent Assets (this does not include retirement funds, home equity, or small (Family) businesses with under 100 employees)
- Student Income
- Student Assets
“What most families don’t understand is that an EFC is actually four different calculations. There is a lot that you can do to determine the outcome of filling out your FAFSA. This includes how you structure your assets before filing your taxes,” says Amrein.
10 Strategies For Maximizing Eligibility
Once you have a better understanding of the FAFSA calculation, you may think twice about how to approach your savings, assets, and income, especially before the end of the tax year of your child’s first semester junior year in high school.
Below are 10 strategies that could have a significant impact on need-based aid eligibility. These suggested strategies are meant to increase your awareness of different steps families can take to minimize their EFC, thereby increasing their eligibility for financial aid. Since each family’s situation is unique, some or all of these strategies may not apply. Each family’s EFC will differ
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