Feb 06, 2019

The Ins and Outs of College Financial Aid Calculations

Colleen Krcelich, CPABy Colleen Krcelich, CPA

MoneyLife100Your child has been accepted to the private college of her dreams. She can’t wait to fly the nest this fall, but you are still trying to figure out how you will manage the $60,000 cost to cover tuition, room and board or rent, books, supplies, transportation, and living expenses.

Graduation pictureThe good news is that most private colleges (and some public ones) offer great financial aid packages. These can include grants (private and public), scholarships, work study programs, and loans. According to a report from the National Association of College and University Business Officers, private institutions offered aid packages consisting of grants, scholarships, and work study programs that covered about 50 percent of the cost of tuition and fees for the 2018-2019 school year.

Careful planning and an understanding of how financial aid works can help you to maximize the amount of aid offered to your child. The Net Price Calculator tool, provided by the U.S. Department of Education, will direct you to your school’s calculator, which will estimate how much aid you will receive.

The first step when applying for aid is to complete the Free Application for Federal Student Aid (FAFSA) for both you and your child, if they file a tax return; the second is completing the CSS profile required by many schools. The FAFSA is used to determine how much you can afford to pay toward college. It can be completed as early as Oct. 1 of your child’s senior year. The CSS profile, found on the College Board website, collects much more financial information, including financial investments, income from businesses, equity in your home, and, in the case of divorced parents, income from both parents, including stepparents.

There are many factors that determine a college aid package, including who earns income and the ownership of assets, along with the type of assets. First is income – from jobs, from a business, or rental property. The CSS profile considers the prior year income as reported on tax returns, including retirement contributions as well as an estimate of current year income. For a family of four with one child in college, the first $25,000 of income is protected in calculating aid. A family with adjusted gross income of $100,000 would be expected to contribute about $17,000 a year to their child’s education. As this income increases, a family can be expected to contribute up to 47 percent of their income. The second factor is assets. An emergency reserve of $15,000 or so is excluded from the parent’s total assets. In addition, retirement assets do not count in the financial aid formulas. All other assets are included, including 529 plans and equity in your home. Parents are expected to use up to 5.64 percent of those assets each year. These also include assets in a small business that you own and rental properties.

The college also factors in a child’s earnings and assets. Any retirement plans for the child are not included. All other assets are included at 100 percent. It is expected that the child will use 25 percent of his or her assets every year for college under the CSS profile. It is also expected that a child will use 50 percent of his or her income to pay for college.

Here are a few tips to help you maximize the college tuition aid package:

  • Complete the FAFSA as early as possible. Colleges use this form to allocate their money, too, not just federal grants.
  • Make yourself aware of college financial aid deadlines, and file the CSS profile as early as possible.
  • Explore merit-based scholarships offered by your college of choice.
  • Check to see if your child is eligible for state grants.
  • Explore private scholarships.
  • Many people will put assets in a child’s name to save on taxes, but it hurts when applying for financial aid. A parent should transfer assets out of a child’s name two years before they start college (other than 529 plans, which are counted as a parent’s asset).
  • Maximize retirement assets as opposed to other assets, as they are not included in aid calculations.
  • Ensure your credit score is strong and there are no errors on your credit report so that you get the best interest rate on student loans.
  • Consider appealing your package.
  • Use a nonprofit, such as CAP of PA or the National College Access Network, to assist you in reaching your college and financial aid goals.

With the proper planning, your child can realize her dreams, while you can minimize the financial impact.

Colleen Krcelich is a self-employed CPA and adjunct professor at Northampton Community College. She is also a member of PICPA’s CPA Image Enhancement Committee.

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