About 3 years ago a frustrated Arne Duncan (our Secretary of Education) told Congress, “You basically need a Ph.D to figure that thing out!” . Mr. Duncan was referring to the 106 question Free Application for Federal Student Aid, or “FAFSA.”, the application that all schools require to determine whether and how much financial aid a family will qualify for. (In Florida, any student who wishes to receive Bright Futures, the state’s merit-based scholarship program, must also file a FAFSA, even if they do not plan to seek additional financial aid for college).
Now fast forward a few years — like to this past Monday — and the Wealth Adviser section of The Wall Street Journal (yes, the Wealth Adviser of that Wall Street Journal) has a lead story with this headline: “How Not to Blow It With Financial Aid”.
Finally. an official acknowledgement that financial aid (need and merit) is not only one of today’s most important components in a middle class family’s college funding plan, but also that the lack of true information and mass confusion about the financial aid formulas — and the Dept. of Ed. regulations upon which they are based — is causing thousands of qualified families to needlessly leave money on the table (one estimate had 22,000 families in Florida forgoing $24,000,000 in 2010.)
Just one seemingly small mistake can lead to an inaccurate portrayal of a family’s finances — one that does not fairly reflect its needs — and results in thousands of scholarship dollars lost. For instance, did you know that money saved in your child’s name (potentially an efficient tax strategy) will be penalized much more heavily in the financial aid formulas than money saved in your name? And did you realize that your child’s 529 plan is NOT considered to be money saved in your child’s name (he’s the beneficiary), but if a grandparent sets up and uses a 529 then it can be treated as student income? The Journal put it this way: “Grandma giving YOUR child $5,000 from her 529 plan could mean as much as $2,500 less aid…”
How about parents who are separated or divorced? Who’s information should get reported? The Dept. of Ed. guidelines require that the applicant report the household dynamics (step-parent too, if applicable) of the legal parent who provides more support, which is interpreted as the household where the student lives the majority of the time. Two notes: 1) the other parent’s household is largely ignored on the FAFSA, but WILL LIKELY be counted in the CSS Profile formula which is used by many private universities; and 2) children with divorced same-sex parents face additional difficulty when applying for aid and should contact a specialist to review their situation.
There’s also an oft-misunderstood Small Business Loophole. For most business owners I see in my practice, the proper value of their business is “zero.” Why? The rationale buried in the directions has to do with the number of employees your business has and the percentage ownership. Those with fewer than 100 employee shoud be exempt, but I’ve seen people make this mistake and lose tens of thousands of potential financial aid.
Oh, and please don’t forget – retirement assets are exempt! Don’t report them on the FAFSA. As far as other non-retirement assets, there is an asset protection allowance, and certain annuities and insurance products may also be exempt from the formulas.
The Journal story covered a lot of this and it’s definitely worth a read. Bottom line, if you have college-bound students, regardless of whether you think or have been told that ‘you won’t qualify for aid’, you owe it to yourself to learn the nuances of the Title IV financial aid regulations BEFORE you file an application. Remember that many strategies that are tax-friendly will actually hurt your families’ financial aid prospects.
Throughout the next few months, I’ll be conducting a few classes on this topic. They are free, open to the public, and full of this type of information, including a thorough review of the common mistakes and myths that trip up parents and students when seeking help with college costs. To learn more or to register, you can go to www.LearnCollegeFunding.com. If you have college-bound children, I hope to see you there. If you don’t, please invite someone who does — they’ll thank you for it.