Recently, I scrambled down a rabbit hole as I dug into student financial aid. When I was a college student, I don’t recall putting much effort into understanding the Free Application for Federal Student Aid, or FAFSA. All I knew was that I needed to do it to maximize the financial aid I could get as a student. You submit the answers and later the school tells you how much aid you qualify for.
As a parent of a student, I’m much more interested in the formula. After all, on average parents fund 54% of the cost of education, sourced from income, savings, and borrowing. Having an understanding of the impacts of particular types of income and savings, could potentially save me and my children thousands of dollars towards education.
How Much Financial Aid Will I Need?
First, we need to get an idea of how much financial aid we’ll need. Financial aid comes down to a simple equation:
Cost of Attendance – Expected Family Contribution = Financial Aid Need
The Cost of Attendance (COA) is easy. Every school that accepts federal funding must publish their COA, or the expected cost of a student attending their university. The COA is composed of tuition, room & board, books & supplies, personal expenses, transportation, and other fees. My daughter’s school totals $19,654 for one semester of school. That’s roughly $80k for a four year degree.
I’m only planning on footing the bill for seven semesters of tuition and ~62% of housing, or about half of the COA.
The Expected Family Contribution (EFC) for most students, is broken into two parts: the expected parental contribution, and the expected student contribution. Parents are off the hook if the student is older than 22, married, has dependent children, in graduate school, orphaned, homeless, veteran and several other uncommon cases. If none of those apply, the government expects your parents to pitch in, even if in reality they don’t, for whatever reason
We’ll save digging into the expected student contribution for a later post. Instead, let’s dig into the expected parent contribution.
Expected Parental Contribution: Income
First, we’ll need to calculate the parents’ Total Income. Let’s assume we’re filling out the 2021-2022 FAFSA. Calculating Total Income involves:
- Starting with the parents’ adjusted gross income from their 2019 tax return. If they didn’t file taxes, then total of what they would have reported, had they filed.
- Add any untaxed income and benefits. The biggie here is contributions to tax-deferred pension and retirement plans in 2019, including 401(k)/403(b)/457(b)/etc. workplace plans. Also add back in deductible contributions to traditional IRAs, SEPs, SIMPLE and Keogh plans. It also includes child support payments, and tax exempt interest.
- Subtract items like American Opportunity Tax Credit and Lifetime Learning Tax Credit. Also subtract paid child support, and various Federal Work-Study sources of income
Now that we have our Total Income, our next step is to calculate our Income Allowance:
- Start with income tax paid in 2019. This is your total income tax, less credits.
- Add your state and other tax allowance. This depends on your home state and is a percentage that you multiply by your total income. In Virginia, if your total income is less than $15k, you multiply by 6%; otherwise, 5%.
- Next, add your social security taxes. If your earned income from working is less than $132,900, it’s 7.65% of your working income. Otherwise, it’s less, since you now only compute your additional medicare tax. Repeat this for your spouse.
- Add in your income protection allowance. This is a fixed dollar amount that depends on how many students you have in college and the household size. For my family of six kids with one in school, our allowance is $50,570.
Our Available Income is our Total Income – Income Allowance.
Now let’s take a look at the impact of our assets.
Expected Parental Contribution: Assets
- Checking and savings accounts
- Investment accounts, including: taxable brokerage, 529 accounts, Coverdell plans, trust funds, UGMA/UTMA, money market funds, CDs, stocks, bonds, etc. Retirement account balances aren’t included.
- Real estate, excluding the home you live in
- Business and/or farm values. Excludes small businesses that your family controls more than 50% and has fewer than 100 employees. Also excludes family farms that you live on and operate.
To compute the Contribution from Assets:
- Total up cash, savings, and checking accounts
- Add net worth of investments and real estate
- Add business and/or investment farm values
- Subtract a “education savings and asset protection” allowance. This is indexed to the age of the oldest parent. For example, a 45 year-old parent has an allowance of $6,200.
- Multiple the result by 12%
You have now the total Contribution from Assets
Total Expected Parents’ Contribution
To determine the final, expected contribution:
- Add Available Income to Contribution from Assets.
- Multiply by your parents’ contribution percentage. This depends on how much your income and asset contribution. It varies from -$750 at the low end, to 47% if the income and assets exceed $35,100.
- Divide the total contribution by the number of college students in your family attending college in 2021-2022
Ta-dah! You now know your Expected Parents’ Contribution! How exciting!
In looking at this calculation, a few things stuck out:
- Contributions to tax-deferred retirement accounts count against your aid eligibility. I suspect the rationale is that if you have a child going through school, you should scale back your retirement savings. However, this seems like a bad idea. We should be encouraging retirement saving, and not using financial aid eligibility as another carrot/stick seems like a missed opportunity.
- I expected education savings vehicles (e.g. 529 and Coverdell ESA accounts) to be favored over taxable brokerage accounts and real estate, but they aren’t. Whether it’s a 529 or a brokerage account, I guess both are equals in their ability to pay for college.
I filled out the FAFSA with my daughter before her freshman year. As expected, I was right and we didn’t qualify for any needs based funding. But filling it out kept our loan options open, even though we haven’t needed them.
For the 2021-2022 school year, we started the FAFSA, but it got stuck and wouldn’t progress. And now the June 30th, federal deadline has passed. Oh well. Maybe next year we’ll try again.
What do you expect to contribute to your children’s education expenses? Have any good stories or ideas about the parental contribution? Leave me a comment.