We haven’t had a blog recently, and we apologize for that. Like many of you we are juggling virtual work, virtual school and dealing with pandemic related fatigue. While we haven’t put much in print, we have had the pleasure to work with families through workshops and individual counseling. We continually hear that families are overwhelmed by the cost of college, the financial aid process and how to understand what they can afford. We are going to answer a few questions we get asked often and provide some resources to help you plan.
Should I file a FAFSA? Yes, even if you don’t think you will qualify for need-based aid. Many schools require them for their merit aid process. You also never know when tragedy might strike-job loss, death, divorce. If something occurs where you might need more aid or a loan, having a FAFSA on file can’t hurt. You need to make sure to submit your FAFSA before the school or state deadline–whichever is first (for example, Indiana’s state deadline is April 15th but many colleges have a March 1 deadline, so you would need to file before March 1). You then need to file the FAFSA for each child every year they are in college. Tip: Parents and students will have a PIN you each create to access and sign the FAFSA. Save your PIN in your phone so you can find it next year when you file again. The FAFSA is free. Never pay to file it. You can find it at http://www.fafsa.gov.
What tax year does the FAFSA use? The FAFSA now looks at tax data from two years ago (called prior prior year data). The FAFSA typically opens around October 1. It has gotten easier to file because it now includes an IRS look up tool that pulls in your tax data automatically. If you don’t use the IRS look up tool, you may be selected for verification. Verification requires you to submit hard copies of all your info to be “verified” by each financial office, slowing down the process.
What if your parents are divorced? The FAFSA will look at household financial data. If parents are divorced, list the parent who provides 50% or more of support or has the child 50% or more of the time. If parents have joint custody there are 365 days in a year–who had the extra day? Or who provides health insurance? If parents are remarried, the parent selected will also have to provide the step parent’s financial info even if that step parent contributes nothing financially to their college education–the FAFSA looks at household. The parent listed does not have to be the parent who claims the tax deduction for the child. It does not matter who is responsible for college tuition in any divorce decree. If the divorce decree says mom and dad must split tuition costs, only one parent (and any step parent) has to be on the FAFSA.
How do I know what I can afford to pay for college? This is often one of the hardest questions to answers and discussions to have with a family. We rarely met anyone who agrees with what the FAFSA calculates as their estimated family contribution. We like to drive newer cars, take vacations and eat out–but the government doesn’t care about that. Sit down and budget out your monthly expenses. What do you have to pay each month (mortgage, car payment, utilities, groceries, insurance, etc) and what is left. Reasonably, with making some sacrifices, what could you pay each month in tuition and costs? Most schools allow you to divide tuition payments into 10 or 11 months. If you think you can handle $1000 a month then you need to be at $10,000 out of pocket or take a loan to cover the rest.
I need help comparing financial aid packages? Colleges don’t use standard language on their financial aid letters so it is hard to compare apples to apples. We have created a spreadsheet you can use to compare costs and aid. We are happy to walk through this with your family to help you understand what is your bottom line cost and what options do you have to cover those costs.
Can I ask a college for more aid? The answer to this is maybe. First, we will look at need-based aid, then we will talk about merit aid.
Need-based aid: If something in your life has changed (job loss, death, medical bills or divorce for example) you can work with your college financial aid offices to complete an unusual circumstances form. The college is allowed, by the federal government, to use their professional judgement on whether or not to adjust your FAFSA data and recalculate your need-based aid. But you must have a FAFSA on file. Make sure to file it by the school/state deadline.
Merit aid: Some schools will not negotiate their aid packages. Other schools may be willing to review it. First, you need to have a reason for the adjustment. Saying “X school gave us $20,000 and you gave us $15,000” is not reason enough. X school might be more expensive to begin with, have weaker applicants, or just be able to afford to give more. Sit down and compare you net costs (your out of pocket costs after aid is applied) at each school, understand what you truly can afford, then have a conversation with the aid office (the spreadsheet above can help). If schools are very similar (both are small privates for example) but the aid packages are very different, that might be worth sharing. But if you are comparing a state school and a private school, the costs are not going to be equal. A school will likely not make an adjustment in that case. It never hurts to ask (nicely), have a discussion and learn what options might be available to you. You should only do this if your child is truly going to attend. Don’t waste people’s time just trying to game the system. They are busy professionals trying to help your family make the best decision for your child. Respect their time and expertise.
Is it too late to get a 529 plan? No, its probably not too late. Look at your state’s plan, as it will probably have the best tax incentives to optimize. See if you can withdraw contributions made in the same calendar year? If so, then put the money you would use to cover your out of pocket costs into the plan, get the tax credit/deduction (depending on your state) and follow the process to use the money to cover eligible educational expenses. In Indiana we get a 20% tax credit (not deduction, credit) on contributions up to $5000. That is up to $1000 off your state tax bill each year that can be directed to tuition. We are not tax professionals so check with your financial planner or CPA to get the most up to date info for your state and to also understand how other tax credits or college savings plans can be optimized for your family.
How can we avoid loans? This advice is going to be controversial–we don’t think you should. Too much loan debt is a bad thing. But a reasonable amount of loan gives your child “skin in the game”. It will also help them establish credit while in college. There are many different payment plans to fit many different income levels. Interest rates are low. However, you need to balance a variety of factors–what will their salary be like when they graduate? If they are entering a low paying field will they be able to pay off their loans. Are they planning to go to graduate or professional school, likely resulting in more loans? If so, minimizing undergrad loans might be important so they don’t have too much debt after graduate schools. Debt of 30,000 or less is reasonable–many people borrow that for a car and will pay it off in 5 years. College loans can be repaid over a longer time period.
We are happy to meet with families to help you understand the financial aid process. Happy Holidays, stay safe and healthy.