How do you plan to pay for your child’s college? If your answer includes anything about dipping into your life savings or retirement, then taking out some loans to fill in the gaps, stop right there. There is a better way to do it.
First . . .
Find out your EFC—expected family contribution. There are three categories of financial need for college-bound families:
- Category 1 families qualify for need-based aid at every institution of higher education and have low to no EFC.
- Category 2 families qualify for need-based aid at some schools—like private universities—and not at others. They will have significant EFC to provide.
- Category 3 families do not qualify for need-based aid and may have a large amount of EFC or very low EFC depending on the school their child attends.
There is aid available for every category. Determining EFC is not simply about your income as a parent. There are three major things to keep in mind when determining EFC:
Income is tiered (like taxes, after income allowance). The more you make, the more you will be expected to contribute to your child’s educational expenses.
Some of your assets will be counted as part of this income and some will not. Most personal investments—after tax investments—are generally counted. And before tax investments are not counted.
Counted Assets in EFC
- Personal checking and savings
- Stocks, bonds, mutual funds
- Money Market, CDs, 529s
- Equity on investment properties
Counted assets depend on the methodology of the financial aid you apply for. For instance, some EFC will be calculated to include equity on primary residence in addition to investment properties. Read the fine print to find out the parameters of the aid you apply for.
All EFC parental asset income is calculated based on a percentage. For every dollar of asset income, 5.6 cents is included in the EFC.
Not Counted Assets in EFC
- 401K, IRAs, 403b
- SEP IRAs, Roth IRAs
- Annuities, C.V.L.I
Annual contributions made in the base year (the year before application for aid is made) will be included if they qualify as a countable asset.
Student income is also calculated into EFC. Students are allowed a certain amount of money before their income is counted. After the allowance, 50% of all income is expected to be contributed toward EFC.
Likewise, any personal assets of your student (same as assets of parents) are counted and 20 cents on each dollar become a part of the EFC.
Next . . .
The next step of the process is finding the right school for your student. This question is not only about a program of study, but about the financial fit as well. Some category 3 parents find that it’s actually less expensive for their child to attend a private school than a state school depending on their EFC.
Join us next week for more about the next step in the process and how harmonizing the COA—cost of attendance—with your EFC can help you get your child through college without going bankrupt.