This is the third post out of the series of posts discussing the FAFSA and your EFC as a family. In previous posts we introduced each term. This included defining each and explaining how they tie together. In addition, we explained the financial aid equation including the ultra important role EFC plays in it. We also talked about what information Uncle Sam reviews to calculate your EFC. In this final post, we will focus on the EFC FAFSA Chart we have utilized to estimate your Expected Family Contribution as a family.
This is critical when forecasting what your EFC will be prior to completing the FAFSA. Once again, your Expected Family Contribution (EFC) relates to your family and what the federal government and ultimately the schools feel is the MINIMUM amount you can pay out of your own pocket as a family towards tuition. Learning your approximate EFC can lead to strategizing on how you can possibly reduce it, in turn increasing need.
The below video will show you our EFC FAFSA Chart. This will display the percentage the EFC will count of your non-retirement assets. In addition, what percent of your Adjusted Gross Income from the previous-previous years tax return will be counted.
This is the second post out of the series of posts discussing the FAFSA and your EFC as a family. We introduced each term in the previous post. That post included defining each and explaining how they tie together . We also explained the financial aid equation and the ultra important role it plays. We will now focus more on the EFC and how it is calculated with the EFC Calculator.
Once again, your Expected Family Contribution (EFC) relates to your family and what the federal government and ultimately the schools feel is the MINIMUM amount you can pay out of your own pocket as a family towards tuition. Some people get confused when they hear “paying out of your own pocket”. They think you literally have to have that amount available in either an investment fund or your checking account etc. This is not the case, if you have the funds available to pay your EFC by withdrawing money from a savings account or 529 plan etc then that’s great but if you don’t then you’re going to have to borrow the money.
Simplistically your EFC is basically the amount of money that you need to come up with as a family to pay for one year of school. How you do so is totally at your discretion as a family. But the money will not be coming from Uncle Sam, the State or your School.
So now you know what EFC means, how it fits into the conversation of paying for college and why it is such an important variable of the financial aid equation. The next step is to understand how the number is calculated. This is where the EFC Calculator comes into play.
The below video gives a great explanation of exactly how the federal government calculates your EFC as a family.
This will be the first blog post in a series of blog posts discussing the FAFSA and your EFC. Now if you just read that sentence and thought “what the heck is FAFSA and EFC” trust me you’re not alone. But don’t despair as we will be thoroughly explaining both. In this series of posts we will focus on the FAFSA EFC calculator. In this post specifically though we will explain the important connection between the FAFSA and EFC.
To start, let’s define what each acronym stands for; FAFSA stands for Free Application for Federal Student Aid. EFC is defined as Expected Family Contribution. These are extremely important terms when discussing the student debt crisis in particular when talking about college financial aid. The FAFSA is the form that every school receives no matter if it’s a public or private institution. The form determines how much federal aid a family is eligible to receive.
It’s important to understand that just because a family is eligible to receive aid does not mean that they will. It all depends on the individual school and their financial aid philosophy as far as how much need they meet. What the FAFSA will produce though is an extremely important number known as your EFC. This is where the FAFSA EFC calculator comes into play. As you will see in the below video your EFC literally pops up on the screen once you hit the submit button on the FAFSA form.
Your EFC is vitally important for two reasons. First, it represents the MINIMUM not the MAXIMUM amount of money the government expects your family can pay for college. This is a very important distinction. The EFC is based on your family structure and finances which you inputted electronically on the FAFSA.
Financial Aid Equation
Second, it’s the most important variable of the financial aid equation. Below is the financial aid equation;
COST OF ATTENDANCE (COA) – EFC = NEED
The below video goes into detail about what this equation means. As you can see the EFC is the middle variable and the one you subtract from the cost of attendance. This result will tell the federal government and ultimately the schools themselves how much money you “need” as a family. Common sense tells you that the lower the EFC the higher the need amount which is a positive for you.
In addition, out of the three variables that make up the all important financial aid equation, the EFC is the only variable that you have some control over. This is because it partially reflects your family’s financial situation as far as assets you own and income you report on federal tax returns. It is no exaggeration to say that the financial aid equation is by far the most important piece of information you need to be aware of. As well as your EFC as we have discussed.
No matter what state you live in, no matter what school you plan on attending, the entire conversation regarding college financial aid starts with this equation.
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The majority of parents do not realize financial aid is broken down into two different categories. Those categories are Need Based Financial Aid and Merit Aid and they are very different. The topic can be confusing due to the fact Need Based and Merit awards come from different departments on campus. When the dust settles though they both end up in the same financial aid award letter. Unless you had a high level of understanding of how the system works, the average parent would not be able to decipher what is a need based award versus merit by looking at an award letter. This just adds to the overall confusion.
Over 90% of what we discuss at College Funding Professionals revolves around Need Based financial aid and the financial aid equation we have previously spoken about. We focus on Need Based because of its complexity compared to Merit based aid and also due to the fact that the majority of the money you receive in a financial aid award letter will be from Need Based awards.
Merit Aid comes from the admissions office on a college campus and is solely based on academic performance. This includes extra curricular activities such as volunteering and activity in school clubs etc. It is a fairly straightforward process. A prospective university will have certain internal guidelines as far as eligibility for Merit awards. These are most commonly referred to as scholarships on an awards letters. Eligibility mainly consists of reviewing a prospective students GPA, Class Rankings and Test Scores (SAT/ACT). So unlike Need Based, there aren’t a lot of moving parts when it comes to Merit. One aspect you could have some control over is if you need to write an essay for a particular award.
Similar to when a school reviews a families tax return when generating an EFC for that family on the NEED based side, when it comes to a students scores in the aforementioned areas there is nothing you can do about it. Once the rankings and GPA have been calculated and test scores documented, to use a favorite slogan “it is what it is” at that point. The one thing you can do as a family is strategizing as far as what schools give Merit awards (not every school offers Merit awards i.e. Ivy League) and what are the range of scores they are looking for in prospective award winners.
Once you have that information then you can strategize about which schools give you the best chance at securing Merit awards. Helping families understand how to go about this represents the 10% of our help here at College Funding Professionals when it comes to Merit Awards.
Need Based Awards
Need based is the total opposite of Merit. It is solely based on your family’s structure. This includes married or divorced, number of kids in college, total number living in household and finances. As we have previously mentioned, to calculate how much Need Based money your family is eligible for, you always go back to the financial aid equation (COA – EFC = NEED). This is always the starting point of any conversation dealing with Need Based financial aid.
In addition, need based awards are generated by the financial aid office of a university as opposed to merit which comes from admissions. Need Based awards do not take into account any of the academic scores (gpa, class rank, SAT/ACT) when generating awards. Simply put, if it’s not a variable in the equation then it doesn’t matter as far as Need Based. With that being said, the biggest variable in the need equation is by far EFC. Remember, there are a lot of different items that are considered when calculating your EFC as we have previously discussed.
You can have a financial aid award that consists of both Merit and Need Based money. For families with a large EFC, Merit becomes their only resource other than private scholarships. This is because they do not qualify for Need Based money due to their EFC. When you hear the term “Need Based” just remember they are referring to the financial NEED of your family. Which is based solely on the Financial Aid Equation.
The Big Mistake
The far majority of families get consumed with the cost of attendance or “sticker price” of a school. Of course that is important and the first variable in the equation (coa). But in reality the numbers families should be focusing on is their Expected Family Contribution (efc) and the NEED amount. Those are the variables and numbers that will dictate your out of pocket costs as a family.
This is a major point and an overarching theme throughout our Virtual Counselor program that we thoroughly discuss.
The below video provides a good summary of this discussion as far as Need based aid
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A common question we hear when discussing financial aid is, “Financial Aid, Do You Payback”? You cannot thoroughly understand your award without knowing the answer to this question. The answer is it depends on what type of aid you received and where it came from. The important point is that all financial aid is not created equal.
Sources Of Aid
To understand if you have to pay back your aid, first look at the sources of where it comes from. College financial aid comes from 3 sources;
College or University
By looking for certain terminology or “trigger” words you can easily decipher if certain aid has to be repaid. Whenever you see the word “Grant” that means it is free money and is considered a grant or gift. This means that award does NOT have to be repaid. The same also can be said for when you see the word “scholarship”. This is money that does NOT have to be repaid. If instead of “Grant” you see the word “Loan” that means that specific amount does need to be repaid.
Most likely that repayment will be at some future date. That date is usually six months after graduation which means repayment of the loan will begin at that time. It should be pointed out that we are specifically referring to financial aid awards and loans that are within the award. We are NOT referring to loans that a family would secure that are not part of their child’s award. Those are loans that you would secure in addition to the money in the financial aid award. These are the type of loans you would secure to pay your Expected Family Contribution (EFC).
The below video further explains which parts of financial aid awards you need to payback and which parts of your award you do not. Specifically discussing popular grants from the Federal and State governments. As well as loans and work study programs.
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In this post we will be discussing College Planning which should not be confused with College Funding. We at College Funding Professionals consider College Planning to be a comprehensive overview of the entire process. It is a 30,00ft /360 degree view of how you will be paying for college with many moving parts. Conversely, we view College Funding as the investment strategies, including loans, that you would use to pay for college. Similar to the College Funding discussion, the conversation will be divided between early stage College Planning for “Pre-High School” Parents and late stage planning for ‘High School” Parents.
Pre-High School Parent
So let’s start with College Planning and how it pertains to Pre-High School parents. The biggest hurdle at this stage is simply just getting started. This might not seem like a major stumbling block but based on experience it’s the most daunting hurdle to overcome. You might be asking yourself how could this be? Well unfortunately as human beings procrastination affects the far majority of us and planning for college is no different. It seems overly simplistic but forcing yourself to learn about college planning, specifically early stage funding, is half the battle.
In our experience many families fall into the trap that is procrastination. Simply because the act of actually paying a college tuition bill is so far away. It’s hard to convince yourself that its something that should warrant your immediate attention. If you have a newborn or toddler, its easy to get into the mindset of saying “I know its important but hey we have so much time, lets look at college planning next month”. Before you know it next month turns into the end of the year which turns into lets wait to after tax day next April. Cycle repeats and your newborn or toddler is in middle school and you still haven’t started a plan. You will never get back the valuable time you lost where you could of been growing your college fund.
There is never a perfect timeso you just need to be disciplined and force yourself to do it. We have spoke to literally thousands of high school parents over the years. A great majority of them have told us they wish they started planning for college much earlier. When it comes to investing, time is one of the most precious commodities. The below video is an excellent case study. Delaying starting your college planning and college fund just a couple years can wreak havoc on the growth potential.
The Financial Aid Mistake
The second most common regret from high school parents is wishing they considered college financial aid awards into their planning. There is really only going to be one resource besides yourself when it comes time to pay for college. That resource is the college financial aid system and giving you money to help you offset your college cost. So why would you fail to understand anything about how it works? In particular, how they determine a family’s eligibility for an award?
The answer is it’s actually not your fault but the “system”. No one takes the time to educate pre-high school parents on this topic until they become high school parents. They now have an 18yr old and are literally sitting down and filling out the financial aid applications. Then and usually only then will the discussion of financial aid eligibility be brought to the forefront. In our opinion this is about seventeen years too late!!!
It’s impossible to have an accurate understanding of your goal as far as how much money you need as a family to pay for college, if you do not factor in and ultimately learn how to forecast the potential amount of a future financial aid award. For example, lets imagine your goal is coming up with a college funding plan for your 6yr old son. You might just do a quick search and look at the cost of attendance at universities in your area. Lets say your state school costs $35,000 a year. Factoring in average inflation and then multiplying the cost over four years, you come up with a total of $160,000. This represents your investment goal for the money you need to save.
Now two things are going to happen next both of which are bad for you as a family. First off, a lot of families will stop right there and say to themselves “what’s the point”? We’re never going to be able to save that much money. So they just give up and resign themselves to borrowing for most or all of the $160,000. This mindset is one of the major contributing factors on why the student debt crisis exists today.
Now if the family doesn’t get discouraged and actually moves forward, good for them. They’re on the right path and following one of our golden rules of Do Something, Never Nothing! So they proceed with putting a college funding plan in place. They do so most likely without one extremely important piece of information, an accurate goal! Why is that? Well it’s simple, they failed to factor in a potential financial aid award. They’re under the impression that they need to save roughly $160,000. So their entire thought process as far as what investment is right for them is centered around this number.
This could literally affect every aspect of their funding plan. This includes the amount of risk they take in a particular investment strategy. For example, they might choose a more aggressive strategy than they are comfortable with cause their lofty goal of $160,000. They might also possibly reduce or even eliminate contributions to their own retirement plan such as a 401k. All in an effort to invest as much money as possible into the college fund to meet their goal.
The Right Approach
Now, imagine if they did factor in financial aid. They knew how to forecast what a potential award might look like. They would now know based on their families particular situation there is a very strong possibility that they would receive roughly $20,000 a year in financial aid money. Multiply this out over four years you’re looking at around $80,000 of financial aid. In turn, reducing their out of pocket cost in half to only $80,000 instead of $160,000. Now think about how much of a drastic difference this would have made in their planning. Everything from what college funding strategy was right for them to how much to contribute every year would possibly change.
Don’t forget about all those families that never even made it to this point and just threw their hands up in the air right after learning they needed to save $160,000 for just one child’s college education. They ultimately just resigned themselves to having to borrow the full amount. If these families knew the real number was much closer to half the amount they thought they needed to save, the far majority would not have felt so discouraged and would have moved forward with some type of strategy.
So as you can see, pre-high school parents need to desperately avoid the two most common pitfalls; procrastination and failing to factor financial aid into their goals when coming up with the right investment strategy for their family.
High School Parent
Now that we have discussed early stage college planning for pre-high school parents, it’s time to move the discussion to late stage college planning for high school parents. As we have discussed in earlier posts, the high school parent, particularly those of juniors and seniors, are right at the “finish line” when it comes to planning. This is due to the fact their child is so close to graduation. We at College Funding Professionals solely focus on the financial side of the conversation so we will not be addressing test taking, the common application or curriculum. We will focus on the only resources besides yourself that you have to offset the cost of college which is the college financial aid system.
What you first need to realize is that applying for college financial aid is a process and it will play out over anywhere from six to eighteen months depending on when you start. So as you can see, it’s not something that is going to happen quickly and there are a lot of moving parts. Because of this fact, it is extremely important that when you approach this from a mental standpoint you break down the entire process into stages. This will help you avoid feeling overwhelmed or possibly confused while also helping you be better organized. This includes setting goals, completing tasks and ultimately managing your progress in the most efficient and effective way.
The below video does a great job of describing the four stages when applying for college financial aid;
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College funding could have many different definitions to many people depending on what stage you are in as it relates to the overall process. For the purpose of this post, we are going to break down college funding into two categories; early stage and late stage college funding. Early stage is referring to parents with children in the age range of 1-14 years old. At College Funding Professionals we refer to this as a “Pre-High School Parent”. The focus for this group is funding investments that will help them pay for college at a later date. That date could be anywhere from 17 years to 4 years depending on the age of your child.
Late stage is parents with a child who is currently in high school, most likely a junior or senior. They need to figure out how to pay for college in a short amount of time. This could be anywhere between 2 years to just a couple of months. We at College Funding Professionals refer to this group as “High School Parents”.
Many people use the words “College Funding” and “College Planning” interchangeably but we make a distinction between the two. We view College Planning as a much more comprehensive 30,000ft / 360 degree type view of paying for college. There are many moving parts that all come together in one way or another. Conversely, College Funding is isolating the investment and/or loans that a parent would utilize to pay their college tuition bill. It is a much more drilled down focused viewpoint than college planning.
Early Stage College Funding
So lets first start with exploring early stage college funding for Pre-High School parents. Again, there are other factors that would contribute to the decision making process. Such as what investment strategy is the right fit for you and your family. The most overlooked factor is college financial aid. Specifically, the impact it will eventually have on your out of pocket cost as a family. This is something that we explore in blog posts when we talk about college planning. This post we are analyzing some of the most effective investment strategies that a pre-high school family would utilize.
The rule of thumb is always do something never nothing. This means even starting with a very small amount of money is still better than do nothing at all. The biggest thing you need to guard against as a pre-high school parent is procrastination. We will expand on this topic of procrastination in other posts. Specifically, how waiting just a few years to start your college funding plan could have an enormous impact on the amount of money you can save. There is never going to be a perfect time to start a college fund. You might as well start as early as possible because the enormous advantage pre-high school parents have over high school parents is time. Referring to the amount of time the fund has to earn interest and grow. I cannot stress enough how important this point is.
Popular Funding Options
Once you have realized that now is the time to start saving for college you need to understand your options . We analyze each one of these options in detail in others posts. Below is a short list of the 5 most popular college saving strategies that we have seen parents utilize;
529 College Savings Plans
Coverdell Savings Account
702 Investment Contracts
UGMA / UTMA
401K / IRA
The first four options on the above list can be used at any time by pre-high school parents to fund college tuition. Just like any investment strategy there are pros and cons to each. As many investors know there is no such thing as the “perfect” option. The last option on the list is different from the rest because these are specifically retirement plans. They are not designed to be a funding source for college but we have seen some parents use them.
401k or IRA
A lot of parents who used their 401k or IRA as a funding source for college did so out of necessity. They already had a 401k/IRA and were making regular contributions. They did not have the additional funds to start stand alone strategies like the first four on the list. Conversely, some truly thought using their retirement account was the best option for their unique situation. The pros and cons of this including potential tax consequences is beyond the scope of this blog but something we cover in detail in our Virtual Counselor program.
The most popular strategy on the list is the 529 plan but that is neither an endorsement nor a representation of the best option as it will truly depend on your unique circumstances as a family. This is another very important point, just because something is popular does not automatically mean it’s the right fit for you. In reality, a blend of several different of the above referenced options is probably the best approach.
Late Stage College Funding
When discussing late stage college funding for those high school parents the conversation is much different. The main reason is the ultra valuable asset time is now no longer on your side compared to pre-high school parents. You’re either at or very close to the “finish line” so now you need to look at what resources you have in place and how to best use them. For the purpose of this discussion, we are assuming that you received some type of financial aid award. We will talk a great length about all aspects of the college financial aid system, including award letters, throughout this blog. You are now trying to find additional funds to bridge the gap between the financial aid award and family’s out of pocket cost.
Technically, you could start any of the first four strategies but most likely this is going to be a futile effort. Simply because you do not have the requisite amount of time for the fund to grow. There are two reasons why you might start one of these funds in the late stage: you have a large sum of money that you are going to use to fund these types of plans. Second, your investing philosophy is extremely aggressive. This could possibly generate an unusually high return on your investment in a short amount of time. The trade off though is a drastic increase in the risk of financial loss.
Exhausting All Resources
Conversely, if you did put one of the first four plans in place pre-high school this is going to be your first funding source you are going to look at and utilize. This is going to be your starting point because these plans were put in place specifically for your child’s college education and most likely will have extremely favorable tax treatments because of this fact. Once you exhaust these funds than your next course of action should be utilizing any money or funds that wasn’t specifically earmarked for college such as general savings and checking accounts.
A traditional example would be savings bonds that relatives might have purchased for your child. It goes without saying that you should never deplete general funds to the detriment of your retirement or everyday life. Remember, although not ideal when done in excess, you could always borrow for the cost of college. You cannot borrow to fund your retirement or day to day expenses as a family so use your best judgement when looking internally at your family finances.
If using your 401k or IRA was your funding choice this would be the time to execute on that decision by either borrowing against or just withdrawing from these accounts, this is something you should NEVER do without consulting a financial professional first. The negative to this is the fact that you are now affecting your own retirement by taking money out of these funds instead of borrowing the money so a decision such as this should be made with extreme caution and much discussion.
The next and final option is borrowing the money you need. The rule of thumb is exhaust all other options before borrowing because obviously you will be paying, in the form of interest, on the amount you borrow. Over 4 years this amount could become substantial as we have seen play out with the student debt crisis currently affecting many American families. With that being said, there are 3 major resources you can borrow from and just like the funding strategies they are all different with pros and cons unique to each. Below is the list of borrowing sources;
In the case of the Federal and State Government categories there are several different options. When it comes to private lenders there is literally hundreds of different options. The right choice will ultimately come down to the best fit for you and your family. When comparing most loans borrowers typically review the interest rate & term. With College loans you also need to consider who is borrowing, the parent or the student, and what is the consumer protection. Consumer protection is important due to the size and length of repayment on these loans. Knowing what happens in the case of late payments and/or defaulting becomes a critical part of the decision making process.
Strictly speaking from a consumer protection standpoint the Federal government is by far the best. Private lenders are the worst and state government options are somewhere in the middle. With that being said, the below videos are excerpts taking directly from our Virtual Counselor program. The videos further expand on the loans conversation;
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Preventing A Student Debt Crisis One Family At A Time