FAFSA vs. Institutional Methodology:
Subject to minimum allowances, FAFSA requires 5.6% of certain parental assets be used for college costs and count toward the family’s EFC. However, FAFSA exempts some assets, specifically:
• Home Equity
• Retirement Funds
• Life Insurance, including Annuities
Many private colleges and universities require information beyond the basic FAFSA to calculate the EFC. This is called “Institutional Methodology.” Frequently, these colleges look at home equity, believing that families should be willing to use a portion of their home equity to pay for college. Some schools will also pay particular attention to sudden increases in various retirement funding vehicles or cash-value insurance.
Both FAFSA and Institutional Methodologies more heavily weigh student assets than parental assets. Student assets traditionally have been calculated at 20% (annually) to be used for college costs, compared to 5.6% for family assets above an excluded amount (that rises as parents get closer to retirement age).
Assets of grandparents, aunts and uncles (unless they are guardians for the student) do not count toward the family’s EFC. Income and assets of step-parents, divorced parents and remarried, non-adopting partners are treated in a variety of ways, depending upon the college. Accordingly, the “off balance sheet” income or assets of such alliances are what typically pay for, at a minimum, the extras of fraternities or sororities, or more often, even books!
What About Loans?
Loans are future income used to pay for today’s expenses. Various subsidized and unsubsidized loans, sponsored by federal, state and private sources, are available to parents and student. Remember that borrowing is less efficient than saving and should be a “last dollar” strategy. Borrowing satisfies today’s cravings at the expense of tomorrow’s standard of living.
Borrow or Save? The penalty for “instant gratification” is severe. Consider the following table:
Total Amount Needed: $50,000
Years to Borrow or Save: 10
Interest rate (borrowing or saving): 4%
Save Borrow Difference
Monthly Amount: $330.56 $506.23 $175.67
10-Year Total: $39,667 $60,747 $21,080
Few families realize the penalty they face by not adopting a disciplined, regular savings plan. The above table, using extremely modest assumptions, shows just how deleterious procrastination can be.
More realistically: How about a 4% interest rate on saving and a 7% interest rate on borrowing? The 10-year difference between the cost of saving $50,000 and the cost of borrowing $50,000 becomes nearly $37,000!
Beware of Scams:
Some financial advisors may claim that they can:
(a) Find “hidden” scholarships and/or
(b) Guarantee that your child will receive more financial aid than he or she otherwise would qualify for.
• Never pay for scholarship searches. Any student or high school guidance counselor can do a free scholarship search on the Internet.
• It is true that, while the uniform methodology EFC formula does not consider certain assets in calculating the Expected Family Contribution for a student’s college education, some of the more common “tricks” – such as hiding parents’ assets by putting them in the child’s name or making advance payments on a home mortgage and so on – can backfire.
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