The first quarter of the year always seems to end with a sigh of relief. The cold and dark days of winter start to wane, and the frantic pace brought on by year-end reviews and tax season nears its end. Spring is at our doorstep and will be especially welcome this year as we come out of the COVID pandemic with vaccinations soon available for all who want one. All hope the availability and application of an effective vaccine marks the end of recent pandemic times and ushers in a return to a new normalcy, one which would include the ability for our children to return to their schooling and academic endeavors safely and without interruption.
Spring is generally a time when parents of college-bound children start to receive acceptance letters to the colleges or universities they applied to in the fall semester, and as you know, college these days is a very expensive proposition. Many private colleges and universities have a cost of attendance in excess of $60,000 a year, and these costs show no signs of abating. Gone are the days where you can simply send your child off to any college or university to allow them time to “figure out” what it is they hope to do with the majority of their productive years in life, largely because of the cost of an undergraduate degree is such a high burden for most families.
Applying for college is an exciting and anxious time for both parents and children alike. Happily, I have experienced it repeatedly with clients, and now personally, as my daughter will be heading off to a two-year conservatory program in New York City this fall. From the age of two years old, my daughter took dance classes, singing lessons, and was involved in every major school theater production as well as performing in local community theaters in her off time. It is her dream to become a Broadway theater actress, and this is the next step in making that dream a reality. I could not be happier and marvel at her accomplishments and her creativity in getting to where she is today. The school she is attending is a good choice for her and I am confident she will do well. After all the work that has gone into getting to this point, a successful launch into her adult professional life will make the previous planning all worth it.
I have had the privilege of counseling thousands of individuals and families, many of whom are faculty and staff at schools, on how to achieve their personal financial goals of sending their children to college. Most of these families could be considered middle-income households and heavily rely upon the financial aid process to assist them in achieving their educational goals for their children. In so doing, I’ve adopted a practice of looking at a family’s wealth from a holistic standpoint with a focus on getting the most out of financial aid first, to target allowing family assets to be held in reserve or for other future goals. It is important to note, at the end of 2020 Congress passed legislation modifying the Free Application for Federal Student Aid (FAFSA), which will take effect in the 2023-2024 school year. Some of the changes make a dismal and invasive process much easier, but certain strategies previously used under the old application process may not be as effective. The remainder of this article outlines a few of the successful concepts and suggestions I’ve learned over the years, along with a brief outline of some changes which may be coming for college financial aid planning.
Begin your research early and engage the admissions and financial aid officers.
Whatever college or university you set your sights on, view the school you apply to through a lens where it meets the right academic and social fit for your child as well as the right financial fit for your family. Statistics show students who start a college education and finish within four years at the same institution is less than 20%, which means the other 80% either transfer to a different school because it wasn’t a good fit, take a fifth year because of academic rigors, or drop out completely. There are other reasons too, but the point is you want to be sure your child is in the 20% category. Begin your research early and engage the admissions and financial aid officers. Know what they are looking for in an ideal student candidate. Use the “net price calculator” tool provided on the school’s website to get an idea of what you can expect in financial aid. Start thinking about your strategy before your first child is in their sophomore year of high school because your tax return from the next calendar year will be the first of many looked at when you apply for financial aid. Determine what your capacity is for funding college education. I have encountered scenarios where parents in their own eagerness to meet the needs of their children’s college education end up sacrificing their plans for their own retirement.
Consider saving family wealth in ways where it is beneficial from a financial aid standpoint but provides flexibility to gain access to funds if financial aid is not forthcoming. Under the current financial aid rules, assets saved into retirement accounts, annuities, or life insurance policies are assets that are not used to calculate what is known as the “expected family contribution” (EFC). Additionally, equity in a primary residence does not count against you under the federal methodology either. This can be especially important for parents of younger children who have ambitions to send their children to college, would like to save towards their retirement, and will probably make a good case for receiving some form of financial aid, and have time to start on a savings plan. Funds committed to saving in retirement accounts, like a 401(k) or 403(b) pension plan, are done through a salary deferral election made with their employer. The parents get used to making contributions to retirement accounts, which are sheltered from the EFC calculation. However, salary deferrals can be stopped if needed at the critical point of the college years to increase cash flow to help pay for tuition costs. It’s as if the parents are already used to making the tuition payments. Once the college years are past, savings towards retirement goals can resume.
In its current form, the FAFSA is comprised of 108 questions and can be seen as understandably cumbersome. Under the new process taking effect in the 2023-2024 school year, the number of questions will be reduced to 36 making it much easier to complete. The “expected family contribution” will go away and be replaced with a new “student aid index.” Most think the EFC is what a family must pay out of pocket, but its real intent is to help schools identify a family’s ability to pay. The elimination of the EFC may bring some clarity to the financial aid process, but in so doing, it eliminates a planning tactic for families who have multiple children enrolled at private schools and universities. Previously used strategies like taking a gap year or going to community college to have siblings attend a 4-year university at the same time may not work to qualify for more aid. Instead, each student will be viewed individually using the student aid index without preferential treatment for other tuition payments made by the family.
Apply for financial aid even if you think you won’t receive any. If there’s a change in family financial circumstances during the school year, you can bring it to the attention of the financial aid officer, but only if you applied for aid and met the filing deadlines. One positive fallout from the COVID pandemic is under the new rules financial aid officers, in their professional judgment, will have more flexibility and leniency in reconsidering aid awards under a qualifying national emergency. The financial aid officer could have the latitude to drop family income to zero, a point especially relevant if both parents have become unemployed, in order to qualify for more financial aid.
Another big change coming to the financial aid process is identifying the responsible applicant for separated or divorced parents who are not re-married. The current FAFSA identifies the parent who needs to complete the application as the custodial parent, or the parent where the student resides the majority of the time irrespective of any legal agreements between the parents. The new FAFSA will identify the parent who provides the most financial support as the responsible party for filing the FAFSA. If both parents provide equal support, then the parent with a larger income is expected to complete the application. The new rules will also change eligibility requirements for federal Pell Grants from using ‘federal poverty guidelines’ to a student’s family size and adjusted gross income; a move intended to increase eligibility, especially for lower-income student households.
Many of the changes coming in the 2023-2024 academic year will likely impact households at the top end of the middle-income spectrum. Those in this category should review and plan for these future changes in their college education planning. Like you, we want to see your children grow to meet their education and post educational financial goals.
If you believe this is an area of concern for you, reach out to your Atlas Wealth Management Advisor to discuss.