The factors that affect needs-based financial aid for college are often misunderstood.
The “Expected Family Contribution” is determined predominantly by parental income, not parental assets — such as savings in 529 plans.
A separate savings vehicle, not in the name of the child, may be the most advantageous in the financial aid formula.
One of the biggest misconceptions about saving for college is the impact that assets may have on needs-based financial aid qualifications. Many families may be surprised to learn their Expected Family Contribution (EFC) — the amount they are solely responsible for per student for each year of college. This amount is determined predominantly by parental income, not parental assets.
The difference income makes
The following three families earn different amounts, but all are sending their first child to college in the fall of 2013. Table 1 illustrates how much parental income, factored at 22%–47% of income available after taxes, affects Expected Family Contribution (EFC). Table 2 shows the minimal impact of parental assets, such as money in a 529 plan. For each family, estimated parental assets of $75,000 increased the EFC by only $1,720. That same $75,000, if in a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account — which is in the student’s name — would lead to an additional $15,000 in the family’s EFC for that student.
(Source: Quick EFC Calculator)
Determining financial need
Financial need is the difference between the EFC and the cost of attendance. This table looks at the Jones family and demonstrates how difficult it can be to qualify for needs-based aid. According to the College Board, a large amount of financial aid (44%) is in the form of loans that need to be repaid.* It’s also important to note that there is no guarantee that financial need will be fully met by a financial aid package offered by any particular school.
Planning to meet your EFC
Though you may be expected to pay more than you originally anticipated, you can take steps to prepare for this cost. Remember:
- Start now, while there is still time to plan.
- A separate savings vehicle, not in the name of the child, (such as a 529 college savings plan) may be the most advantageous.
- When children own custodial accounts, they have an EFC of 20% of that asset each year.
- 529s in the parent’s name are never factored at more than 5.64% in determining EFC.
- If a 529 is owned by a grandparent or other relative, it does not count toward the EFC.
- Even students who don’t qualify for needs-based aid may qualify for merit-based grants, which are not contingent on financial need.
- Consider asking a professional financial advisor about using advanced gifting strategies. Grandparents may be able to offer a grandchild a choice in college selection while enjoying certain estate planning benefits.
Use a resource like the Quick EFC Calculator to estimate what your EFC would be if you sent your child to college today. You may be expected to pay more than you thought. So don’t wait — talk to your financial advisor about saving for college today.
*Source: Trends in Student Aid 2012, collegeboard.com
** Cost of attendance is the average tuition, room and board for four-year private and public schools for 2012–2013 as published by the College Board in “Trends In College Pricing 2012”.
Hypothetical examples for illustrative purposes only, and accuracy is not guaranteed. The estimates provided are an approximation of the EFC. The EFC will vary based on several different inputs, such as parental income, assets, age, number of other kids in college, etc. The weighting of those inputs may vary based on differing factors. In this example, the calculation was based on a family of four, with one child in college, and the age of the older parent is 48 years. When using the calculator, you should enter figures that are appropriate based on your individual situation.