Answerings Readers’ Questions About the FAFSA

Now that we’re in the thick of FAFSA season, I wanted to answer some questions on my college blog that I’ve been getting about financial aid forms. If you have your own questions, please leave them in the comment box below. Lynn O.

Mom’s question:

Try as I might I still can’t get my hands around the whole financial aid picture.  We completed the FAFSA and CSS/Profile and were amazed to see that the FAFSA family contribution amount was way more than we could actually afford! Does this mean that this is the lowest cost possible for schools with a larger price tag, merit scholarships included?

My son did apply to 2 private schools that use the institutional methodology, which I believe if admitted would give him the best financial packages.  My husband makes a good salary, but we are not homeowners and do not have much outside of our retirement plan.  Am I right about this?  Lastly, my son did apply to 1 state school that we could afford without financial aid.  At this point, we’re waiting to hear back from all the schools.

Answer:

Lots of parents are surprised when they discover what their Expected Family Contribution is. (If you don’t know what that term means, read my previous post:

What Is Your Expected Family Contribution?)

Experts have rightfully complained that the methodology used to generate EFC figures for millions of families is flawed. A family’s EFC isn’t always going to be fair. In fact, it’s quite likely that the EFC won’t pinpoint what a family can truly afford for college. And it’s no wonder. Congress decides what’s in the EFC’s secret sauce.

The formula does play favorites. The methodology, for instance, favors homeowners, aggressive retirement savers, small business owners, teenagers of divorce and rural Americans. That said, the biggest factor determining an EFC is usually the family’s income.

The FAFSA doesn’t ask if you own a home, which is great news for homeowners. Since you don’t own a home, this benefit won’t help you. The CSS/Financial Aid PROFILE does, however, ask about home equity.

Your EFC indicates what you will have to pay, at a minimum, for one year of college. Let’s say that you have an EFC of $40,000 and the school costs $40,000. That means you would not receive any need-based aid. Families with a high EFC, however, are eligible for merit scholarships from schools. For instance, the school might award a teenager a $12,000 merit scholarships, which would drop the cost from $40,000 down to $28,000. The vast majority of schools give merit scholarships to affluent students.

John’s Question

I have your book and enjoy your advice through that and other sources.  I wonder if you have any advice for someone who has very low current income but very high net worth. Our EFC is very high using the FAFSA (especially the Profile method) due to our taxable account balances and home equity.  It is close to full cost of most colleges.

Are there any schools that would not consider our assets but only income?

John

My answer:

Most schools exclusively use the FAFSA and the FAFSA does not ask about home equity of a primary home so that’s not an issue.

In addition,  if you have a lower adjusted gross income —  below $50,000 — you can qualify for something called the Simplified Needs Test, which doesn’t require that you disclose assets on the FAFSA. To be eligible for the Simplified Needs Test, you can’t file the regular federal tax return.  You must also be able to file a 1040a or 1040EZ tax form. Sometimes with high valued assets, however, capital gains could require that you file a 1040.

At some FAFSA-only colleges, however,  if you qualify for the simplified method, you will get federal aid (loans, work study and a Pell grant) for some of your award package since your EFC will be low, but for the school’s own institutional funds, (the good grant money that doesn’t have to be repaid), they look at the assets regardless of the simplified method.

While you might be able to avoid disclosing your assets on the FAFSA, you wouldn’t be able to do this on the PROFILE, which delves deeper into a family’s finances. The PROFILE is used by 249 schools that are almost all private. The five state schools that use the PROFILE for undergrads are:

• University of Virginia
• University of Arizona
• University of Michigan
• University of North Carolina
• College of William and Mary

Barry’s Question:

How about a post on the FASFA and financial aid for returning students?

Our daughter is in the middle of her first year at Oberlin, so we went through FAFSA and the whole financial aid process last year. Your blog was a big help!  Now, we are filling out our FAFSA again and while we are more experienced, there are some new wrinkles for a returning student. For example, our daughter received a generous academic merit scholarship that is guaranteed for her four years (as long as her grades are up). She is also doing federal work/study with a job on campus.

There is a section of FAFSA which asks for the student’s financial information and has a couple of questions about work study and any scholarships received that “were reported to the IRS” or some such language. This worried us until we called the college fin aid department and they explained that we did not need to fill in the scholarship received from the college itself, but we did need to report our daughter’s earnings (only a bit over 1k) in the federal work/study program.

Anyway, just an idea for you to consider.

Barry

Answer:

Thanks for the idea Barry. All work-study earnings are taxable income and must be reported as such. Students are supposed to report work-study earnings in the FAFSA’s Additional Financial Information section. The good news is that work-study earnings are excluded when determining a student’s financial need.

And just as Oberlin told you, institutional scholarships from the college should not be reported on the financial aid form.

San  Diego College Workshop

Time is running out to sign up for my next two college workshops at the University of California, San Diego on Jan. 28 and Feb. 4. At the workshops — you can sign up for one or both – I aim to share with you ways to help you make smart decisions about picking colleges and making them more affordable. You can learn more here and sign up for the workshops here. Lynn O’Shaughnessy