The first thing most parent and students want to know about college financial aid is if they will qualify at all and, if so, for how much. There is no short answer. There are different types of financial aid and three categories of families that determine needs-based financial aid.
Every family falls into one of three categories. Those in Category 1 are likely to qualify for a significant amount of financial aid if they go through the process properly. Category 2 families are likely to qualify for some amount of aid. Category 3 families have a different challenge because they are unlikely to qualify for any financial aid. The job here is maximizing tax strategies and figuring out how to pay for the rest through cash flow.
Category 1 is the easiest to determine. These families have income of less than $24,000 adjusted gross income a year or qualify to complete the IRS form 1040EZ or 1040A. You can also qualify for the Automatic Zero-EFC if, during your base year, the student, the parent(s), or anyone in the household receives benefits under a federal benefit program such as food stamps, SSI, WIC, TANF or certain school lunch programs. This student could qualify for 100 percent funding aid through the college.
A warning for Category 1 families is that there is no guarantee, in the coming years, that a college will be able to meet the full need of a family. Since the recession, states have been cutting funds to colleges at an alarming rate, so these families need to make every effort to provide some college savings, if at all possible.
Category 2 is the hardest hit. It is the middle-income family that, too many times, is jeopardizing their retirement and their homes in helping their student realize the dream of attending school. This family has adjusted income of less than $100,000 with assets other than just their house. There is much that can be done to lower their Expected Family Contribution (EFC) and pave the way to qualify for more federal financial aid. Assets can be shifted so that they are not required to be reported on the Free Application for Federal Student Aid.
The federal formulas for aid have protection for part of the parents’ income as well as a limited amount for the student. There is also a protection amount for the parents’ assets but the student does not enjoy this for his assets. In planning for college funding, it is good to have income and assets in the protected classes so that they open the door for more financial aid. After the college years, assets can be shifted back.
Generally an independent business person, small business owner/partner, or farmer will fall into category 1 or 2. There is, in many instances, much that can be done to create the ability to qualify for more financial aid for these people. They have more control over and ability to time their incomes and payrolls. They might also use sections of the IRS code to lower assets in the use of their business that will, in turn, lower their EFC giving them more financial need that can be met through other sources.
Category 3 families are those that have incomes and/or assets in enough abundance that they are most likely to not qualify for any needs-based assets. There are still strategies that can be employed to make funding their student’s college education easier. In these cases it is time to look carefully at how the family makes the best use of any tax law they can. They can also educate themselves on certain cash flow techniques. Both of these strategies can increase their cash flow to provide the dollars available for college.
Many of these strategies can be employed as late as December of the student’s senior year in high school. They are, however, best utilized as a combination of planning and funding strategies implemented as early as possible; certainly by the sophomore year.
Regardless of the category into which your family falls, there are strategies that can be employed to help with the college funding process. The important point to take away is that educating yourself could help you save thousands of dollars a year while educating your child. In many respects planning and funding your students’ education is like a game; there are rules and strategies you need to know to win.
One place to start: College Goal South Carolina is taking place from 10 a.m.-1 p.m. Feb. 22 at Midlands Technical College, Richland County Public Library and Columbia International University, offering free assistance completing the Free Application for Federal Student Aid (FAFSA). See collegegoalsc.org for more information.
George Scott is a college planning and funding specialist with Seeds of Wealth College Funding Solutions in Irmo. Reach him at collegeplanning@ seedsofwealth financial.com or (803) 781-3600.