College Planning: Don’t Wait to File Your FAFSA

If the prospect of sending your child on their entry into adulthood isn’t hard enough, there is all the paperwork to decipher… the ACT/SAT, college applications, scholarship applications, and of course, the dreaded FAFSA!

Parents of school-aged children, Are you ready? It’s coming, faster than you think. I tried to begin preparing myself, starting with our son’s first day of middle school. I knew then that high school graduation would come in the blink of an eye and after that, college. In spite of my best efforts, it still felt like time traveled at warp speed and on August 13th, we dropped him off at college. That, in itself, was victory and heartache all wrapped up into one big emotional quagmire, but that is not the focus of today’s discussion.

As your child enters the end of their sophomore year of high school, the onslaught of mailings and emails begins. Colleges inviting them for visits, hoping to win their tuition dollars. You secretly throwing away the mail, trying to ignore the inevitable. If the prospect of sending your child on their entry into adulthood isn’t hard enough, there is all the paperwork to decipher… the ACT/SAT, college applications, scholarship applications, and of course, the dreaded FAFSA!

When I was in high school, people only filled out the FAFSA if you were applying for need-based financial aid for college. Today, EVERYONE should fill out the FAFSA, regardless of your income. In addition to awarding federal grants, loans, and work study, it is how colleges award scholarships, allocate their need-based awards, and how non-subsidized loans are awarded. In addition, because many colleges award aid on a rolling basis rather than waiting until all applications are in, the earlier you fill out the FASFA the better.

So, what is the FAFSA? The Free Application for Federal Student Aid (FAFSA) is a form that provides financial information about your family’s income and assets. The primary reporting source for income is your federal tax return, which by the time you file it, reflects your taxable income for two years prior. For example, with our son starting college in the Fall of 2020, our income was based upon our 2018 federal income tax return. Because filing for the FAFSA begins every year on October 1st, the most recent tax return on file is generally two years prior, which depending upon your situation, may be a good or bad thing. The key here is to make sure your tax filings are up to date by the time you need to complete the FAFSA.

Once your FAFSA is completed, you wait to hear from the college of your choice what “financial aid” you are eligible to receive. The amount you are offered is determined by calculating each family’s Estimated Family Contribution or EFC. The EFC is the amount that the school’s financial aid office uses to determine how much financial aid you are eligible for and the calculation is based upon a formula established by law.

Now, I have to say, this was an extremely eye-opening experience! The amount of EFC for our family with one child still living at home, in addition to the college freshman, was shocking. Essentially, whatever your EFC amount comes out to be, you or your student will need to pay through savings or obtaining loans. For example, if your EFC is $44,000 annually and after scholarships and any aid your student may receive, you have an annual tuition bill of $25,000, you or your student will have to figure out how to pay that $25,000, because it is less than your EFC. No wonder students coming out of college have such high levels of student loan debt. If you are curious what your family’s EFC may be, you can find a calculator on the College Board’s website.

As a financial planner, I have always encouraged clients to focus on saving for their retirement before saving for their children’s education. After all, there are loans and scholarships available and I think most would agree, no one wants to give up their independence and move in with their children in retirement! However, if you are confident in your retirement savings, there are a variety of ways to save for your children’s educational costs.

Perhaps the most widely-known vehicle is a 529 plan. Every state in the U.S. has a plan and there are a variety of investment company sponsored plans available through entities like Fidelity and Vanguard. Establishing one of these and setting up regular contributions is easy. The assets in a 529 grow tax deferred and are not taxable if taken out for a qualified education expense. A recent feature of most 529s is that you can now send a link to anyone to make contributions to your 529 account. This is a great opportunity for family members to help save for your child’s education. When they ask, “What should I get Timmy for his birthday?” you can respond with a link to their education fund. Especially when children are young and haven’t figured out birthdays yet, they will not miss opening a present or two. However, they will appreciate having a nice college nest egg when it comes time.

An even better strategy is for a grandparent to open a 529 plan for their grandchild and make contributions. This will make a difference when it comes time to file the FAFSA since 529s owned by parents or the student are counted as a financial asset but 529s owned by other family members are not. This strategy goes beyond the scope of this article, but it is worth noting. When trying to decide whether to open a state-sponsored plan or a plan offered by an investment company, choosing the plan offered by the state in which you live may offer some state income tax benefits for your contributions. I recommend checking with your tax preparer or Foster Group advisor to get the facts and determine what plan is best for you.

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