Saving for College and Expected Family Contribution
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In The College Solution, Lynn O’Shaughnessy provides an easy-to-use roadmap that you can use to find the right colleges (not just the most hyped) and to dramatically reduce your costs. In this excerpt, learn more about saving for college and your family’s expected financial contribution. Read more about financial…
In The College Solution, Lynn O’Shaughnessy provides an easy-to-use roadmap that you can use to find the right colleges (not just the most hyped) and to dramatically reduce your costs. In this excerpt, learn more about saving for college and your family’s expected financial contribution.
Read more about financial aid and your family’s expected financial contribution.
The formula does play favorites. The methodology, for instance, favors homeowners, aggressive retirement savers, small business owners, some teenagers of divorce, and rural Americans. Let’s take a look at some of these categories:
Home Ownership. Parents who own expensive houses, particularly on each coast, worry that they will be rejected for financial aid because of their home equity. The federal formula, however, doesn’t even ask if a family owns a primary residence. You could have paid cash for a stunning property in Palo Alto, California; Chevy Chase, Maryland; or the Upper Eastside in Manhattan, and it wouldn’t hurt your aid chances.
Cost of living. The federal methodology doesn’t take into consideration the cost of living, which penalizes families living in expensive cities or states. A family making $75,000 in Honolulu, which is the highest priced housing market in the country (a median home sells for $580,000), is expected to be able to cover college costs that same as someone living in Youngstown, Ohio, which is the nation’s cheapest major housing market (a median house costs $55,000).
Retirement accounts. The federal EFC formula also doesn’t care about the amount of money a family has stashed away in retirement accounts. You could have millions of dollars sitting in these retirement accounts and it wouldn’t impact your aid award.
Small Business. A family that owns a business with less than 100 full-time employees doesn’t have to divulge its net worth.
Divorce. The federal formula penalizes married couples. If the Harvard mom was divorced and her ex-husband was a schoolteacher who made significantly less money than her, it’s possible that her child could qualify for significant need-based financial aid. If the judge and the schoolteacher were married, however, it’s unlikely they would qualify for any need-based financial aid.
The federal financial aid formula only inquires about the finances of the custodial parent. For financial aid purposes, the custodial parent is the one whose residence the child lived at for more than 50% of the year from the date the financial aid form is filed. Let’s assume the judge is divorced. If her child lived with her 5 ½ months and the dad 6 ½ months, the father would fill out the federal aid application and would never even be asked about his ex-wife’s salary or assets. If the custodial parent remarries, the new spouse’s income and assets would also be used in financial aid calculations.
Child planning. Families sending twins or triplets to colleges are huge winners. The EFC drops considerably when more than one child is in college simultaneously. The EFC drops roughly 50% when two children are in school, and it shrinks even more with three college students. For instance, let’s say a family’s EFC was $30,000 when once while was in college, but the next year another starts as well. The EFC for each child would drop to about $15,000, which could qualify the students for significantly more financial aid.
There is no break, however, for families whose children are spaces four or more years apart. Thanks to the idiosyncrasies of the financial aid formula, parents who have one child in college at a time could end up paying far more than the parents who spaced their children closer together.
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