College Planning Video: Your Estimated Family Contribution and Why It MattersSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on October 12th, 2018
Presented by Stephanie Mauro, October 12, 2018
Part 2 of 4 in Our College Planning Video Series
How to Pay for College Without Going Broke!
The second part of our video series on How to Pay for College Without Going Broke is about your Expected Family Contribution (EFC). This is the amount the government and the educational institution expects the family to contribute towards tuition, room and board. Knowing this number is critical in the college planning process because this greatly impacts your out-of-pocket costs and the schools you can afford.
In this video, Stephanie Mauro, Founder of College Planning 101, discusses how EFC is calculated, how assets owned by parents or guardians of the student impacts EFC and application tips for potentially reducing this number.
What is the expected family contribution? The EFC is the minimum the government expects you to pay based on your income and assets. The reason why I say ... and non-retirement assets. The reason why I say government and/or college, but the government is where the FASFA comes from, Free Application For Federal Student Aid. That's the federal student aid, so that's what the colleges use to determine need.
There are two methods, the federal method and the institutional method. The FASFA only looks at parent income, non-retirement assets. If a student makes more than $5,000 a year, it starts to impact. Student assets, equity and vacation homes, and equity and investment properties held privately. Does anybody here have investment properties they hold privately? Okay. Yes. You hold it privately? Do you think you qualify for need-based aid? Maybe, maybe not.
When you have an investment property held privately there are two problems with that, they count on the FASFA, and should anything happen to one of your tenants on that property, you could be personally held liable. When you put that property in an S corp or an LLC, it is off the FASFA and the corporation gets sued, not the owner. Something to consider.
Whenever I have families who work with me, I encourage them to work with their accountant or lawyer to open up the corporation, and then you have to retitle it and all that, you have to go through all of that formal paperwork. Then you as an individual are protected, and then it doesn't show up on the FASFA. Hello. That's okay. I just asked that questions are held until the end, and the complete presentation is in the packet. The FASFA, and also the FASFA is looking at two years prior. It's called ... Has anybody heard of the words prior prior? No? When I first started my business we would file the FASFA with the tax return that was complete, and then have to rush and get the taxes return done for the current year, and then update the FASFA. Everybody said this is a pain in the neck, I'm a business owner, I don't do my taxes until October, and I'm not finding out anything until January 1st, the timing is bad.
What the government said was, "Okay, we're gonna look at two years prior tax return, assets currently." So current assets as of the date of the filing of the FASFA, tax return two years prior, no updates required. This way if you're a business owner, your taxes are already done because you had to have them done by October 1st, and then the new FASFA is now available as of October 1st. It's not due, it is available on October 1st.
It's still a little late in the game because if you do think ... like I can have a five minute conversation and I know whether or not you qualify for need-based aid. Based on that information, if you're not finding out when you qualify for need-based aid until October, well your students already made a lot of decisions by then and where they want to apply. You can do the FAFSA4caster, you can do a lot of stuff online, just be careful with the information online, it is not always accurate, and every college by law has to have the net price calculator at their website.
Yale is off by $10,000. I had a client come to me and said, "You know, your calculation ..." and I calculate this for my families and it's accurate. "Your calculation said $28,000 to Yale", which by the way, it's still not a bad price, but I did their net price calculator and it came back at 18. I said, "If you pay 18, I'll refund half of your fee because I cannot be wrong. You're paying me to be right." We get the paperwork, pay 28,000, like 27 and change to Yale.
We called Yale and we're like, "Hello, we did the net price calculator at your website", and I happen to get the director of financial aid there and she said, "We are required by law, it doesn't have to be accurate." Her attitude, her quirkiness she ... I know of now I'm calling during the FASFA filing season so she's probably tired of people at that point. I was like, "but you're Yale."
I was talking to the superintendent in my school district and she's like, "I went to Yale's, uh, you know, website, it's all 18,000." He goes, "How did you know?" I said, "It seems like everybody's gonna pay $18,000 for Yale." Just be careful with what is on the internet. If you are going to do these things on your own, you should not have to pay for filing of the FASFA. Remember the first F stands for free, so keep that in mind if you decide to do that on your own.
Then we get to the institutional methodology which is the CSS profile, and it starts to look at more things. This is the Syracuse's of the world, the Sacred Heart's, all the Ivys, the northeasters. Those are the colleges that take, in addition to this, you have to file the CSS profile. Now they're looking at the parent income, the non-retirement assets, student income, 18.50 minimum, dollar for dollar they add that to the EFC.
My student didn't work. We don't care. We assume they're going to make 18.50. Great, thanks. Student assets, sibling assets. But wait, that's my other student's money and it's in their name, it's in their bank account. I'm not talking about five to nine, so we'll get to that. We're talking about your second, third, fourth student's bank accounts count on the CSS profile. Assets held by relatives for the student.
When I first started my business, we would use grandma and grandpa, aunts and uncles to do five to nines as long as it didn't interfere with their own financial planning. Can't do that anymore when it comes to the CSS profile. Yes, you can remove the [inaudible 00:22:21] beneficiary and then re-add the [inaudible 00:22:24] beneficiary, so there's a little bit of a loophole there. This question is now two years old or three, three years old, so it's a new question on the CSS profile.
The equity held in your current home. You see, that's not on there on the FASFA. The equity in your current home is an asset and they feel that if you really ... Your students says, "But I really wanna go to Syracuse", you might dip into the equity of your home. They're banking on that. Equity in vacations home, and then equity in investment properties held privately or in a business and businesses under 100 employees. Everything counts.
If you have a business with under 100 employees, it doesn't count on the FASFA. If you have a business over 100 employees, the FASFA wants to know about it. I have not worked with a family yet who has a business with over 100 employees, 80 was my top, like, "Good, don't hire anybody else. "There's a lot more to the CSS profile and expected family contribution than to the FASFA.
There are certain families I will actually steer away from CSS profile colleges because they're not going to qualify for need where they would with the FASFA. Of course, I talk to the student, any of these colleges that require the CSS. Are you really interested in them? It's usually so early in the game that they're not. I say, "Well, if you are then we know we have to, you know, you have to get the 1600 SAT score so you get a really good merit scholarship to make it work. That's why we call it student positioning, because we're always understanding the family's financial condition, the student's capacity-
PART 1 OF 3 ENDS [00:24:04]
... [inaudible 00:24:00] the family's financial condition, the student's capacity, and how we can make that work best for the family. The CSS profiles EFC is usually higher. And on the CSS profile, we do include the retirement assets but it does not increase the EFC. Okay?
And if you own a business, how many here own a business? Anybody? Yeah? On the CSS, did you fill out the CSS for the NYU or you just didn't bother?
No I didn't.
And did you have to put in your current receipts?
For NYU, you only do it once, correct. And so if you have a business they wanna know your current ... Annual gross sales. And all of the minutia that goes on in your business, and they want your full business tax return.
So, you have to enter it in and then they make you send the full tax return. And some people like, "Well, why don't we just not put that?" Okay. We can't. Yeah, don't lie. If you lie on the FASFA, it is a 20 thousand fine. And I don't know about the CSS profile, but you probably would not be accepted anymore, 'cause it's not a federal thing. Goes to the college board. But the federal, the free application for federal student aid, if you get caught lying on that form, there is a 20 thousand dollar fine. So, don't do that. Not that I think you would, I'm just saying.
So, what are the assets that increase the EFC? 529, stock bonds, mutual funds, CDs, trust accounts, bank accounts, UGMAs, UTMAs. So, how many families here think that the 529 belongs to the student? K. It is a parent asset, not a student asset, and that is a good thing. The 529 belongs to the parent, and the student is the beneficiary. And, that's a good thing, and you'll find out why. The Uniform Gift to Minors Act, Uniform Trust for Minors Act, that is the student's asset. You are the custodian of that. And be careful with those, because at the age of 18, with most of them, it belongs to the student. It's their money, you are no longer the custodian of it, now we don't have to tell them that, but, it is their money.
So, that is not my favorite way of saving for college, and the 529s are fantastic. We were talking earlier there are tax deductions you may qualify for. You have the power of time if you started early, so.
Trust accounts, I like to see the trust document to see how it's worded. If it says its for college, we actually have to count whatever money is in that trust for the student. But, if it says it's not available to the student until the age of 21 or 25, then we don't count it. So, I like to read through the trust document to see the actual verbiage there so I know if I need to count it or not.
And a lot of people say, "Well, is all this stuff looked at?" It's not. But, it could be, they could request any document from you. And, now, instead of ... On the FASFA, instead of having to input everything, we have to use what's called the data retrial tool, which connects to the IRS and then it pulls everything over from the tax return. So, it simplified my life, 'cause I wasn't lying, but for those families who, "Well, maybe we just won't put all that 8A." What's the 8A? Line 8A is interest income. "Yeah, we just won't put that there." Because interest income shows that you have a lot in assets, and that's where people were getting tripped up. They weren't realizing, "Oh, yeah, we're going to put in all our tax stuff. But yeah, I only have 15 thousand dollars in assets." And they'd be like, "Well then, how do you have a thousand dollars on line 8A?"
So, that's where it gets kind of tripped up. Or, if you are being honest about your assets and you don't put anything in 8A. They'd be like, "Where's line 8A? You have nothing there. Where is this money? If you say you have 100 thousand dollars in investments?" So, people don't understand the nuances of it, and they think they're maybe saving here, when they're being honest there, and so with the data retrial tool absorbs all that. Everything goes in and then I assure you that being honest is of course, the best way to be, right? So.
And this is why it's better to have it in your name, than the student's name. Parents are only assessed at 5.64 percent, on wall assets. So, if you have a hundred thousand dollars, in a stock, bond, mutual fund, 529, whatever. That's non-retirement, five thousand six hundred and forty dollars will start the EFC. Income, I've seen it actually at 15 percent, but the general rule is 20 to 47 percent. So, when we have families who are that 80 to 150 thousand dollars in income, they're charged at about 20 percent. Now, what affects it? Why is it 20 to 47 percent? Number in college, I mean well, number in college matters, but number in family. So, if you have a hundred and fifty thousand dollars of income, but you have six family members? They're gonna take less of a percentage of your income, 'cause you need it for your family. Where, if you're a family of three, and you have a hundred and fifty thousand dollars of income, you might be at the 25 percent. Does that make sense?
So, the more you have in your family, the less they're gonna take and the less you have in your family, the more percentage they're gonna take. So have more kids. I'm just kidding. Nope. Okay.
So, if you had a hundred thousand dollars in income and four family members, you'd probably be charged around the 20 percent. So then, your EFC would be 20 thousand, plus the 5640 dollars, for a hundred thousand dollars in assets, am I clear here? So, then your EFC would be 25640 dollars. Clear? That's how ... So, it's not like I have a hundred thousand dollars in assets, and that's what my EFC is, they use percentages of.
5.64 percent in non-retirement assets, and 20 to 47 percent. So, who gets charged at 47 percent? People making 300000 dollars and more. They just like [inaudible 00:30:33] that's it. So, and I don't even know why they bother with that, because obviously if they make it 300 thousand, they're not qualified for need, but, it's a formula.