By BRIE SODANO
A college education is one of the most expensive purchases a person will ever make. It unfortunately also is an item people often do not plan for properly. Ideally, parents should start saving for college when their child is born, but the real planning needs to happen during the child’s sophomore and junior years of high school. The thing is, most people don’t know that until it is too late for them to make adjustments and save a fortune on the tuition bill.
Colleges have a lot of control in the financial aid process. The “FAFSA” is the Free Application for Federal Student Aid that is completed by the parents. It uses the parents’ last year’s tax return and asks questions required to calculate the amount of “Expected Family Contribution” and financial need. The completed FAFSA can be sent in as early as January of the student’s year of attendance. Colleges distribute financial aid and loans based on federal guidelines, but also first come, first served. It is important to get the FAFSA sent in as early as possible to get the most aid.
Colleges calculate the financial aid. They have a “Cost of Attendance” (COA) for the year. The COA includes all the expenses a student will incur for one year, including tuition, room and board, books, insurance, fees and travel.
Next, they calculate the “Expected Family Contribution” (EFC). It is the amount of money the family is expected to spend on tuition. The EFC is based on income, assets and current savings for the parents and student. The COA minus what the family is expected to pay equals the financial need.
The bigger the financial need, the better. The more need there is, the more grants, scholarships and federal loans are available. Here is where the planning comes in.
Parents have some control over the EFC. The smaller the EFC, the bigger the need and the better the result, The calculation is complicated but can be manipulated. Some assets are expected to be used for tuition at a rate of 5.6 to 20 percent per year depending on who owns the assets and the type of account. The calculation ignores other assets completely. Parents also are expected to redirect some of their current retirement savings to pay tuition. Often, making adjustments to the family assets will result in a much lower EFC and a better result.
The time to plan is the student’s sophomore or early junior year. This is because you want the changes reflected on the tax return for the year before you complete the FAFSA. Also, making adjustments may have a tax consequence, and you don’t want capital gains and a new tuition bill in the same year.
Brie Sodano is an financial advisor with Lux Financial Services in Waterbury, 203-755-7676.
