October 2021
College and Tax Planning

It is that time of year again for those who have kids and grandkids that are headed to college to start the FAFSA application process! Parents sometimes wonder if it’s worthwhile to file the Free Application for Federal Student Aid (FAFSA), especially if they think their income is too high to qualify for need-based federal financial aid. But, there are no simple FAFSA income limits, or income cutoffs on financial aid eligibility, in part due to the complexity of financial aid formulas.

Unless the parents earn more than $350,000 a year, have only one child and that child will enroll at an in-state public college, they should still file the FAFSA form, as there is a good chance they may qualify for federal student aid or state or institutional grants. They may also qualify for low-cost federal loans and federal work-study. Even if a college uses the CSS Profile to determine institutional aid eligibility, the student must still file the FAFSA to apply for federal financial aid.

It is important to submit a financial aid application every year, even if you did not get anything other than a student loan last year. There are subtle factors that can affect eligibility requirements for need-based financial aid. These factors can change from one year to the next. Congress tinkers with the financial aid formulas periodically. If you don’t file the FAFSA every year, you might miss out on financial aid. Financial aid is based on financial need, which is the difference between the cost of attendance (COA) and the expected family contribution (EFC). Financial need increases when the COA increases and when the EFC decreases.

Thus, a student who enrolls at a higher-cost college might qualify for some financial aid, while the same student might qualify for no financial aid at a low-cost college, such as an in-state public college. The parent contribution part of the EFC is divided by the number of children enrolled in college at the same time. When the number of children in college increases from one to two, it is almost like dividing the parent income in half, which can qualify both children for much more financial assistance than either could qualify for on their own.

For example, when the oldest child enrolls in college for the first time, that child might not qualify for much college financial aid. However, when the oldest and second oldest children both enroll in college at the same time, the number of children in college increases from one to two, potentially qualifying them for more financial aid. Thus, there are no clear FAFSA income limits. Eligibility for need-based financial aid depends on more than just income.

There is no explicit income cutoff on eligibility for the Federal Pell Grant. Eligibility for the Federal Pell Grant is based on the expected family contribution (EFC), not income. Based on data from the National Postsecondary Student Aid Study (NPSAS), more than 94% of Federal Pell Grant recipients in 2015-16 had an adjusted gross income (AGI) under $60,000 and 99.9% had an AGI under $100,000.

The odds of receiving a federal grant decrease with increasing income, as shown in this chart.

As noted above, a family with two or more children in college may qualify for a Federal Pell Grant because the parent contribution is divided by the number of children in college. Also, the family may have special circumstances that affect their ability to pay for college. Eligible students may also qualify for other forms of financial aid, such as institutional grants. For example, some students whose parents earn $100,000 or more will qualify for grants from their college.

Some colleges require students who are applying only for merit aid to file the FAFSA, just to make sure they get any need-based aid for which they are eligible. Colleges often use need-based aid to offset part of a merit-based grant or scholarship. If there is any question as to whether a student might qualify for financial aid, use the college’s net price calculator to get an estimate as to how much gift aid the student might get.

As you begin this process with your student and have questions on the aid you received, or how best to finance college for your kids and grandkids, give us a call at the office for a review!

If you have questions, please contact us.

MARKET UPDATE
FINANCIAL PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

To download the October 2021 Newsletter: CLICK HERE