Employees with Children Attending College Next Fall Should Apply Now for Financial Aid

Federal employees with children who plan to attend college next fall, including high school seniors who have not yet applied for admission, are highly encouraged to submit the 2020-21 FAFSA (Free Application for Federal Student Aid) form as soon as possible. The 2020-21 FAFSA became available October 1 and can be downloaded at https://studentaid.ed.gov/sa/fafsa. This column discusses what parents with children who will be attending college or university in the fall of 2020 should do in order to maximize their chances for financial aid.

For many federal employees, providing a college education for their children has long been an important family goal. But paying for that education has never been easy. In particular over the past few years, it has become more of a challenge as college costs continue to rise at a rate exceeding the rise in the cost of living. Private colleges and universities have costs  - this includes tuition and fees and room and board - of upward of $70,000 per year. Even as high as $80,000 is possible.

Families who may not have qualified in the past for need-based financial aid may qualify now. The federal government through the Department of Education provides almost $120 billion a year in student aid through a variety of programs. 

Students who wish to borrow money and be considered for work-study jobs and merit-based scholarships must submit the FAFSA. As the saying goes: “The early bird catches the worm”. and the same applies to applying for financial aid. The sooner a student applies for college financial aid, the greater the chance the student will receive that aid. That is precisely why the 2020-21 FAFSA is available now in early October 2019.

The 2020-21 FAFSA considers a family’s assets at the time the FAFSA is submitted, as well as the family’s taxable income from 2018 as shown on the family’s 2018 Federal income tax return. Cash in the bank and investments that are not associated with a retirement plan (retirement plans include IRAs, the Thrift Savings Plan and other qualified retirement plans) will count against a family for the purpose of qualifying for financial aid. On the other hand, debt including credit cards, home mortgages, and car loans are ignored for the purpose of a family qualifying for aid. In essence, this means that in comparing one family that has lots of credit card debt and assets and another family that is not carrying credit card debt from month to month and has fewer assets (because they pay off their credit card debt) the second family has a better chance for qualifying for financial aid. Of course, paying off credit cards each month is a good idea for other reasons.

Eligibility for need-based financial aid is determined by taking the college or university’s cost of attendance and subtracting the expected family contribution (EFC). The difference if any is the amount a student may receive in need-based forms of financial aid, including grants, scholarships and loans.

The problem with the EFC is that many colleges and universities present the EFC in a way that makes a four-year education seem more affordable than it really is. In short, there is much in marketing gimmicks going on. For example, some schools reduce their grants (money that does not have to be repaid) by the amount of a student’s outside scholarship funds. This means that a student’s net cost to attend that college or university remains the same, in spite of the student’s hard effort and work to receive that scholarship.

“Net price” calculators are available on many college Web sites. These calculators will tell families what the “true “cost of a college education will be at a particular college. But “net price” calculators can be misleading. A recent study from the University of Pennsylvania Graduate School of Education indicated some “net price” calculators use old or incomplete data, or treat loans like grants. By subtracting loans from the net cost, these “net price” calculators come up with a net price for a college education that is much lower than the amount a family would actually have to pay.

Direct student loans from the federal government obtained through the FAFSA include direct unsubsidized loans, which are available to dependents and are not based on need. The limits are $5,500 for first-ear students, $6,500 for second-year students and $7,500 for third and fourth-year students. The federal government also has loans for parents, namely “Parent Loans for Undergraduate Student) or PLUS loans.

When parents are considering how to finance the part of their children’s education not covered by grants or loans, they should not forget some of the IRS tax benefits associated with paying for college. These benefits include the American Opportunity Tax Credit with a maximum of $2,500 tax credit eac year of undergraduate. Also not to be forgotten are  tax-free distributions from Coverdell Education Savings Accounts and 529 college savings plans used to pay for the qualified expenses of a college education.

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Certified Employee Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD.  Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652.  

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