Hi, I am a mother of two from a middle class family. I have a daughter who will be attending college as a freshman this fall, and I have a second daughter who will be a high school senior this fall. This post is concerning my second daughter.
A few years ago, I invested some money in the market (about $3,000) for my second daughter because I thought it would be a smart way to save up for college. But the one thing I did wrong is the equities are under her name, and one of my friends told me that this would greatly affect the student’s expected family contribution. Also, she has a car and a job for the past year, and has been saving up all the money from the paycheck.
How will all my daughter’s ‘assets’ play into the financial aid equation? How much will this impact the aid we will receive.
The following is my response to her question in detail.
I’m glad you have asked this question, because so many don’t know about these issues.
You are correct; all of those factors would effect your EFC normally, but not necessarily given your circumstances , and here’s why:
Parents are assessed at a rate of no more than 5.64% of after tax assets as a part of the EFC; so if a family had $10,000 in free assets after their income allowance, no more than $564 of it would be fair game for the EFC calculation.
For your children who are dependents the rate is a whopping 20%! So any saved money, or investments you put into her name are hit at that level. However, thats only after the first $6000 in income. So if your child earned nothing this year, you are in the clear. But if they earned more than $3000, the excess past $6000 will be assessed at that higher rate.
So that $3,000 equity investment would be hit at a 20% rate excluding any gains on the investment. In addition, your daughters work efforts and savings are also taxed at that rate. Many try to do the right thing and encourage their children to work while in high school to learn the value of a dollar. My father and mother did the same thing. However this factor actually reduced my ability to pay for college when I was about to leave high school. Unfortunately, the upstanding way your raised your daughters and character they have displayed actually works against them with regard to financial aid as far as the Federal Formula is concerned. But don’t fret, as we can get in front of this and minimize the damage. In addition, this may not work against you depending on the amount of Merit Aid your child receives.
My assumption is that you have not filed the FAFSA for your second daughter at this point and only have an EFC for your first daughter. If so you are in luck and can resolve this issue before filing for her as well.
Here is what I advise
Since you have not filed the FAFSA, here is a where you can help protect your assets through the use of a 529 college fund. Believe it or not a 529 can help you right up until graduation as you can place funds into that 529 from both you and your child’s savings. Cashing out those equities and moving funds into a 529 in YOUR name not your child’s name. This way the assets while assessed, will be at the lower rate. In addition, the 529 fund can be spent on any educational cost without tax penalty. Your state may even offer a tax break that lowers your AGI on the next years FAFSA! my state of Illinois offers up to $10k per year AGI reduction on the state 1040. However your state of Missouri offers between $8k and $16k of AGI reduction. This is quite valuable to you as a resident.
Now here’s what is great: when of put those funds into a 529 plan, you can use them funds for EITHER of your daughters. The only stipulation is it be spent on educational expenses. So it will offer you maximum flexibility for either daughter.
Now it’s important to keep in mind that with two children in college, the EFC for each one will drop lower than they would alone. The EFC equation takes into account the number of children in the household actively attending school more than half-time. This. Means more financial aid will be available to your children as she enters school.
Did you or your spouse either get laid off, receive a reduction in pay, or your small business take a revenue hit due to the down economy? The same question would apply to your child. If any of these apply, a financial aid letter appeal would be proper. Talk to the office of financial aid where your daughter will attend and find out their rules for applying. for an EFC Override or Change. They will ask for the circumstances, and the necessary evidence and will consider the request as per regulations
As for your daughter, it may be better for her to volunteer her last year in school and not work. The revenue from work will penalize you, while volunteering benefits her with regard to scholarships while still offering work experience.
Now let me offer the warning; if you have a retirement portfolio, check with your advisor about your best financial options. Also, you can use a private financial aid counselor. There is someone I recommend to everyone that can help you deal with these issues on a very personal level and is trustworthy is Jodi Okun (twitter: @jodiokun). She can help you with even more advanced EFC reduction strategies to help get more aid and cut the need for loans.
I hope this information has helped you. If there is anything I have left Out, or anything else you wish to know, feel free to email me at anytime via the site, directly, or via twitter. I will have new podcasts on EFC reduction tips in the coming weeks for parents.
Also do not forget the value of scholarship searches. Start NOW, TODAY! Partner with your child and get the ball rolling, the hours you spend now helping your children find the money they need, will save them and yourself potentially tens of thousands loan costs. I wish the best of luck for both of your daughters in college. Again, feel free to contact me at anytime.