I’m going to tell you something that you don’t know: college is expensive. OK you know this already. The average cost of a year of education at a private college has cleared $30,000. Multiply that by a four year degree and we get to $120,000. Let’s not even calculate what happens if you stay in school for another year or two. Public universities are better price wise, averaging roughly $15,000 annually. That’s $60,000 for four years of education. This is more manageable, but is still a hefty sum of money. When it comes to college financial aid, everyone, and I mean everyone should apply. You might be thinking that you have too much money saved and therefore will be declined by the college for receiving aid so why bother. This is a common misconception and I hope to dispel it. So, here is hoping the following is something you don’t know.
The Formula is Weighted
To begin, the formula for determining whether you qualify for financial aid is weighted. It takes both your assets and your income into account to determine eligibility. But, it weighs income more heavily than assets. So, if you have an average income but many assets, you still qualify for financial aid.
Retirement Assets Aren’t Counted
Assuming you have many assets, how they titled? By this I mean, what type of account are they in? Any money you have saved in a retirement account (401k, Roth IRA, Traditional IRA, SEP IRA, 403b, etc.) are not counted in the formula. This money is considered to be for retirement. So if the majority of your assets are in retirement accounts, you in good shape to qualify for financial aid.
Finally, when completing the Free Application for Federal Student Aid (FAFSA), you can shield a portion of your cash from the formula. The amount you can shield is tied to the age of the eldest parent. The closer the parents are to retirement, the more money that can be shielded from the formula. The thinking behind this is that older parents are gearing up for retirement and are therefore saving the majority of their money for retirement.
Each year FAFSA releases an updated Asset Protection Allowance worksheet for you to determine how much money you can shield from consideration. For example, if your parents are married and the oldest parent is 50 years old, they could shield $40,900 from the calculation.
Let’s take this one step further. Let’s say that all non-retirement assets of the parents total $100,000. To determine the expected family contribution that would be added to FAFSA, we would subtract the shielded assets from the total, ($100,000 – $40,900), which gets us $59,100. We would then take this amount and multiply it by 5.64%, which is the parental assessment rate. This gives us $3,333.
What exactly does mean? In it’s simplest form, having $100,000 in non-retirement assets hurt the financial aid chances by $3,333. While this is a decent sum of money, that money could have been loans which have to be repaid as opposed to grants from the school. In the end, it is better to final for financial aid and risk missing out on $3,333 as opposed to not filing and risking missing out on even more aid.
As I pointed out at the start of this post and as you are all well aware of, college costs a lot of money. Filing for financial aid won’t guarantee you free education, but it could help you defray some of the costs associated with attending school. Personally, if sitting down and filling out the FAFSA (which I’ve done numerous times over the years) means I might have to pay a couple thousand dollars less for college, then I will always make time to fill out that form. That couple thousand dollars will grow to thousands more if you take out student loans to cover college. Or, if you get to leave that money in your investment account, it will grow to much more over time as well. Take the time to file for financial aid. You never know how much money it could save you.