How Colleges View Your Assets - Nancy McKenna ––

How Colleges View Your Assets

Is your child going to apply to a public college? Or a private college? They should be applying to both.  Then you can compare the offers to be sure you get the best aid package.

Public schools require that you fill out the FAFSA form (Free Application for Federal Student Aid) .  Private Schools require that you fill out the Profile form.  Even if you think you won't qualify for financial help, fill out the forms.  You may be surprised.  These forms are also used for work-study plans.

What is the difference in the two forms?  And how do they view your assets?  Is there a difference?

Yes, there is.  Let's take a look.

Expected Family Contribution

Let's start at the beginning, with the EFC.    The Expected Family Contribution is one of the factors determining how much your family will pay for college.   How is this number derived?  By our government.   

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    Families making less than $24k have an EFC of $0 - meaning, they aren't expected to contribute anything toward college tuition
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    Families making between $50k - $60k have an EFC of $5k- $6k.  For those doing the math, that is about 10% of gross income
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    For incomes above $60k, the percentage slowly increases. If you make $150k, your EFC will be about 25%, or $32k

See the following chart, which I pulled from an article on Forbes.    This is a quick reference EFC  guide by salary.  


Once you have your EFC, you can start to look at the other college cost factors.

Home Equity

The FAFSA form doesn't ask you if you own a home,  let alone if you have equity in the home.  The Profile form does ask.  Though some schools don't include this in their financial calculations and some won't.  Easy, right?

For the schools that will factor your home equity into the equation, there are two main ways this happens:

  • either as a straight percentage  (example 1) or
  • using a factor applied to your income (example 2)

Example 1 - $100,000 equity in home

Example 1 - $300,000 equity in home

$100,000 x 5% =   $5,000 added to EFC

$300,000 x 5% =   $15,000 added to EFC

Or, the schools will use a "factor" for home equity and apply it to your income.  Just to keep things interesting.

Example 2 - $100,000 equity in home,

$100k income

Example 2 - $300,000 equity in home,

$100k income

Income x 1.2 

$100,000 x 1.2 = $120,000

$120,000 x 5% = $  6,000 added to  EFC

versus

$100,000 x 5% = $  5,000 added to EFC

Income x 1.2 

$100,000 x 1.2 =  $120,000

$120,000 x 5% = $  6,000 added to EFC

versus 

$300,000 x 5% = $ 15,000 added to EFC


So, if you have a lot of equity in your home, it can "hurt" you, or the school won't even look at it.  It depends on the school.

Here is a great article from Lynn O'Shaughnessy about home equity and how it is viewed.    In the article Lynn links to an excel database that Paula Bishop put together  In the blog post, she also references an article in the NY TImes.  The article speaks to parents using home equity loans to pay for college.  Wow.  Do NOT do this!  What are these people thinking? You are putting your home in jeopardy, as well as borrowing against your retirement.  If you find yourself thinking this way - I suggest you instead focus on less-expensive schools, and/or the community college path.

Here is a summary of how the FAFSA and Profile forms view your assets:

Asset Type

FAFSA-

Public Schools

Profile Form

Private Schools

Home equity

not counted

at 5%

529 Plans

at  5.64%

at 5%

Retirement plans - 401k/IRAs/pensions

not counted

not counted

Non-retirement savings

at 5.64%

at 5%

Investment properties

at 5.64%

at 5%

                Let's drop in some numbers to see how they compare.

Asset Type

FAFSA-

Public Schools

Profile Form

Private Schools

Home equity

$100,000

$100,000

529 Plans

$100,000

$100,000

Retirement plans - 401k/IRAs/pensions

$200,000

$200,000

Non-retirement savings

$50,000

$50,000

Investment properties

$500,00

$500,000

The Expected Contribution would be calculated as follows: (multiplying % in the first table times $ amount in the second table above)

Asset Type

FAFSA-

Public Schools

Profile Form

Private Schools

Home equity

$0

$5,000

529 Plans

$5,640

$5,000

Retirement plans - 401k/IRAs/pensions

$0

$0

Non-retirement savings

$2,820

$2,500

Investment properties

$28,200

$25,000

The total for the FAFSA assets equals $36,650   and the total for the Profile form is  $36,660.       So, it came out very close.

What about your child's assets and income?   How do colleges view the student's asset?


FAFSA 

Public Schools

Profile Form 

Private Schools

income

up to $6,400 is shielded

expected to contribute $2,200

assets

at 20%

at 25%


FAFSA 

Public Schools

Profile Form 

Private Schools

income of $5,000

$0 added to EFC

expected to contribute $2,200

assets of $5,000

$5,000 x 20% = $1,000

$5,000 x 25% = $1,250

Let's look at an example for the student:

  •  The FAFSA rules indicate that the student would be expected to contribute $1,000. 
  • The Profile form shows that the student would be expected to contribute $3,450.

Your child is working, right? 

So, now that you have an idea of how colleges view your assets, you can be strategic with any windfall.  Maybe you get a big bonus at work,  find a priceless heirloom in the attic, or win the Irish Sweepstakes. You could position the assets accordingly to shield them, or just do your child a favor and put it all toward college costs.

To understand how much a particular college will expect your family to contribute, you could try a True Cost Calculator. Money Magazine has this helpful tool.  It is not a substitute for going through an actual Net Price Calculator, but it's a pretty decent start.  You'll note that it includes salary bands, which will give a pretty good indication of typical aid received at each level.

So, now that you have a better understanding of how colleges will look at your money, why don't you start researching schools for your children?  To make sure that you are saving enough.   Check out this article to get some great tips on how to research schools.









About the Author Nancy McKenna

I'm a personal finance geek. A real estate investor. An accountant, a single mother. And I'm going to get my kids through college without student debt! Will you?

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