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Assessing Need Disqualification For Aid Programs You should be aware that money in the name of a child, whether it was earned and saved, received from a relative or the result of an investment gain, may reduce aid qualification. The Definition Of Financial Need The key to understanding financial aid is to understand the concept of financial need. First, visualize three bars - A, B and C. Bar "A" represents the cost of college. It is a variable. It will differ at each college. Bar "B" represents a family's expected contribution to college costs - the amount it is judged capable of paying. This amount remains constant; no matter what college the student selects. Bar "C" is the amount of "outside" student aid received. Determining Expected Family Contribution Expected Family Contribution is the amount of money a family must contribute to college costs. Understanding how to figure this contribution is the key to formulating your financial aid strategy. - Parental income - Parental assets - Student income - Student assets Two Special Situations - Two family members in college at the same time. - The parents are divorced or separated Back to top Disqualification For Aid Programs You should be aware that money in the name of a child, whether it was earned and saved, received from a relative or the result of an investment gain, may reduce aid qualification. The formula mandated by Congress, and used by most schools (generally referred to as the Congressional Aid Formula) penalizes those students who have money. This might prompt you to use life insurance or an annuity as the education investment, since these do not count negatively in the congressional formula. Sources: Tax Facts 1, 2000 Financial Planning Consultants, Inc. for calculations Back to top The Definition Of Financial Need The key to understanding financial aid is to understand the concept of financial need. First, visualize three bars - A, B and C. Bar "A" represents the cost of college. It is a variable. It will differ at each college. Bar "B" represents a family's expected contribution to college costs - the amount it is judged capable of paying. This amount remains constant; no matter what college the student selects. Bar "C" is the amount of "outside" student aid received. If Bar "A" is larger than Bar "B" and "C" combined, the family has "need." If a family has need, the student qualifies for financial aid. Example: Take a family judged capable of contributing $5,000 to college cost. This family is considering three colleges, how would the need be determined? College X costs $20,000; Need $15,000 (20,000 - 5,000) College Y costs $10,000; Need $5,000 (10,000 - 5,000) College Z costs $7,000. Need $2,000 (7,000 - 5,000) Back to top Determining Expected Family Contribution Expected Family Contribution is the amount of money a family must contribute to college costs. Understanding how to figure this contribution is the key to formulating your financial aid strategy. For a dependent student, it is the sum of four separate calculations: The contribution from parents' income; the contribution from parents' assets; the contribution from the student's income and the contribution from the student's assets. Because most of the money available for student assistance comes from the federal government, the exact formula for calculating family contribution is prescribed by Congress and is called the Federal Methodology. Let us look at these factors one at a time. Back to top • Parental income Parental income includes taxable and non-taxable income from the year proceeding the award year. From that, families subtract an income protection allowance - money for food, rent, transportation and laundry. For a family of four, that allowance is approximately $19,140. The bigger the family, the bigger the allowance. Also subtracted are federal and state income taxes, social security taxes and an employment expense allowance of up to 35% of the lower income or $2,800, whichever is less if both parents work, or it is a single parent household. What remains is called "available income." It is multiplied by a percentage up to 25% to 47%. The higher the available income, the higher the percentage (47% kicks in when the available income exceeds $19,000). Back to top • Parental assets Parental assets include the value of stocks, bonds, savings accounts and business assets as of the date the form is signed. From that, parents subtract an asset protection allowance - a sort of nest egg for the golden years. For a student whose parents are married with the older parent being 45, that allowance is about $39,200. For a single parent age 45 the allowance is $24,600. The older the parent, the bigger the allowance. What remains is multiplied by approximately 5.6%. Back to top • Student income Students add up all their income and subtract their federal, state and social security taxes. They may also subtract an income protection allowance of $2,090. Uncle Sam expects them to contribute 50% of everything the student earns, which is over that amount. Back to top • Student assets Students add up all their assets. They rate no asset protection allowance. Families (students) must contribute 35% of the value. Independent students have it a bit easier. Only their own income and assets, and that of any relevant spouse, are evaluated to determine expected family contribution to college costs. Back to top Two Special Situations Back to top Two family members in college at the same time. In this case, each student will have a separate family contribution figure consisting of half the parents' contribution from income and assets plus the student's own contribution from income and assets. The parental contribution to college costs may be divided by a "number in college" figure that includes parents who might be students as well as children. Back to top • The parents are divorced or separated In this case, students use the income and assets of the parent with whom they lived for the greater part of the calendar year preceding the year in which they enter college. That would be 2000 if the student starts college in the fall of 2001. If the parent has remarried, the stepparent's income and assets must be included for need analysis... just as though he or she was a natural parent. However, this means that the non-natural parent would also include contribution being made to a child living elsewhere who is attending a college. Back to top |