In this segment from the episode of Motley Fool Answers, Robert Brokamp and Alison Southwick interview Brock Jolly and Tim McFillin from TheCollegeFundingCoach.org about how your assets can influence whether your college student can receive financial aid. The Free Application for Federal Student Aid (FAFSA) doesn't consider your retirement account or your home when evaluating your student's eligibility. However, colleges that use the CSS Profile can factor those assets in.
A full transcript follows the video.
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Robert Brokamp: Myth No. 2. "If I have a lot of assets in my 401(k), IRA, and home, my student will never get any aid."
Tim McFillin: Yes, this is a big part of college financial aid planning if you're in this situation. A good example I can give you of this is a family we've worked with recently that essentially has a home that they own. Their primary home is free and clear and it's worth over $1 million. They've got a lot of money in their 401(k)s and their IRAs.
The dad, who is the main income earner, stopped working last year and is essentially semi-retired and he's 60 years old. He's a much older parent than the average we see, but he's got all these assets we totaled to about $3 million, zero of which count against them on the FAFSA. And he's over age 59 1/2, so he has access to this money should he need it or want to spend it on college.
But on paper, their family income is $15,000 and they have an 11th and a 10th grader. We mentioned earlier how it's difficult for families with higher incomes to get financial aid. That can change dramatically if there's two or more kids in school simultaneously, because most schools will take what they expect you to pay and divide it by two.
So, if you've got one kid going to Virginia Tech and you've got one kid going to Georgetown, right now that is, combined, nearly $100,000. So, even if you have a high income, but they're in school simultaneously, your Expected Family Contribution may be $60,000 because your family income is $150,000. So, if your kid is going in-state [just one kid], you have no chance of getting financial aid.
But, because those assets don't count on the FAFSA, you have a good chance when two kids are in school simultaneously, particularly if one is going to a more expensive private school. It may cost $100,000 total. You're only expected to pay $60,000 and so there's a $40,000 need-gap potential, there. It doesn't mean you're going to get it, but it means you have the opportunity.
Brokamp: Now, is that a difference with the CSS, by the way? The CSS does factor in retirement and home equity?
Brock Jolly: It can.
Brokamp: It can.
Jolly: What I always tell people is draw that line in the sand. Figure out what your Expected Family Contribution is, and then if your child is applying to or attending a CSS Profile school, you want to know what questions they ask. To put it in perspective, the CSS Profile is actually a pool of about 700 questions of which each school can ask 10.
Brokamp: So, it varies from school to school.
Jolly: It varies from school to school. The schools like it, because it allows them to customize and there are some schools that even have their own institutional forms that tend to ask CSS Profile style questions. All you want to know when you're going into it is understand what forms your school requires. The FAFSA is pretty cut and dry. We understand it. We know what it asks. We understand what counts and what doesn't. But if a child is considering or strongly considering a CSS Profile school, we want to understand at that school what questions they're going to ask.
The income is always the biggest driver in the formula, regardless of the forms that they use, and in a lot of cases, as Tim mentioned, if you've got a family that's earning [maybe over $200,000 is a good threshold], they're probably not going to qualify for need-based aid, but if they've got a low income, as the example that Tim just gave, we might be able to do some things [and I always say legally, morally, ethically] to shift those assets in such a way that it could allow you to qualify for even greater amounts of need-based aid.
Brokamp: And you can't wait until your senior year of high school to do that.
Brokamp: You've got to do that planning sooner.
Jolly: Absolutely, and I think the key is for so many families they do wait until junior or senior year. The sooner you start, the better. You can draw that line in the sand. Make it up. Let's say you've got a fourth grader. Draw the line in the sand, now. Now, inevitably things will change, but at least you understand the rules of the game and you've got a game plan that you can start to implement.
McFillin: Also keep in mind that it's not the income that you earned 10 years ago or five years ago. It's only the calendar year that they're looking at for your taxes. So, if you choose to take a sabbatical one year, you could precisely choose one to do it wisely. If you're a business owner, you could choose to depreciate something in a certain year [buy equipment in a certain year] to lower your income for that particular year. So, another important part of this is if you are in a situation where you may have a lot of assets but a lower income, and you may have multiple kids in school simultaneously, try to apply to some schools that are FAFSA only.
Just as an example -- since we're sitting here in the D.C. area -- UVA, William & Mary, Georgetown, GW; all these schools require the CSS Profile, so you are less likely to get financial aid from these schools than you would a FAFSA-only school if you're in that situation with high assets and a lower income. Virginia Tech, University of Maryland, James Madison are FAFSA only.
My stepsister went to Georgia Tech, another great school. FAFSA only. You want to make it a specific part of the financial aid planning process if you're talking about college funding, and I think that's really where we try to add more value, [as] most people [aren't] even thinking that far ahead.