A Taxing Workload
Students who are working in high school to save for college may be putting themselves at a disadvantage when it comes time to apply for financial aid. The Estimated Family Contribution or EFC is a calculation that aid officials use to determine how much parents and students can be expected to provide for tuition. What some families don’t know is that the EFC puts a large emphasis on how much a student earns and saves before attending college.
The Time to Know
The Free Application for Federal Student Aid (FAFSA) wants to know how much students have in the way of assets between a specific period of time prior to attending college. The time a student’s assets become relevant is as early as January 1st of the student’s junior year until December 31st of the senior year of high school. If your child has done any work in that time period and saved money for school, he or she will need to report these assets to determine the ECA.
Working for Financial Aid
The issue that is the most critical to your student’s financial aid package is their level of assets. For parents, there is a portion of assets that are protected from being used to determine the ECA, which is calculated according to age and marital status. This amount is subtracted from the total assets. The percentage of a parent’s protected assets that are used to determine the ECA can be as high as 5.6%. However, student assets have no protection and will be factored in to the ECA at a whopping 20%. In other words, the more assets a student has the less financial aid he or she will receive. Student assets include savings accounts, mutual funds, cash, and other liquid assets. Although this policy seems appropriate given we’re talking about need-based aid, some kids in need who are given money by their grandparents or who work tirelessly to save for school or to pay expenses will see their financial aid package dramatically reduced.
With regard to income, students are given an income protection allowance that enables them to earn up to $3,750 for 2009-2010. Any amount over that allowance will be assessed at 50% for the purposes of determining the ECA. Although students are often encouraged to work if possible, they need to be aware that this income is considered fair game for paying for tuition. Income includes adjusted gross income or total wages, non-taxable income like income credits, public assistance, IRA deductions, retirement distributions, etc.
Declaring Your Independence
One other element to consider is whether or not your son or daughter is dependent or independent. In order to be considered independent a student needs to fall under one of several categories. This includes being 24 years of age or older by December 31st of the year the award is provided, a veteran of the U.S. Armed Forces, married, or a number of other categories. Being independent will alter the way a student can calculate EFC and may provide the student with more aid, since he or she will not be receiving assistance from family. Remember, not being counted as a dependent on a parent’s tax return doesn’t automatically mean a son or daughter is independent. Check with a financial aid officer for more information.
Planning for College
If you are saving for your child’s college education through a tax-advantaged plan like the 529 plan, the good news is changes to the law in 2009-2010 will make it easier for students to qualify for aid. The law currently states that students who own 529 plans must report them as assets, but the new law ensures that both types of 529 plans will be counted as parent assets and will therefore be subject to the lower percentage for calculating the ECA. In addition, 529 plans allow parents to make gifts up to $12,000 per year (per spouse) free of the gift tax. Talk with a financial aid officer for more information on 529 plans and their impact on financial aid. Although we don’t discourage savings or work, parents should keep this in mind when planning for how they will be able to supplem
