This proposal to pay for college would make it too easy to cheat the system

Among the Creative Solutions to Pay for College proposed by sociology professors Laura Hamilton and Elizabeth A. Armstrong is a radical change in defining the notorious Expected Family Contribution (EFC).  This idea has some merit, but would it let slacker parents slough off their financial responsibilities?

2. Use different measures of dependency. Need-based student aid and loan amounts are typically calculated using the federal government’s estimate for “expected family contribution” — which may not bear any relation to the parental assistance students actually receive. Undergraduate students are considered dependents unless they have children or are: over 23, married, a member of the military, an orphan, a ward of the court, an emancipated minor, homeless or at risk of becoming homeless. Dependents must report parental income on the Free Application for Federal Student Aid, and it is considered in calculating the expected family contribution. This poses a severe hardship for students who are financially independent. A measurement based on student reports of actual expected contributions would alleviate this burden. Given the financial constraints families face, there would be temptation to game the system. However, students and parents could sign a legally binding document stating their financial relationship (if any), and proof may be required to show financial independence through individual earnings in the first year of college.

This proposal addresses the frustrations felt by those unlucky students whose parents, even if they could afford it, will not financially support their children’s college education.  Yet for purposes of qualifying for financial aid, these students are stuck unless they fit into one of the narrow categories listed above.  For example, in cases of deadbeat dads, middle-income families deep in debt, or prosperous but anti-education parents, the children may not qualify for aid under current rules.  Often these children are essentially self-supporting, but cannot be considered independent in the application process.

Too many opportunities to game the system

While this idea seems reasonable in some respects, it also seems ripe for abuse.  Legal documents and tax records may screen out some would-be moochers, but loopholes would allow many to qualify for money.  Business owners in particular could easily set their kids up with “jobs” that would make them appear self-supporting.  And it’s easy to imagine a scenario where a “financially independent” student would regularly receive generous cash gifts and other  goodies from his parents while remaining eligible to receive financial aid.

No thanks.  The rules as they stand are onerous and imperfect, but I don’t believe the suggested solution is a better option.

Related:  Why does the EFC come as a shock to many parents? (Cost of College)

College Net Price Calculators are not accurate for business owners

A word to the wise —

Net price calculators are not accurate for business owners and other situations.

Here’s the warning from Bowdoin College:

For some families (e.g. divorces/separated, business owners) using the Net Price Calculator will be less reliable because of the complexity of their family financial circumstances. The calculator is not intended for international families….

The general message is that if your family’s financial circumstances deviate from a “typical” situation, the simplified NPC calculations are less likely to predict your cost to attend college.  In the case of business owners, schools usually will ask for additional financial information, which often results in revenue that had been netted out being added back in for the purpose of determining expected family contribution to college costs.

Net Price Calculators have been required since 2011.

In accordance with the Higher Education Act of 1965 (HEA), as amended, as of October 29, 2011 each postsecondary institution that participates in the Title IV federal student aid programs is required to post a net price calculator on its Web site that uses institutional data to provide estimated net price information to current and prospective students and their families based on a student’s individual circumstances. This calculator should allow students to calculate an estimated net price of attendance at an institution (defined as cost of attendance minus grant and scholarship aid) based on what similar students paid in a previous year. The net price calculator is required for all Title IV institutions that enroll full-time, first-time degree- or certificate-seeking undergraduate students.

Related:

• Burned by college net price calculator estimates (Cost of College)
• ‘Tips for Using Net Price Calculators’ (Cost of College)

The fiscal cliff – higher taxes may not be so bad if you’re seeking college financial aid

Politicians may be close to a deal that will avoid the dreaded fiscal cliff, thereby averting a $450 billion tax increase that would affect most American households.  However, if we find ourselves tumbling over the edge of that cliff on January 1, there is at least one possible silver lining for parents of college students.

Higher Taxes Can Increase Your Child’s College Aid Eligibility

Paying higher taxes can actually increase your child’s eligibility for need-based college financial aid. The reason is that in the formulas used to determine a student’s need for financial aid, federal, state and FICA taxes that parents and students pay get subtracted from their respective incomes. The more taxes you pay, the less income the formulas determine you’ll have available after taxes to contribute toward the cost of college. Depending on the cost of the colleges your child is considering, the child’s aid eligibility may go up because the child’s expected contribution will go down as the result of you paying more in taxes.

The Fiscal Cliff and Need-Based Aid Eligibility

Colleges determine your child’s eligibility for need-based aid by subtracting the amount you are expected to contribute toward the cost of attendance (cost of attendance – expected family contribution = need). The more taxes you pay, the lower your child’s expected family contribution (EFC). At colleges where the overall cost of attendance is higher than your child’s EFC, the child will qualify for need-based aid. If you end up paying more in taxes if we go over the so-called “Fiscal Cliff” when the Bush-era tax cuts expire this December 31st, then your child’s EFC will go down and aid eligibility at the colleges where your child qualifies for need-based aid will go up.

A simple rule of thumb is that your child’s EFC will drop by about 47% of every dollar you pay in additional taxes on the same amount of income.

Higher taxes may not be so bad if you’re seeking college financial aid, but they can be tough on  long-run economic growth.

Related:  How Would the Fiscal Cliff Affect Typical Families in Each State? (Tax Foundation)

Reminder – automatic zero EFC maximum income DROPPED TO $23,000

Last month Congress made it harder to qualify for an automatic zero EFC by reducing the maximum income allowed from $32,000 to $23,000 for the 2012-13 Award Year.  A zero EFC usually makes a family eligible for the highest amount of financial aid.

This significant change seemed to have stayed mainly under the radar, even though it will hit low-income families hard since over 4 million students qualify for the automatic zero provision this year.   Perhaps some provisions of President Obama’s 2012 “Blueprint for Keeping College Affordable and Within Reach for All Americans” will counteract this benefit cut to poor families.

Here are more details about how dependent students can qualify for the automatic zero EFC, updated from last year’s post.

For the 2012-2013 school year, a dependent student automatically qualifies for a zero EFC if both (1) and (2) … are true.

1) Anyone included in the parents’ household size (as defined on the FAFSA) received benefits during 2010 or 2011 from any of the designated means-tested Federal benefit programs: the SSI Program, the Food Stamp Program9, the Free and Reduced Price School Lunch Program, the TANF Program, and WIC; OR
The student’s parents:
• filed or were eligible to file a 2011 IRS Form 1040A or 1040EZ11,
• filed a 2011 IRS Form 1040 but were not required to do so, or
• were not required to file any income tax return; OR
the student’s parent is a dislocated worker.

AND

(2) The 2011 income of the student’s parents is $23,000 or less.
• For tax filers, use the parents’ adjusted gross income from the tax return to determine if income is $23,000 or less.
• For non-tax filers, use the income shown on the 2011 W-2 forms of both parents (plus any other earnings from work not included on the W-2s) to determine if income is $23,000 or less.

Federal Pell Grant Program of the Higher Education Act – Background, Recent Changes, and Current Legislative Issues  (pages 20 & 22)

Related:  Congress curtails Pell Grants and federal loan grace period 

Congress curtails Pell Grants and federal loan grace period

The budget finalized by Congress on Saturday curtails some federal student financial aid programs.

The two most important changes: A reduction in the number of years students can receive Pell Grant money and the temporary elimination of a six-month grace period on interest payments on federal student loans.

Pell Grant maximum eligibility period cut from eight to six years

College students taking longer than six years to obtain their undergraduate degree would have their Pell grants cut off next school year under a $1 trillion budget bill passed Friday in the House.

Millions of students each year receive Pell grants, which are offered to low-income students and don’t have to be paid back.

The bill keeps the maximum grant award at $5,550, but seeks to save $11 billion over the next decade in Pell dollars, in part, by reducing the maximum number of years the grant can be received from nine to six.

It is estimated that this change would affect about 100,000 individuals, typically part-time or transfer students.

Federal loan grace period

… Congress suspended the six-month grace period on loan interest for graduates with subsidized Stafford loans.

Stafford loan borrowers will still get a six-month reprieve upon graduation from having to pay back their loans, but the principal on the loans will accumulate interest during that period for loans issued between July 1, 2012, and July 1, 2014.

Also will be harder to qualify for automatic zero Expected Financial Contribution (EFC)

It appears that a lower income will be needed to qualify for the automatic zero EFC loophole

The bill also reduces the income level under which a student will automatically be eligible to receive the maximum Pell grants from $30,000 to $23,000. 

Why does the EFC come as a shock to many parents?

Parents who fill out the Free Application for Federal Student Aid, or FAFSA, are often shocked by how much the federal government thinks they can afford to pay for college when they receive their official “Expected Family Contribution,” or EFC.

According to Kim Clark at USNews Education, some fundamental aspects of the federal formula for calculating the affordability of college are the reason for the shock.

1. Outdated budget estimates. The Education Department bases its estimate of what families can afford today on a government budget for a “family maintaining a lower standard of living” in 1967. That budget has been adjusted for inflation every year. But it has not been adjusted for changes in family spending patterns. During the 1960s, fewer wives worked, for example, so families spent much less on child care. The antiquated budget also can’t account for modern technological expenses such as cell phones, computers, or internet access.

2. No regional adjustments. The government doesn’t account for the different costs of living in different cities. The Council for Community and Economic Research, which produces widely used data for tracking cost of living, estimates that living in New York City, for example, costs more than twice as much than living in, say, Pueblo, Colo. Yet the federal government assumes Brooklyn, N.Y., families paying, say, $2,000 a month for a three-bedroom apartment can afford to spend as much on college as similar families with comparable income paying only $1,000 for a similar home in lower-cost communities.

3. Unrealistic family spending assumptions. The government’s formula doesn’t make any accommodation for parents whose disposable income is reduced because of their own student loan bills, even though a growing number of parents are still paying off their own student loans as their kids enter college.

These policies mean the EFC is “at best, a very harsh assessment of families’ ability to pay,” says Mark Kantrowitz, publisher of FinAid.org. At worst, he says, it is “somewhat unrealistic…and archaic.”

Some basics on how colleges use financial need in admissions decisions

Here are some terms used to describe the ways in which colleges may incorporate student financial need into admissions decisions.  This generalized information can serve as an introduction to a topic that comprises many shades of gray and is often confusing to families.

NEED-BLIND ADMISSIONS  —  Students are evaluated and admitted without regard to their financial need.  Virtually all public schools fall into this category and many private schools are mostly need-blind, but may use financial need to decide the fate of  borderline, wait-listed, international, or transfer students.  Additionally, this explanation by Mark Kantrowitz shows how the waters can be muddied by a school’s preference for wealthy students.

Need-blind admissions also doesn’t mean that the admissions is wealth-blind. A college might ignore financial need for low-income students, but then grant an admissions preference for high-income students. Most colleges define need-blind as meaning that financial need has no role in the decision to deny admission to low-income students. As such, financial need is not treated as a negative characteristic for low-income students. But colleges can treat a lack of financial need as a positive characteristic for high-income students and still consider themselves to be need-blind. For example, some need-blind colleges will admit full-pay but borderline candidates or grant wealthier students more attractive financial aid packages.

NEED-AWARE, NEED-SENSITIVE, OR RESOURCE-AWARE ADMISSIONS  —  A student’s financial need is typically considered in the school’s acceptance decision.  Enrollment management techniques are employed as a way to make sure the student body generates a sufficient  level of income for the school.  If you can pay your own way you are more attractive than a needy applicant, at least on that basis.  Consequently, a student who does not need financial aid may have an edge in getting accepted over an otherwise equally qualified student.  (“Need-aware” and similar terms are increasingly being used to describe many colleges that self-identify as “need-blind”, in the belief that only schools that ignore financial factors for ALL applicants are truly need-blind.)

FULL-NEED SCHOOL  —  One that claims to meet the student’s full financial needs, defined as the Cost of Attendance (COA) minus the Expected Family Contribution (EFC).  It is worth noting that many families are surprised to learn that the school’s determination of financial need is often lower than the family’s own assessment.  Also, the school may decide that a loan “award” will be used to meet all or part of the student’s need.

GAP STUDENT  —  Student whose financial needs are not fully met by the college.  The gap student is at higher risk for dropping out.

ADMIT-DENY ADMISSIONS  —  What “need-blind” actually means to a student unable to afford the college to which he was admitted.  If the school offers insufficient financial aid to cover the gap between the COA and the EFC, the student is effectively “denied” admission.

Some basic college financial aid terms

FAFSA -Free Application for Federal Student Aid
It’s a form you fill out and submit to the government. The Office of Federal Student Aid determines your eligibility for getting student aid (including PELL grants, and work-study programs). You’ll need your parent or guardian’s help though, because it asks for information such as their income. It is recommended that you fill out the form as close to January 1st as possible. Don’t wait! Completing, and submitting this form should be the first step of your financial aid process.

EFC-Expected Family Contribution
This dollar figure is how much (the government) expects your family to contribute to your education for one year. The figure is calculated from the FAFSA information you provided, and factors such as family size, number of family members in college, family savings, and current earnings affect it. Usually, the lower your EFC, the more financial aid you’ll receive.

SAR-Student Aid Report- (ISIR- The Electronic Version of SAR)
A summary of your FAFSA responses, it’s sent back to the student electronically or in paper version after their FAFSA is processed. The SAR is also sent to the college’s you’ve selected to receive it. The colleges or universities will use this information to determine if you’re eligible for federal-and possibly non-federal-financial aid.

PROFILE
This is an online financial aid application service offered by the College Board, used to determine if you qualify for non-federal student aid. More than 500 colleges, universities, graduate and professional schools use it. It’s an efficient way for students to report their financial data to their schools of choice.

PELL
Federal Pell Grants are awarded to (usually) undergraduate students. They are not a loan; they do not have to be repaid. The amount you receive will depend on your financial need, your costs to attend school, whether your a part-time or full-time student, and your plans for length of attending school.

STAFFORD
Stafford loans are low-interest loans for (eligible) students to help cover the cost of higher education. You can use it for a four-year school, community college, or trade, career, or technical school. Students borrow directly from the U.S. Department of Education at participating schools.

There are two types of Direct Stafford Loans: Direct Subsidized Loans and Direct Unsubsidized Loans. Direct Subsidized Loans, as the ones described above, are for students with financial need. They are not charged interest while in school, as long as it’s part time. For Direct Unsubsidized Loans, you are not required to prove financial need, and interest accumulates on the loan from the first time you borrow the money.

From Noelle Smith, a student at Drake University in Des Moines, Iowa.

Your retirement savings are not included in determining EFC

Your 401k plans, IRAs, Keoghs and other qualified retirement savings are excluded when your Expected Financial Contribution* (EFC) is calculated using either FAFSA or PROFILE methods.

Saving for your retirement should be an important priority, and it makes sense that this portion of your financial pie is not “supposed to” pay for your child’s education.  In reality, many parents end up dipping into retirement savings to help pay for college.

* Expected Family Contribution (EFC)
The Expected Family Contribution (EFC) is how much money your family is expected to contribute to your college education for one year.
Typically, the lower your EFC, the more financial aid you will receive. Factors such as family size, number of family members in college, family savings, and current earnings (information you provide on the FAFSA) are used to calculate this figure.