Several Questions from Parent Just Getting Started

Paying for College
1

Hello all – Relatively new to CC and appreciate all the info and advice here, thanks! Parent of a rising junior D, and just starting to dig into the admissions and FA process. A few questions so far, and these are substantially more basic than the questions many of the more knowledgeable CC members are posting:

  1. I ran a FAFSA-based EFC calculator and several individual schools’ net price calculators. Another post indicated that the EFC calculator that uses FAFSA as a basis generates an EFC for federal aid purposes. In our case, as is perhaps not unusual, the EFC generated by the FAFSA-based calculator was lower than the net price EFC.

Question: If we are expected by a particular institution to pay more than a FAFSA-based EFC number, does that mean we (or my daughter) may qualify for federally-subsidized loans to help cover our actual, school-based EFC? Do institutions decide if you are “offered” a Stafford loan, etc., or is that determination always a federal one independent of particular institutions?

I feel like I may be mixing apples and oranges in that question, so I apologize if so.

  1. Somewhat related to the above, and definitely falls in the obvious category I fear, but here it goes.

Question: If we/she do not qualify for federally subsidized loans, I assume there are any number of private educational lenders who will offer loans (if you meet their underwriting requirements or our D does with us as a co-signer) to help us provide our EFC to the institution?

Warnings on student debt welcome, but aversion already high (my parents unable to help me, had over $100,000 in student loans that took 10 years to pay off – not complaining and know that many kids/families face even higher amounts, and I empathize).

  1. The EFC calculations seem weighted toward income, and it's not clear to me that contributions made pretax to retirement programs (401Ks and their equivalents) are "counted" as income. If those contributions are counted (basically added back in for income purposes), this question is moot.

If not, wondering about whether I have this right. It seems we could stop contributing to retirement savings to build up our “regular” savings over the next two years to help eventually pay our EFC. But if we do that, it will increase our taxable income, which seems like it could result in an increased EFC in some cases.

Or it seems like we could keep contributing to retirement savings in hopes that it may reduce our EFC by reducing our effective income. And then stop contributing closer to her first year of college to free up some additional money for the EFC (understanding FA will be recalculated before her sophomore year and we could then have a higher EFC due to increased income).

To put it bluntly, does that make any sense?

  1. We also have a son entering eighth grade. So he may be entering college as a freshman when my D is a senior in college.

Questions: Do different schools give you more or less “allowance” in their EFC calculators for having two kids in school rather than one? I’m not sure how much weight we’d give it given just one year of overlap, and there of course are a ton of variables that could change over the next five years, but curious I guess if some schools are seen as especially “generous” when it comes for accounting for siblings in college.

  1. Do most schools allow payments to be spread out over as many as twelve months (basically a monthly payment of annual EFC)?
  2. Perhaps the most random question is about the University of Alabama. Kudos it seems to them for being seen as a strong OOS option for merit-based aid for those kids who qualify for their merit-based programs. This is neither here-nor-there for our personal financial situation, but I’d be interested in hearing where that approach comes from – did the governor/legislature at one time push an emphasis on attracting meritorious out of state students, was it a university president, other? If the perception I have (admittedly drawn largely from reading threads on CC and a few references elsewhere) is true, is there evidence that Alabama’s more robust merit aid for OOS students attracts a stronger OOS group (measured by test scores/GPAs and such I guess, not the only measure of the strength of a class to be sure) than other flagships in its region?

Corrections to my perception of about their OOS aid programs also welcome. And isn’t at least one, “Roll, Tide, Roll” obligatory from a ‘Bama student or grad who reads this?

Thanks very much all for any help!

2

1 - confusing question, not sure how to answer.
2 - yes there are private lenders.
3 - yes 401k contribution added back into income, before aid calculations.
4 - yes more kids in college reduces EFC.
5 - Some schools do, I think most might.
6 - Always wondered about it. I think their diversity is very low, so they are trying to improve on that. But I might be wrong.

3
  1. All undergrads who are eligible for FAFSA are entitled to a Stafford loan (freshmen $5500). $2000 is always unsubsidized. Whether the $3500 is subsidized or not depends on your financial situation, other aid, cost of the school.
  2. Sure, lots of private loan options.
  3. 401k are added back in as income. If you don't make any 401k contributions, you'll indeed raise your income and pay taxes on that (taxes paid do reduce your income on FAFSA). You'll also be giving up any employer match, and it sounds like you'll have kids in college for 7 years. That's a lot of retirement savings you'll give up. I suggest you don't do that, and just deal with the 401k contributions. If your income is high enough, you won't be giving up any federal benefits like Pell grants or SEOG, but the school might have grants.
  4. Yes, most schools give an allowance for having multiple children in school. FAFSA does.
  5. Many schools allow a payment plan. There may be a $25-100 fee. Often it is 10 months instead of 12.
  6. I'll leave others to talk about Alabama.
4

The typical loan progression is as follows:

  1. Student eligible for a max amount (year 1 $5,500, year 2 $6,500, year 3+ $7,500). As said above, feds decide if any will be subsidized
  2. Parents can borrow (pending approval which has tightened some but is still pretty liberal) up to the total cost of attendance from the federal government
  3. Private loans through banks

Whether the interest rate on 2 or 3 is more favorable depends on your circumstances.

There are exceptions and things like Perkins loans and PELL grants, but the above is common.

5

rgosula, twoinanddone, and InigoMontoya, thanks very much! Two very quick clarifications from me with an apology for the confusing questions I asked - you are helping me a great deal already in figuring out the many places where I’m confused.

On #1, I think from reading your responses my confusion is treating a FAFSA-based EFC as something with separate meaning from a EFC generated from a school-based NPC in terms of our eligibility for federal loans. I think I am going to restate what Inigo said, but doing so will help me figure out if I have it wrong:

It sounds like the school gives us an expected student contribution, and feds decide if fed loan/subsidy is an option for that.

The school gives us a parental EFC, and the feds decide if we can avail ourselves of federal loans as an option for that (or some of that).

If we as parents are either ineligible for federal loans or for some reason prefer a private loan, we can apply for private loans.

Seem right? I was treating a generic FAFSA-based EFC as having some independent meaning in determining whether a student/family qualifies for a federal loan but I suspect now that’s all wrong.

On #3, thanks for the replies. Twoinanddone, I see now that I may have had it backwards - NOT contributing to 401K equivalent may actually decrease income relative to contributing to 401K equivalent. If we don’t contribute, our net income increases but accounts for the tax hit. If we make contributions maybe they are added back in as income but no tax hit is accounted for, so our income actually looks higher (assuming when add contributions back in they don’t apply effective tax rate to those contributions). Agree that a lot more goes into making a deicsion on retirement savings than effect on FA income (and if we don’t qualify for need-based aid in any scenario, as is possible, the FA income effect will be irrelevant anyway). Still, if I am understanding your reply correctly, that’s an interesting twist, thanks.

Again, the help is greatly appreciated. Thanks very much.

6

Depending on the Net Price Calculator, it may show loans or work study in the award already, and you would not be able to add additional loans on top of that.

The EFC is just an index of how much need you “demonstrate.” The school decides how to turn that EFC into a Net Price at their particular institution. Some schools are actually more generous than the federal formula (We had one NPC that came out 20% below our EFC. Stanford is another one - everybody with a net income below 125K and is smart enough to get into Stanford gets free tuition.)

The EFC gives you a ballpark, but the school has the final say as to what aid you will get from them. The school also administers the federal aid program on behalf of the government - you will not apply separately to the federal government for a Pell grant or a subsidized or unsubsidized loan. You just file the FAFSA and send it to the school. Most financial aid offers show the full federal loan you are eligible for, and you decline (partially or fully) the loan if you do not need it. Everybody qualifies for the unsubsidized loan just by filing the FAFSA. Only some folks qualify for subsidized, which is determined by the school, following criteria set by the federal government. If you accept either type of loan, you do the preloan paperwork and such by following the instructions given by your school.

Yes, 401K contributions are added back in to your income and taxes are removed from your income in the financial aid formula. We are reducing 401K contributions while our kids go to college as part of raising money for that expense. But, we get a tax credit back (American Opportunity Tax Credit) that will give us lower taxes, too. It may be a wash in the end as far as our EFC goes. We lose one tax break and gain another. We will see. It does not change what we need to do to pay the bills, though.

7

Re: Alabama

Alabama is one of many schools that tries to attract better students through large scholarships. Here are some lists of schools that do that, but be sure to check the school web sites, since some many have changed:

http://automaticfulltuition.yolasite.com/
http://competitivefulltuition.yolasite.com/
http://nmfscholarships.yolasite.com/

8

Thanks much AroundHere and thanks again to the previous, I think I understand finally! The fed loan options will be administered by the school and be communicated to us by the school as part of their NPC analysis (which we can look at tentatively through the various schools’ calculators) and ultimately as part of a real FA offer (if any such offer is extended based upon our EFC and a particular school’s policies/approaches to aid).

If a school says no fed loans - subsidized or not - are available to us, or if there are some but we also are looking for additional loans, then we turn to private lenders to fund part of our EFC.

Also AroundHere, thanks for the 401K insight from your family’s experience - very helpful indeed.

I don’t think I’m as dense in real life as I’ve been so far in this thread, but it makes me wonder! Thanks for the gracious and extremely patient replies, I appreciate them very much.

9

ucbalumnus, Thank you (yet again as carrying over from the other forum!) for the help and the fantastic resources/links. Great, great stuff!

10

Unsubsidized should always be available. If they are not, ask. If the school does not participate in the federal loan program you should understand why - there could be something strange about the school. (Some schools refuse to participate in federal education programs for religious reasons, some for-profit schools have been suspended for ripping off their students, etc.)

In addition to the federal student loan program, there is a federal parent loan program called PLUS. The fees and rates and loan limits are all higher than the student loan program.

For more info, go to studentaid.ed.gov. Under the Types of Aid menu, click Loans.

11

AroundHere, thanks once again. One final (I hope) clarifying question on the unsubsidized loan info. I’m assuming combining the prior helpful info that the unsubsidized federal is always available, but only if a school make sit part of its FA offer. Put another way, assume a school calculates our EFC and decides we must pay 100% ourselves if we send our D there. They extend us no loan opportunities b/c they decide our need is zero. I assume then we can explore private loans, but we cannot then on our own get a federal loan, even an unsubsidized one.

Is that right, or am I mixing more apples and oranges?

Thanks!

12

@JMS111 if you fill out FSFSA you will be offered the unsub $5,500 regardless of need, at least that’s how it worked for us.

13

You can still receive a Stafford loan regardless of need, as long as you fill out the fafsa.

14

3scouts and twogirls, thanks. Reading your notes and going back and reading the others now, I have indeed proven myself dense again. Your comments helped me reprocess what AroundHere wrote earlier, “Everybody qualifies for the unsubsidized loan just by filing the FAFSA.” I understand now it’s whether it is subsidized or not that will depend on further eligibility determinations, but she should be able to get a $5500 unsubsidized federal loan for freshman year as a baseline under any EFC/FA rubric.

Thanks all, and again I apologize for the number of replies it took to get me to understand this.

15

Whether your loan is subsidized or unsubsidized will depend upon your financial situation and the schools that you apply to.

16

Don’t feel bad about asking questions. I think it is complicated.

So much will depend on the type of school your child picks, from public to well endowed private to barely making ends meet private. If it is a public, and only uses FAFSA to award all federal aid and school aid, it’s a little easier to understand - you either qualify because you have low income or you don’t. If it is a school that also uses CSS, it becomes a lot more complicated and some schools consider home equity, retirement savings, other children in private schools, number of cars - whatever they want.

Income is income, but how different places consider it varies. A 401k contribution isn’t considered for taxes, but is for FAFSA. If you make $100,000 but put $20,000 in a 401k, the IRS considers you to have made $80,000 but FAFSA considers you to have made $100,000. If you put nothing in the 401k, your taxes will be higher, and FAFSA will recognize that and consider you made less. If you ‘save’ the $20k in your own savings account to have it to pay for college, the Catch-22 is that FAFSA will consider that an asset but it doesn’t consider the same $20k if it is in a retirement account. And, if you are single, if you put the $20k into the 401k, your income drops to $80k and you are eligible for the AOTC, but if your income is $100k, you don’t.

I think the 401k is always the way to go. Too many negatives to not contributing. In most cases where the income is above $70k or so, there isn’t going to be a lot of federal aid, so giving up the 401k tax benefits and employer match is not worth getting (maybe) $1000 in aid.

17

You’ll see the student loan and parent plus loans listed on your financial aid offer from the school, but it is true the school does not determine the amounts or administer the loans in any way. They’ll tell you what you should be eligible for, and then you go through the federal government to actually apply for the loans. You can elect to take all/part/none of the student and parent loans from the fed. The money will be paid to the school based on the school schedule - typically 1/2 the first semester and 1/2 the second semester.

There is a different type of loan - called a Perkins - that is administered by the college, but that is a need-based loan and not necessarily widely available.

It’s possible to take the loans and if the student account ends up overpaid, receive a reimbursement and use those funds for any purpose. Just bear in mind that on unsubsidized loans, that interest starts adding up over time.

Extended payment plans are often available, as stated above they typically have some fee associated with them. My kid’s colleges charged $130 and $80. We had to do 10 months freshman year, since by the time everything was sorted out the first two months of the 12 month plan had passed. Since then we’ve done 12 months.

It is possible at some schools to pay by credit card, however many schools now put a finance charge on credit card payments since they have to pay the credit card company a percentage of the transaction.

You can borrow through private lenders regardless of whether you utilize federal loans or not. Some people have found better rates through private lenders, however for many people federal loans are more advantageous.

There are many schools of thought on the retirement issue, however if you do take off several years from contributing, what would your plan be to make up the missed investments? For most people, the rule of “you can borrow to fund college but you can’t borrow to fund your retirement” is true.

For us having 2 kids in college the only difference was that put us into the category of qualifying for $3,500 of the loan amount being subsidized. However, you do need to think about how the second child’s costs might go up after you lose any advantage from having 2 in college that one year.

18

Excellent, thanks much Twoinanddone and Inigo! These replies give me a great roadmap going forward, and with a foundation in place now I can dig more into the complexities you both shared. I am going to revisit a variety colleges’ NPCs with all this info in mind and take a careful look at the federal loan rules. Looks like a fair amount of squeezing the balloon in one place causing a bulge in another, where doing something on one front can cause other variables to get “better” or “worse”.

Thank you!!!

19

The FAFSA EFC formula gets updated every year. The parent income (AGI and income from working) gets reported and there is an income protection amount (based on members in household and students in college) and some deductions for federal, state and soc sec tax paid. Then there is an asset protection allowance based on marital status and age.

For the student there is an income protection amount ($6420 for 2017/18 FAFSA) and same tax paid deductions, but no asset protection allowance.

The calculated EFC is a number that qualifies for Pell grant if low enough. Some states offer grants as well.

Yes, 401k contributions are added back in as untaxed income for FAFSA.

Private schools often use the CSS profile or their own aid forms and often will consider home equity in their calculation as well.

My understanding is that if you have unmet need after all other aid is applied to the cost of attendance, then student can qualify for a subsidized loan (need based).

The student can also take a $2000 unsubsidized loan.

20

The FAFSA EFC is used to determine primarily if you are eligible for federally funded grant money (Pell, SEOG), or subsidized loans.

The net price on the NPC from the school is probably closer to what you will need to pay. The FAFSA EFC should be viewed as the MINIMUM you will be paying for college.

If your FAFSA EFC is higher than $5500 you won’t be eligible for any federally funded grant money in all likelihood.

The Direct Loan is available to anyone who files a FAFSA form.