Having grown up with depression era parents, I've never been
someone that liked to have debt. I'm told that avoiding debt will not
work in my favor when applying for financial aid for my son's
education. What should I know and is there something I should do to
improve my odds of getting what other typically debt-ridden families
in our tax bracket will be offered? My son is 17 and so we are in the
process of filling out applications for schools now and soon will be
dealing with the financial aid forms.
— Priscilla T.
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You have been misinformed. Unsecured consumer debt is not considered
by the federal need analysis formula. (Secured debt such as margin
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loans is considered as an offset to the value of the asset to the
extent that the asset is reportable on the Free Application for
Federal Student Aid (FAFSA).) There is no advantage to having more debt.
Consider two families with a net worth of $50,000. One family has
$50,000 in the bank and no debt. The other family has $100,000 in the
bank and $50,000 in debt. Assume that the age of the older parent is
48 in both families, so the asset protection allowance is $52,400
(2009-10). Then the first family will have no contribution from
assets, while the second family will have $47,600 in unsheltered
assets and a contribution from assets of as much as $2,685. Thus the
family with no debt will get more financial aid than the other family,
all else being equal.
Families are always better off saving for college. While there is a
slight penalty for savings, savings provides more flexibility. For
example, money in the parent's name reduces aid eligibility by at most
5.64%, or $564 for every $10,000 in assets. This means that a family
who has saved $10,000 will net at least $9,436 more money to pay for
college than a family that has saved nothing.
It is also cheaper to save than to borrow. If you save $200 a month
for 10 years at 6.8% interest, you will accumulate about $34,433. If
you were to borrow the same amount at 6.8% interest, you would pay
$396 a month for ten years. So you have a choice: save before college
or pay twice as much after college.
My daughter is in her second year residing on campus. We complete
the FAFSA annually and receive financial aid in the form of student
loans and parent loans. Next year she is thinking of residing off
campus in an apartment to be shared with others. Will financial aid
continue to help us and consider the costs that she will have for
living off campus?
— Shelley M.
Financial aid is based on financial need, which is defined as the
difference between cost of attendance and the expected family
contribution. The cost of attendance includes an allowance for room
and board. Most colleges will have two cost of attendance figures
(often called "student budgets"), one for students who live on campus
and one for students who live off campus. Some colleges base their
off-campus budget on a survey of local apartment rents or on national
figures published by the College Board. Others simply adjust last
year's figure for inflation (and may have been doing so for
decades). This sometimes results in a figure that is lower than the
student's actual costs. If your daughter's actual costs are higher,
she can ask the college financial aid office to adjust the cost of
attendance to reflect her actual costs. If her costs are reasonable
there's a good chance the college will grant the adjustment.
Keep in mind that every $100 she spends on rent using student loan
money will cost her $200 by the time she has paid off the loan. So the
primary motivation for living off campus should be to save
money. Otherwise it is a luxury she cannot afford. She should live
like a student while she is in college so she doesn't have to live
like a student after she graduates.
I have child support in the bank for the second semester of my
daughter's sophomore year. After I pay the cost, I will not have
any college funds left. I will be submitting the FAFSA in January
and have to show what I had last year, as the child support is
considered taxable income. But I won't have that amount this year. How
do I handle this?
Child support is often discontinued when a child reaches the age of
majority. Ask your college for a professional judgment review, arguing
that last year's child support is not reflective of your ability to
pay during the upcoming academic year due to its discontinuation. The
college has the authority to adjust your prior tax year income to
compensate for the loss of child support.