Perspective Matters
February is financial aid awareness month. Navigating financial aid when planning to pay for college is more than just filling out the FAFSA form. I'll come back to that but first I want to talk about a positive change related to 529 accounts.
529 plans have been around now for just over 20 years. Parents open them to accumulate money towards college for their children, and they have also been used extensively in estate planning. One of the unique features of 529 plans is the ability to “front load” up to five years of tax free gifting (based on the annual exclusion.) This has allowed for a grandparent, for example, to give between $60,000 and $85,000 per child tax free in one year. (The amount is based upon the annual exclusion which was $15,000 a few years ago and rose to $17,000 in 2023.)
Most people know qualified distributions from a 529 plan allow earnings to be tax free. What many people have not been aware of however is that there are situations in which withdrawals from 529 plans even for qualified expenses can be treated as income when it comes to financial aid.
You can find more information about 529 plans on my Saving For College page; what many people have not realized is that a withdrawal from a 529 started by someone other than a parent can actually make it more difficult to receive financial aid since even qualified distributions are considered income for the student. A common strategy when a grandparent has set up the 529 plan is to avoid taking withdrawals from the plan until later years of college. Since the financial aid forms are typically income information from two years earlier, by waiting to take money out of a 529 account owned by a grandparent until the child has already filed the financial aid form for their junior year means that the withdrawal will not be considered income to the student for financial aid purposes.
I know this sounds confusing, and it has created unexpected problems for many people. Thankfully there are new legislative rules which allow for withdrawals from 529 accounts owned by grandparents, aunts, uncles, friends and any other non-parent to avoid being treated as income on financial aid applications. This change makes it a little easier for people who want to make contributions to 529 plans for their nieces, nephews and grandchildren but retain control of the money to do so without risking compromising the child's eligibility for financial aid.
Why is financial aid such a hot topic? According to The College Board, the average cost of a four-year in-state public university degree has gone up 23% in 8 years* while total financial aid for students has declined 6%** in the same time period. In the last twenty years there has been a push to consolidate and scale the process for seeking financial aid. The standard form that every student and their parents is expected to complete every year is the Free Application for Federal Student Aid also known as FAFSA. This allows the standardization of information gathering so that families don't have to complete multiple forms and applications for financial aid for every institution. Most schools won't even consider granting students direct financial aid without a FAFSA. There's another group called the College Board which has an online application called the CSS profile which is a second application that many schools suggest or even require in order to evaluate eligibility for non-federal institutional aid. You can find links to both in the helpful link section of my saving for college educational page. Both websites provide information about how to fill out the form.
The FAFSA form is seeing some significant changes. The form is getting simpler to complete and the math is changing, particularly for families with more than one student in college at the same time. In essence the goal of this form is to calculate how much a family should be expected to contribute towards paying for students’ college education based upon its income and assets. Under the old system the expected family contribution would then be divided by the number of students in college at any one time. Under the new calculation the Student Aid Index (SAI) - which will be calculated slightly differently than the EFC - will be the expected contribution for each student, which is likely to result in more out of pocket costs for families with multiple students in college at the same time.
The Income Protection Allowance in the federal formula increases the amount of money both parents and students may exclude from the calculations and one of the more significant changes is occurring for divorced or separated couples. Until now only the financial information of the parent who housed the child for the majority of the previous 12 months was included in the application; now the parent providing the most financial support must complete the application. Because that parent must use their income and investments if they are earning more than the parent who houses the child the student may qualify for less financial aid.
The CSS profile collects more data than the FAFSA and always requires both parents to provide financial information but provides relief for multiple simultaneous college students.
It’s important for students and families to look beyond the FAFSA and CSS profile when seeking assistance paying for college. An often overlooked source of college funding is scholarships. Individual schools can have their own scholarships that they award as part of a financial aid package but there are many scholarships and grants available that are outside that system. There are a range of scholarships available, often offered by private individuals or organizations that nobody claims because not enough people know they exist.
The time to start looking for scholarships is as early as possible. I know that's very broad, but I would say even as a freshman in high school it's not too soon to start learning about what's available. There are three websites you could start with to get a feel for what’s available. You may see an available scholarship that inspires you to choose your activities or classes in high school with an eye towards scholarship money.
There are multiple sites that allow you to search and screen for scholarships; I'm not endorsing these, and I have no financial interest in any websites I mention here. I am providing them for informational purposes, and I make no guarantees or warranties about any of them. Each website is a little bit different in its focus so let me give you a sense of each. Most of these websites require you to share your e-mail address at a minimum to get information from them. You may want to consider setting up a separate e-mail address specifically to receive information related to your search for scholarships so that your main e-mail inbox doesn't get overwhelmed.
Prominent on the home page of this site are links to search for grants for low income students, special grants and scholarships for women, and multiple articles on topics such as choosing a major and selecting a career. The home page also has categories for Easy Scholarships and New Scholarships. Easy Scholarships are ones that they say have applications that take less than two minutes to complete. They have information about the amount of the scholarship, how many are available, the criteria for consideration and the award deadline. As of today, the home page includes a Sallie Mae No Essay Scholarship, McDonald's HACER National Scholarships (for Hispanic students,) Davidson Fellows Scholarships (for gifted students) and the Coast Guard Exchange Scholarship program (for dependents connected to the Coast Guard and others.)
Global Scholarships is a platform for current and prospective international students. This could be non-US students seeking to study in the US, or US students seeking to study outside the US. Many of these are smaller scholarships that are very targeted. For example, The Hope for Healing Scholarship is awarded by a Florida organization and is for students studying mental and behavioral health or psychiatric nursing. The Good Samaritan Scholarship is awarded by the Connecticut Domestic Violence Information Center at the Law Offices of Mark Sherman in Stamford Connecticut. The criteria seem to be both good grades and demonstrated compassion and sympathy towards others. The Actuarial Foundation awards the Curtis E Huntington Scholarship to students studying actuarial science. The site also includes University specific scholarships from schools around the world as well as government scholarships. There are articles with useful information for students considering studying outside the US as well as for non-US students looking to go to college in the US.
If you’re a fan of Shark Tank you’ve probably heard about Scholly. Scholly founder Christopher Gray successfully researched scholarships to fund all of his costs to study at Drexel University. After experiencing the challenges of trying to put together his own scholarship package, he started Scholly, which includes an app, to make the process easier for other students. Scholly is very clear in its goal to partner with schools, companies and brands, which means some personal information you provide will likely be shared, so a separate email address is probably a good idea. You won’t be able to see the scholarships in their database without first giving them information about you, and the site uses technology to show you a list of opportunities based on your interests, activities etc. The difference between Scholly and the other sites I’ve mentioned is that you have to dig through the others, while Scholly looks to do the work for you.
It has become very clear in this country that future financial security for today’s high school student will require either a college degree or a certified professional trade, such as plumber or electrician. If you believe college is your child’s path, be realistic about the potential costs, and think about ways to avoid him/her/them graduating with debt that could require a mortgage-size payment for ten years or more. One way is to consider attending community college for a year or two before switching to a four-year school. Another is to seek as much financial aid as possible. By all means plan to use the FAFSA and CSS processes, but don’t ignore the opportunities for targeted scholarships and grants that are available and often go unclaimed. Put the time and effort into searching these sites and others. Like Christopher Gray, you and/or your student may be able to qualify for multiple relatively small scholarships that can add up to graduating with little or no student debt, which is the best way to achieve financial security in the future.
As always, consider meeting with a Certified Financial Planner® professional to help plan for a secure financial future for you and your family.
*The College Board, Trends in College Pricing, 2013,2015, 2017, 2019 and 2021. Based on average tuition, fees and room and board at an in-state, four-year university.
**The College Board, Trends in Student Aid, 2014, 2016, 2018, 2020 and 2022. Includes federal, state, institutional and private grants as well as federal work-study, tax benefits, veteran’s benefits and loans.
Neither Prism Planning and Solutions Group nor Insight Advisors provide tax advice, and nothing in this communication should be treated as such. This communication should not be interpreted as a recommendation for a specific investment or tax-planning strategy. We are providing this material for informational purposes only. We have made every attempt to verify that information contained in this communication is accurate as of the date published but make no warranties. Before making any decisions related to your own tax and/or investment situation you should consult the appropriate professionals.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.