Rachel Dickinson was shocked when she realized her family would be paying more than $20,000 a year for her daughter to attend college.
An author from upstate New York, she had assumed, as a lower middle-class household of six, they would be eligible for more financial aid.
“I felt like I fell into the trap of making too much to make college affordable, yet too little to be able to pay for it,” Dickinson says.
Financial Aid: Are You Stuck in the Middle?
For many parents with kids in college, it can seem like the more money they make, the worse off they are when it comes to need-based financial aid.
To apply for government financial aid, the student and parent complete the Free Application for Federal Student Aid, or FAFSA. The FAFSA is used to calculate the student’s EFC (Expected Family Contribution). This figure determines how much, if any, need-based aid such as government grants and work study funds a student may get.
The EFC calculation process is complicated; the 2009-2010 FAFSA form contains more than 100 questions. As a result, there is no one-size-fits-all correlation between income and financial aid. In other words, it is impossible for a family to know that if they simply keep their income under a certain dollar amount, they will qualify for more financial aid.
“Financial aid eligibility works in a graduated fashion,” says Ken Clark, a certified financial planner and the financial aid/student loans expert at About.com. “So a $500 change in income might only yield a $150 change in EFC. Make $1,000 more, and your EFC changes by a similar, almost proportional amount, until the eligibility for aid gradually disappears.”
The EFC is divided up among the total number of family members (aside from the parents) who are in college, so the more students in the family, the lower the EFC will be. And it isn’t just the parents’ financial info that counts. Any income or assets the student has will be considered.
So Should You Turn Down that Raise?
Given how expensive tuition can be, especially for families with more than one child in college, some parents might wonder if they’d be better off deliberately keeping their income low in order to qualify for financial aid. That’s generally not a wise strategy, experts say.
“In most cases it would not be beneficial to reduce income to receive additional financial aid,” says Charles C. Zhang, a certified financial planner and managing partner at Zhang Financial. “Less income does not translate dollar-for-dollar into more financial aid. Typically, a reduction in financial aid awards is only pennies for every dollar of income earned. Parents would be better off saving the additional income to use for the student's education expenses.”
Christopher S. Penn, chief media officer at Edvisors, Inc., agrees. “You'd have to run the numbers with a qualified financial planner,” Penn says, “but my gut instinct tells me that you'd be better off with the income, especially if you're middle class or above, because the more you can pay out of pocket, the less you have to borrow. Once you're out of the lower income zone, financial aid will transition more and more to loan aid only, so if you can offset that with extra income, you'll owe less debt. And in this economy, that's essential.”
The Single Most Important Figure
To maximize their child’s chances of getting need-based aid, parents must focus on their adjusted gross income, or AGI, which is perhaps the single most important figure in the EFC calculation.
Penn’s suggestion: “Look to things like moving expenses and tuition deductions, both of which are above-the-line AGI offsets that will reduce the AGI.”
“Parents who are very close to making an income above the Pell Grant limitations could consider contributing more money to their 401(k) or retirement plans,” says Zhang. “Not only will that reduce the family income, retirement assets are not considered in the EFC calculation.”
(To get a clue as to what your EFC might be, try the Department of Education’s estimator tool.)
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