By: Tahir Jaffri. ChFC, CPFA, LUTF, Financial Advisor
For many Americans, providing a college education for their children has long been an important family goal. Paying for that education, however, has never been easy. Over the past few years, it has become even more of a challenge as college costs continue to rise.
Few families seem able to save enough to fully fund four or more years of higher education. For many students, some type of financial aid, in the form of grants, scholarships, loans, or work-study, is needed to make the dream a reality.
As such, financial aid is available. The federal government, through the Department of Education, provides more than $120 billion a year in student aid, through a variety of programs. Private organizations and foundations, state governments, as well as the schools and universities themselves are additional sources of financial aid.
The vast majority of financial aid is awarded through a standardized process which, in general, proceeds as follows:
Free Application for Federal Student Aid (FAFSA): The student and their family complete the application, the single form used to apply for all types of federal aid; it is also used to apply for state financial aid at many public and private colleges. The FAFSA collects information such as family size and number of family members in college, in addition to financial data such as income and benefits, and net assets.
Student Aid Report (SAR): Using the information supplied on the FAFSA, the government calculates the amount a family is expected to contribute toward a student’s education, known as the Expected Family Contribution (EFC). The same information is sent to the financial aid offices of the colleges the student listed on the FAFSA.
CSS/Financial Aid PROFILE: A few schools will require a prospective student to complete an additional standardized financial questionnaire known as PROFILE. The data collected on this form is used to award a college’s institutional aid.
A majority of financial aid provided to college students in the U.S. is from programs funded and/or administered by the federal government, which much of the support coming in the form of student loans. The major elements in federal student aid include, but are not limited to, Federal Pell Grants, Federal Supplemental Education Opportunity Grant (FSEOG), the William D. Ford Direct Loan Program, and the Coronavirus Aid, Relief, and Economic Security
(CARES) Act.
In addition to the financial aid programs provided through the federal government, there is a wide range of aid available through other organizations. Some of these include state programs, institutional aid programs, military aid programs, and private scholarships.
Congress has passed legislation designed to lighten the burden for paying for higher education. Because the rules surrounding these strategies can be complicated, the counsel of a qualified tax of financial professional is recommended. Two different tax credits are available, as well as interest deductions on education loans.
A number of other approaches can be used to help pay for college expenses. Carefully consider the pros and cons of the following suggestions, including the income tax ramifications, the impact on any possible financial aid, the likelihood that a student might not complete college, and any effect on your long-term financial goals. Some of these approaches include, but are not limited to, home equality loans, life insurance cash values, borrowing from qualified plans, and choosing a lower cost school.
Overall, the key step in paying for a child’s education is to begin the process as early as possible. A great deal of information, as well as counseling, is available from high schools, colleges, and the various government agencies involved in high education, at little or no cost! Questions involving income, gift, or estate taxes should be carefully reviewed with a Certified Public Accountant (CPA), IRS Enrolled Agent (EA), legal counsel, or other qualified professionals.
Students and parents should be pro-active and explore all possibilities for financial assistance as soon as possible. Do your research, ask questions and be prepared with as much information as possible so you can make the best decisions when the time comes.