Financial Aid Tips from a MEFA Presenter
By: Peter Wyatt, Assistant Director of Student Financial Services, Wellesley College
This past December I had the opportunity to partner with MEFA and present Financial Aid Night Seminars to two local high schools. While these presentations were intended to be general and wide-ranging in content, two areas seemed to generate the most interest and follow-up questions. The first issue that families had concerns about was how soon they should be submitting the FAFSA®, and which tax documents are the most appropriate to use as a guide for answering the income-based questions. The timing can be a little tricky since tax returns for 2012 may not be finalized yet but many financial aid offices have early priority filing deadlines. The second topic which generated significant interest was differentiating the expected family contribution (EFC), as generated by the FAFSA, with net cost, or what the family will actually owe the college after financial aid is deducted from the bill.
The FAFSA is now available to complete for the 2013-2014 year at www.fafsa.gov and families should be encouraged to submit their applications as early as possible. The best approach is to use estimated 2012 federal tax information. If 2011 tax figures are anticipated to be very close to 2012 figures then it is fine to use a prior tax return from 2011 to answer the 2013-14 FAFSA income questions. If the parent is a wage earner then using a final paystub for the year is a very good approach. For business owners with income that can be variable from year to year it is still advisable to provide an early estimate rather than wait until later in the year when more accurate information is available. It is important to remember that you can always return later and make a correction to the FAFSA after your 2012 tax documents are finalized and submitted to the IRS. Submitting an early FAFSA application with estimates in January or early February is a very good idea to ensure that you are among the first in line for certain funds that may be limited and awarded on a first-come-first-serve basis at some schools.
Over the last few years the FAFSA has partnered with the IRS to enable financial aid applicants to pull in their financial information from the IRS directly to their FAFSA applications so colleges don't necessarily have to request federal tax documents. When parents and students utilize this tool it can greatly simplify the financial aid application process. The Department of Education has recently announced that the IRS data retrieval tool (DRT) will be made available for use on February 3rd. However, since it may take up to three weeks for tax information to be available for the DRT, the earliest you may be able to make this correction is late February or early March. Ideally, then, one should try to complete the FAFSA with estimates in January or early February at the latest, then go back and make an online correction to the FAFSA approximately 2 to 3 weeks after your tax returns have been submitted to the IRS.
The second topic of discussion relating to the value and practical use of the expected family contribution (EFC) is more controversial. In its most basic definition, the EFC is supposed to indicate the amount a family will be expected to pay toward the cost of college. There is a fairly complicated needs analysis process that determines this number, and the final result is the basis for any federal and state aid a student qualifies for. It is often used as the basis for awarding institutional aid. But the EFC does not necessarily correlate to the actual cost a family will incur for college; in fact, it is only coincidental if the EFC is even close to the actual cost. Unfortunately, the EFC will almost always be lower than a student's actual cost in most instances. The underlying reason for this is that few colleges are able to meet full demonstrated need. In an ideal financial aid world, a student's need, which is calculated as the full cost of attendance less the family's calculated financial contribution (EFC), should be fully funded by financial aid provided by the college. Unfortunately, there is no mandate that a student's need be fully met by college-funded financial aid. So when a college is either unwilling or simply unable to fully fund a student's need, the student has essentially been "gapped." For example, the FAFSA could generate an EFC of $10,000 for a particular family, but if a school cost $40,000 and only funded $20,000 in aid then there is still $10,000 in unmet need, or gap. The EFC is only truly meaningful if a college is willing and able to meet the associated need with college funds.
So if the EFC doesn't actually measure a family's cost, then what is it used for? Primarily, the EFC is used as an eligibility indicator for the federal Pell Grant and for the subsidized federal Stafford loan. The threshold for the EFC in order to be eligible for a federal Pell grant was $4,995 for colleges with a cost of attendance of at least $3,300 in the 2012-2013 award year. The subsidized Stafford loan, desirable in part due to interest deferred until repayment after graduation, may be awarded if a student is still determined to have need after other forms of financial aid have been applied. If a college met full need with grant or scholarship there would be no eligibility for a subsidized Stafford loan.
What students and families should be most concerned about is not their calculated EFC, but the net cost of each college under consideration. The net cost can't be determined until the school has completed the financial aid offer, and each school, for a variety of factors, will come up with different aid packages. It is up to the family to correctly determine the direct costs they are being charged (typically tuition, fees, room and board) and deduct grant and scholarship forms of aid in order to determine the amount that is due directly to the college. It is important to exclude loans and work-study from this calculation since loans still have to be repaid and work-study is not deducted from the bill. If it is then decided that the student will elect to borrow some or all of the loan(s) in offer, then this amount should be further deducted to arrive at the "out-of-pocket cost." Note that the net cost will be higher, but the loan portion of the cost is simply being delayed – at an additional cost based on the interest rate and length of repayment over time.
To further complicate matters, colleges who use the CSS/Financial Aid PROFILE in addition to the FAFSA in order to award institutional funds are using a separate EFC that derives from a similar, but more in-depth, needs analysis assessment of a family's ability to pay for college. The good news is that many colleges who use the CSS PROFILE are more likely to meet full need based on the expected family contribution they derive from the College Board's needs analysis formula. The bad news is that the college may or may not share that particular number with you. In the end, it comes down simply to the net cost. In summary, don't stress about the EFC as reported on the FAFSA. Just focus on that offer!
Peter Wyatt works as an Assistant Director of Student Financial Services at Wellesley College. He recently joined MEFA's corps of volunteer presenters, a trusted and knowledgeable troop of financial aid administrators from colleges and universities across the Commonwealth. Peter presents at MEFA College Financing Seminars throughout the North Shore of Massachusetts. We invited Peter to serve as a guest blogger to share his experiences and knowledge as a MEFA presenter.