Financial Aid Algorithm

By Daniel A. Barnes

What’s FAFSA?
FAFSA stands for “Free Application for Federal Student Aid”.  The FAFSA application is 130 questions, not dissimilar to filling out ten or eleven IRS forms.  Its objective is to assess each family’s ability to pay for college expenses.  FAFSA is filed annually to determine federal financial aid (Pell grants, student loans, work study, and private grants).  The Department of Education accepts FAFSA applications beginning January 1st of each year with aid being awarded on a 1st come, 1st serve basis. There is no cost.

FAFSA’s Intent
The FAFSA’s intent is to determine how much your family should contribute to college expenses each year.  It is going to undress you, financially speaking.  Think of it as akin to doing your taxes.

The CSS Profile, known as “PROFILE”, is required by 300 of the most well recognized private colleges and universities.  It inquires much more deeply into your family financials than FAFSA.  It’s what I would devise if I was running financial aid at a school with $60,000 a year membership dues. The cost of submitting the CSS Profile is $25 plus $16 for each additional submittal.

Institutional versus Federal Methodologies
Whereas FAFSA uses the Federal Methodology (FM) which relies exclusively on adjusted gross income as an indicator of family earnings.  PROFILE uses the Institutional Methodology which considers assets including home and farm equity, the assets of the non-custodial divorced parent, and accounting methods that artificially reduce report gross income (like depreciation and capital losses).  The IM also assumes the student will work during the summer to help pay for college.  Financial awards at the $60,000/year private colleges average $30,000-$45,000 a year. It makes sense that these schools uses the detailed approach of the Institutional Methodology.

Sensitivity of Income
Income is the most important variable for the FAFSA application to determine your estimated family contribution (EFC).  For each additional $10,000 of adjusted gross income, your EFC will be $1000 to $3000 higher.  That’s pre-tax.  If you are in the 40% marginal tax bracket and your EFC contribution rises $2000 due to a $10,000 year end bonus, your effective tax bracket just jumped from 40% to 60%!  (Federal + State + larger EFC).

Suffice it to say that a sane approach is to view the college years as a time when you build your home equity, your 401k and otherwise, tread water. Most families, even pretty wealthy ones, are going to experience a real squeeze to pay for college.

Do you Qualify?
But that doesn’t mean that wealthier families won’t qualify for some aid.  Unless family assets are well over $1 Million, or Income is greater than a $300,000, chances are you will still qualify for a bit of financial aid from the expensive private schools.  For State and other Public schools, you probably are not going to be awarded much aid with high income.  One rule of thumb is to expect at EFC of approximately 1/3 of your annual income if income is greater than $80,000.

Don’t Screw Up!
Like all government forms, the FAFSA is an unknown entity to most applicants.  The process is difficult, mainly because it’s new and intimidating.
Submit the FAFSA on time because financial aid is doled out on a 1st come, 1st serve basis.  FAFSA deadlines are different for each school, but most are due in January or February.  If you have errors in your FAFSA application, it will take many weeks for FAFSA to let you know, in which time, your chances of getting aid will not be improving.
For those applying for the 2015-2016 school year, 2014 is their base year for FAFSA calculations.  See our strategy article  on how to get your financial house in order to optimize your application.

Before starting the application, you must apply for a Federal Student Aid PIN.  You will need to enter a unique four-digit number as an electronic signature.  A few days after submitting the online version of FAFSA, you will receive an email with a link to your Student Aid Report (SAR).  The SAR includes a summary of all of your information, as well as your official estimated family contribution.

Good luck.  Please pass on the info herein to any you know who may soon be facing off against the algorithm of financial aid.


Daniel A. Barnes, CFA
Barnes Capital on La Fiesta Square
Lafayette, California

Barnes Capital, Inc. is a Registered Investment Advisor. We manage trusts and retirement income portfolios. Financial planning for each unique client and their household is part and parcel of our service.  Call Daniel at (925) 284-3503 and visit www.barnescapital.com.

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