The family makeup and incomes of these fictional families are identical. The Dads are 45, work as software developers, and all earn 80k$ per year. The Moms are also 45, are homemakers, who have no income. The single daughters are 18 and college bound, with equal grades and test scores. The results of these families applying for college financial aid illuminate some important factors when filing the FAFSA.
The Kings are a typical American family, and from the outside might appear like they’ve got more money than the next two families. They live in a fancy house, have 3 cars, and a boat. The Kings owe the most on their house, have the biggest house payment, are still making payments on two of the cars, and have some credit card debt. They have a little home equity, and their bank accounts have whatever is left, from last month’s paycheck. The daughter babysits, gets paid in cash, spends all her cash, and has no idea how much she earned last year.
Our second family, the Millers are more financially responsible than the Kings. By looking at them, you might think they earn and have less money. Their house is smaller, but they have a smaller monthly payment and they have accumulated a decent chunk of home equity. Like the Kings, they also have 3 cars, but the cars are older, and they only make payments on their newest car. Over the last 10 years, they have saved 10% of their income, for a total of 80k$, which is kept between a savings account and in a mutual fund. The daughter puts in a lot of summer and weekend hours working at a clothing store. Her pay averages out to about 100$ a week. In her last 2 years working she has banked 25% of every dollar she has earned, and as a result has 2500$ in her youth checking account.
The final family, the Walkers, are very similar to the Millers with identical assets and debts. Their daughter has the same work ethic and savings habit. In fact, the only difference between the Walkers and Millers, is the location of their money. The Walkers channeled 40k$ into a Roth-IRA and 40k$ into a 529 college savings plan. Instead of a youth checking account in the daughter’s name, Mr. Walker opened an additional checking account in his name, which his daughter uses.
Crunching the Numbers
All the hypothetical numbers from our imaginary families have been entered into A FAFSA calculator at this link. The point of the FAFSA is to generate a number called the Expected Family Contribution (EFC). Financial aid is supposed to fill the gap between cost of attendance and your EFC. A high EFC indicates low financial need, and triggers a smaller financial aid package. Your EFC is like golf, where you want it to be as low as possible. A low EFC will entitle you to the largest financial aid offers. Remember that while the possessions and financial decisions of the 3 families are different, they are same ages with exactly the same incomes. All families were entered into the calculator as family of 3, married, 45 years old, 80k income, paid 6400$ in taxes, and 1000$ in their checking. Adjustments were made for parent assets, student income, and student assets.
- King Family EFC 12,902$
- Miller Family EFC 16,910$
- Walker Family EFC 12,902$
- JumpStart Family EFC 2017/18 school year 22,300$
The Kings might believe that money is tight and they need aid more than the Millers and Walkers. The King’s higher house payment, double car payment, and credit card payments add up to much higher monthly expenses, when compared to the Walker/Miller smaller mortgage, single car payment, and lack of credit debt. The King family’s predicament, while common place in the US, has been compounded by their extravagant spending, poor choices, and lack of self- control.
I would argue the EFC’s are neither fair, nor logical. Living within your means, being financially responsible, and saving money can lower your share of financial aid. The Miller and Walker daughter’s habit of saving a quarter of their income is admirable. The Miller daughter actually added 500$ to her family’s EFC, by working and saving her money. The Miller family made a huge mistake of saving money in a mutual fund, that was not designated as retirement or 529, while the Walker family kept their EFC low, through a few smart decisions.
Budgeting and making financially responsible decisions are not enough. It is imperative parents learn the basics of the FAFSA calculations. Income is a determining factor in the calculations, but the location of assets made a tremendous difference for these families. My JumpStart family will have 7 college years, and mistakes that cause an increase of 4000$ for the EFC’s will be multiplied by 7, for a total of 28,000$. It is never fun learning crackpot illogical government formulas, but if your family is anything like mine, 28,000$ is worth the effort and worth the aggravation. Do your homework, and put your money in the right places, before FAFSA time.