529 Plan and College Savings

Archive for January, 2010

Question: Massive EFC??? What can I do?

I just completed fafsa, and got an efc of 14,753. I am extremely worried I will get no aid. I don’t know how this happened. I have no brothers or sisters, but my family only makes 50,000 a year. We do have 60,000 in savings/retirement, 12,500 in a 529 Plan, and I have a job that makes 5,500 a year, but this seems unreasonable. I was expecting something closer to 5,000. Why is this so high, and what can I do to get financial aid?

Answer: Nick:

To be honest, there’s little or no practical distinction between an EFC of 14753 and the “5000 or so” that you were anticipating. In both cases, you will have failed to demonstrate the “exceptional need” that triggers eligibility for the “need-based” forms of financial aid. That cut-off comes at the EFC level of 4041.

It should not surprise you that you didn’t demonstrate “exceptional need”, as only about 1/3 of all applicants do. You may not feel that your family is particularly well off with the various numbers that you described, but the simple fact is that you and your family find yourselves in a better financial situation than many other families. Only THE most economically disadvantaged households qualify for need-based aid, and most of those folks don’t have $60,000 in retirement and $12,500 529 plans.

I’ll also tell you that the single most influential factor in your aid analysis was that $5000 job of yours. Always keep in mind that the financial aid system is an “assistance” program – and that the primary responsibility for the cost of your college education lies with you. The Department of Education expects you to set aside a pretty decent percentage of that $5000 that you’ve been earning towards your OWN school expenses – certainly before the taxpayers step up and offer you their money.

Since you didn’t demonstrate “exceptional need” – you, and the other 2/3 of aid applicants like you will be offered the opportunity to borrow from the Department of Education’s exceptional educational lending program, the Stafford program. The Stafford is designed to make borrowing easy and “cheap” for students – and it has many, many advantages over any other type of student borrowing.

If you’re eligible for federal student aid, you’re already approved for a Stafford loan. It doesn’t matter if you have good credit, bad credit, or no credit at all. You can have bankruptcies, foreclosures, canceled credit cards, and 5 really nasty loan sharks breathing down your neck, and you’re still approved for the loan. It’s in your name, your parents aren’t involved, and you won’t be asked for a cosigner, no matter what.

The Stafford has a low, fixed interest rate of 6.8% that will stay at that rate as long as you have the loan – you won’t begin your payments until you’ve been out of school for 6 months, and you’ll have the chance to request a postponement in payments if you have trouble getting a job after school.

Any other type of student loan will require you to have an exceptional income and great credit, or you’ll be asked to provide a cosigner – another applicant who DOES have exceptional income and great credit.

The only downside to the Stafford is the annual borrowing limit – $5500 for freshmen, $6500 for sophomores and $7500 for juniors and seniors. If that’s not sufficient, the government has a supplementary lending program available to your parents – that’s called the PLUS loan program (Parents’ Loan for Undergraduate Students). The interest rate is a little higher, and they WILL look at your parents’ credit, but the approval process is very liberal. Your parents can be approved with far less than stellar credit. Your parents can borrow up to the full amount of your unmet need from the PLUS loan program.

Unfortunately Nick, the financial aid system is not designed to make it possible for students to just pick whatever school they want to go to, and then sit back while financial aid hands over what you need to make that happen. If you and your parents have put aside a significant amount of savings – or you’re willing to borrow what you need – then you’ll have your choice of many schools in all kinds of cost brackets. If you’re relying almost entirely on financial aid, and you’d rather not borrow, that really limits the schools you can choose from.

Finally – don’t forget the possible availability of state-funded financial aid or institutional (school) aid. Many states have fairly generous aid programs of their own (Florida, New York, Michigan, California, Georgia and Tennessee, just to mention a few). If your grades are good, your school may be able to offer you additional assistance – but you won’t know for sure until you receive your aid offer letter from the school.

Good luck – I’m sorry you were disappointed in your EFC score.

College Savings Plans of Maryland Question About Financial Aid