College Funding Advice!

From the desk of Brad Ewerth, CPA, Certified College Planning Specialist,
Member of the National Institute of Certified College Planners (NICCP)

Need to Knows

What is EFC and why is it important?
When comparing cost of colleges, you need to understand this!
New Rules for the Hope Credit!
Need Based Student Loans
Non-Need Based Student Loans

 

What is EFC and why is it important?

The expected Family Contribution (EFC) is the amount a family can be expected to contribute toward college costs. All data used to calculate the EFC comes from information provided on the Free Application for Federal Student (FAFSA).

There are three regular (full-data) formulas for EFC depending on whether the student is a:

  1. Dependent student
  2. Independent student without dependents other than spouse
  3. Independent student with dependents other than spouse

To determine any possible financial need for a family, the Cost of Attendance (COA) for a particular college is compared to the EFC. If the COA is greater than the EFC, a financial need exists. Families should note that the COA is different for each respective school, but the calculated EFC stays the same.

There are many strategies that can minimize EFC. Accordingly, families should discuss with a certified college planning specialist, what opportunities may be available for their specific situation.

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When comparing cost of colleges, you need to understand this!

Besides the actual COA of any college, several other issues need to be researched in order to determine the possible cost of attending a certain college. Families need to realize that all colleges are not created equal. Once a family determines any possible financial need, several related issues need to be determined. First, the family needs to determine from the college being considered what percentage of the financial need will be met. This percentage can range from 30 percent to 100 percent. Additionally, once this is determined, families also need to research how much of the need being met will be grant or gift aid (free money). So for example, if a family has a financial need of $20,000, School A may meet 80 percent of the need ( $16,000), while School B may meet only 60 percent of the need ( $12,000). Then of the need being met, 75 percent of School A will be in the form of gift aid ( $12,000) and School B may be only 50 percent in gift aid ( $6,000)

 
School A
School B
COA
$30,000
$30,000
EFC
10,000
10,000
NEED
20,000
20,000
NEED MET
16,000
12,000
GIFT AID
12,000
16,000
SELF HELP
 4,000
 6,000
TOTAL OUT- OF-POCKET
$18,000
$24,000

So even though the cost of attendance is the same for each school, the out- of – pocket cost to the family is different by $6,000.

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New Rules for the Hope Credit!

For the years 2009 and 2010, the following changes have been made to the Hope credit. The modified credit is also referred to as the American Opportunity Tax Credit.

The maximum amount of the hope credit increases to $2,500 per student. Taxpayers may take a credit equal to 100% of the first $2,000 of qualifying expenses and up to 25% of the next $2,000 The credit is now expanded to the first four years of college. And allowable expenses are expanded to include course materials, such as books.

The credit is phased out if modified adjusted gross income is between $80,000 and $90, 000 ($160,000 and $180,000 if filing a joint return).

If a taxpayer is eligible to but does not claim a student as a dependent, only the student can claim the education credit for the student's qualified tuition and related expenses. Thus it may pay for a parent not to claim the student as a dependent if ( 1) the parent can't claim education credits because of high modified AGI, and (2) the student pays or is deemed to pay the expenses and has sufficient tax liability to claim the credit.

This is where a strong knowledge of tax rules as well as financial aid rules is needed in order to properly plan the best strategies for families dealing with the rising costs of college.

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Need Based Student Loans

Federal Subsidized Stafford Loans
Federal Subsidized Stafford Loans are fixed-rate, need-based loans varying from $3,500 for college freshman, $4,500 for sophomores, and $5,500 for juniors and higher. The interest is paid or subsidized, by the federal government until six months after the student leaves college. The interest rate for loans disbursed after July 1, 2009 and before July 1, 2010 is 5.6 %. Stafford Loans carry both life and disability insurance on the student. If the student dies or becomes disabled, the loan balance is forgiven.

Federal Perkins Loans
Federal Perkins Loans are low-interest, need-based loans ranging up to $5,500 per year for an undergraduate, with a maximum total of $27,500. The interest, whose rate is fixed at 5%, is subsidized by the federal government until six months after the student leaves college. The college determines which students will receive this loan and the amount of the loan.

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Non-Need Based Student Loans

College Loans
Some colleges have student loan programs that may or may not be based on the financial need of the student. The terms and rate of these loans vary with each individual college. You should inquire to the college about the availability of loan programs through the college.

Federal Unsubsidized Stafford Loans
Unsubsidized Stafford Loans are not need-based loans. If there is no financial need, the student can still receive an Unsubsidized Stafford Loan, which is subject to the Subsidized Stafford Loan limits. The interest rate is capped at 6.8%. The interest is not subsidized by the federal government during the time the student is in college. However, repayment of these loans will not start until six months after the student leaves college.

State Loans
Some states have college loan programs. State loan programs may or may not be based on the financial need of the student. The state's Higher Education Agency can provide the details of its loan programs.

Private Loans
There are loans from private sources that can provide supplemental educational financing for undergraduate and graduate students.

Following are some sources of private loans:

Sallie Mae
Bank of America
Wells Fargo Bank
U.S. Bank

Note : Sallie Mae has a student loan program called the “Signature Student Loan.” These loans are in the student's name, but the parents may have to co-sign the loan. A co-borrower may be required if the student is a freshman, or has no credit history or a low credit rating.

These signature loans can be repaid over a period of up to 25 years and repayment doesn't start until 6 months after graduation. After the student makes 24 on-time payments, the co-borrower can be removed from the loan. A student can borrow up to $25,000 per year without a co-borrower, and up to $35,000 per year with a co-borrower. The maximum any one student can borrow is $100,000.

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Copyright © 2009, Brad Ewerth, CPA, Certified College Planning Specialist,
Member of the National Institute of Certified College Planners (NICCP)