Ep # 101: Paying For College Just Got A Lot Harder

Benjamin Haas | Jun 21, 2023

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Benjamin Haas 00:03

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!

Benjamin Haas 00:38

A struggle to get started, but it is an action packed. We're full of information today. So maybe we should just like, get in it’s pool season. There's no dipping our toe in the water here. Let's just jump right in.

Adam Werner 00:53

All right, cannonball! It's like a cold plunge. So, today's topic is going to be about how the FAFSA form, the federal or the Free Application for Federal Student Aid is going to be changing a little bit for this upcoming year, I guess it's for the 2024-2025 year. It's always a year behind but these announcements were made within the last few weeks- the last month. Some changes to not only the formula that goes into what our family is expected to pay, but then there's some other updates underneath the surface that we'll go through. But in our minds, these kind of flew, at least to me, feels like it flew under the radar. I don't know that it really made major headline news but when we actually go through some of these impacts, they're not in an unsubstantial, they're not insignificant changes. These could be major changes for families to help pay for college education and for kids themselves so that was kind of odd that it didn't make major headlines like a lot of other issues do right now.

Benjamin Haas 02:14

Hence, that created the urge for us to do a little podcast, right? This is a financial podcast, with our clients. While we may be work more volume with people that may be past that phase of life, where they're saving for education. That's kind of the theme that you're going to hear today is paying for college, I think just got more difficult. Right? So while we'll talk about what's changing, there's going to be a theme here of man, the onus is being put back on the individual, not unlike many years ago, when pensions were going away and 401k’s became more of a thing. It was just a different way of going about it but the onus became on the saver and I think this new formula here and everything that's going into it fits under that umbrella. It's going to be on you.

Adam Werner 03:08

Yeah, definitely. So, we'll start off because of these changes, typically, the FAFSA is open and available for you to start to submit your application and go through that process October first of every year. Now being with these updated changes, supposedly, it may not be available until December so for those out there that either are about to do this or have done it in the past and still have a child in college, don't expect to be able to do this right over first again this year. But one of those changes, which this is, I would say the most minor impact among all of these, and it's really no impact other than a name change. So, it used to be called the expected family contribution or the EFC. That was the number that after you filled out your FAFSA, that you or your family were expected to contribute to that higher education cost in that given year. They're changing the name of that from the EFC or the expected family contribution to the Student Aid index, the SAI. There's no change necessarily to it, it's just a name change to standardize it.

Benjamin Haas 04:11

That's really the extent of that update and to put that kind of into planning terms, though, both the student and the parent, there's a formula for each one of them on of their eligible assets and their income, what percentage in each of those, think like a little grid here, what percentage of each of those is going to then be expected to be what you pay towards education. Whether you can afford that or not is a different story, but they have to start somewhere with what you're expected to pay and that's not the same for everybody. Right? It's completely dependent on your assets, your income, your child assets, right what you have saved in their name, and if they're earning income. Usually, if my kid is earning income, it's usually because I want to spend some money here. Mom and dad are making me pay my insurance, you know? Some of that's expected to go towards college so I know this isn't about that today, but just to clarify that whole student aid index that expected family contribution, it's an important part of the planning.

Adam Werner 05:19

So then real quick, let's talk about that hierarchy, just to kind of give some context. So, from the parents' side, income is treated, I guess, more sensitively than overall assets, meaning your income is more of a primary driver of what that expected contribution is, than the assets that you have are factored in. On the student side, same thing but the student's income and assets are treated more sensitively, meaning it's more expected to contribute if the student has higher income or has higher assets than the parents do. If that all made sense. Yeah, like the sort of hierarchy, keep money out of your child's name and tell them to get a job that pays them under the table. Perfect. Can we flag this for compliance?

Benjamin Haas 06:22

So yeah, here's where it gets kind of crappy then, what is significantly changing about this expected family contribution, I'm probably going to keep calling it that, I'm sorry. It's when you're going to be in the spot like I'm going to be, where you've got two children going to college at the same time, Gabriel would be a senior when Lucas is going to be a freshman. So traditionally, if you had more than one child in college, you'd get a break on that. It's they're enrolled at the same time, we're just dividing what your expected family contribution if it was 40 with one in college, and the next one starts now it's going to be down at 20. For each college, that's each child. That's the way it was? Right? That discount for my understanding is being eliminated.

Adam Werner 07:10

Right so in your example, if you had one child and your EFC number, your student aid index number was $40,000 in any given year, that's what is expected for the family to contribute. Again, you said it earlier, whether they have it or not, then you go to plan B and you figured out the loan or paying for it, when you had two children in school, they essentially cut that EFC in half, that number in half. So your total expected as a family was still 40,000, 20 to this child, 20 for that child, but in terms of the family that it shouldn't feel much different. But now moving forward, as you said, they're essentially removing that discount. So, if it's 40,000, for one child and it's 40,000, for the other, now you're up at 80,000 expected to contribute. So really, they just they took away that break to families that will end up having multiple kids in college at the same time and I don't remember the senators name that they kind of attributed that to being his honor so I'm assuming he passed. But the idea being it felt unfair for either people that only had one child or that space their children out to avoid that. Again, I get it in theory but the reality of the situation is I think most people end up having children closer together. Ultimately, this is just going to again, you said it earlier, it's going to put the onus on families and individuals and students to do more of the saving or just have to pay out of pocket.

Benjamin Haas 08:39

Yeah, that's clearly the takeaway here and that's clearly what needs to happen if your goal still is to try to partially or fully fund your kids' education. I mean, at some point, all these changes, we're going to talk about if the onus is on us, as the savers and as the parents, you know, there is a conversation to say, reconsider what's most important to you, right, because college education expenses were already not cheap. They're not getting cheaper and now the ability to pay less based on this formula is it's getting worse.

Adam Werner 09:15

Wait till we keep going through the list. There's one bright spot and maybe we should have led with that but we'll say that. So more bad news for anybody that is a small business owner or owns family farmland. In the past those two assets were essentially exempt from the whole FAFSA process, right? It was not if you had equity in a business or equity in your farmland that didn't negatively impact you from this expected family contribution. Well, now those exemptions out go ahead.

Benjamin Haas 09:50

Just to be clear, I know it doesn't fall directly underneath here, but I probably should say it in the formula to retirement accounts fall under that

Adam Werner 09:59

They are exempt, right.

Benjamin Haas 10:04

So, when we're talking about parents' assets, child's assets, if you have money socked away in a retirement account that you're not expected to withdraw money from retirement to pay for education, just wanted to be clear about that, too.

Adam Werner 10:14

Yes, that's a good, good clarification. Yeah. But when it comes now to a business asset or just equity in farmland, which exists, those exemptions are now gone. So, if you have equity built up in your business and you have farmland that has equity, that is now going to go into the calculation and again, it just means that what you're going to be expected to pay for education is probably going to be a little bit higher. Again, just putting more of the onus to save or I think where I'm seeing this with Ava, starting college in August, it just puts more of the pressure on either private student loans or the Parent Plus loans because those have much higher lending caps in terms of dollar amounts than the subsidized or even the unsubsidized federal loans directly in the student's name. Those limits are very low compared to the overall cost of college education right now. So you're again, kind of forcing more of that on to the family.

Benjamin Haas 11:18

Yeah, and thinking back to planning implications if you're a business owner or I mean, here we are in Berks County, we know lots of people, lots of clients that has family farms, farmland. Part of the planning challenge, even before we're talking about now, is that you dump money into your property, your farm, you dump money into the business, you're reinvesting there. We often say there's a lot of really good reasons to make sure that the business is working for you too and you start to pull equity or you start to pull assets out in order to support you. Whether that's just something as simple as a cash reserve or funneling money into a retirement account. All the more important here that if you are having success, if you do have equity, those are not the business is not a liquid asset. Farmland is not a liquid asset. If part of your goal is to pay for education and now, you're being expected to do that with these assets, all the more important to plan on the front end to start to build a reserve that's not just equity in the business.

Adam Werner 12:24

So, the next one, which I feel like it falls somewhere in between a minor and a major impact but it's specific to families of divorce. Historically, it was the custodial parents so whoever essentially had the child the most during that given year, basically, physical custody, was the one to fill out the FAFSA form. That's where the aid and the loans were all kind of based on. Well, now they're changing the rules to it's not who has custody in terms of time, it's which parent spends the most in any given year on the child, that's the person that should be submitting the FAFSA form. Again, the idea being put the onus on the person with probably the higher income or the higher assets. So that again, it puts more of that pressure on the family to be the one to pay for it, not so much on the grants, the loans, and the student aid. How they're going to enforce that? I don't know but just another thing to keep in mind if that's is your situation, that will be changing for this upcoming FAFSA form, it's going to need to be completed. I'm guessing this is early enough that maybe there'll be more details to follow, more guidance and clarity on how that's going to work out and how they are going to force people to substantiate who spent more and how they calculate all that. But that is the change that is also coming. I'll give the good one!

Benjamin Haas 14:07

Oh, I get to get the good news. Yeah, we can make a plug for a podcast we did a long time ago on the concept of grandparent owned 529 plans. So, 20 second spiel, 529 plans are an education savings tool, they became pretty popular but allows you to put some money in, you're accumulating over time and you can withdraw that money once the child gets to college age, and you're paying for it. The way that it was and you're going to correct me if I'm wrong because I'm admittedly not an expert here. The way that it was, is when money came out and was then used for that child's education, that will look like the child's income in that given year. So even though the grandparent owned the asset and therefore it's not really in that expected family contribution formula, right. Ding ding, ding. Have the grandparents here. This is a planning implication that we would say as positive, but after you did that the first year now that did kind of become a part of the formula because the child was now showing that as income. Now a percentage of that already went to education was expected to go to education the next year. Right?

Adam Werner 15:12

Yeah, it was kind of a silly premise but again, it was half of a loophole, that the asset itself was excluded from the calculation. So in theory, would help qualify for more aid or more federal loans. But yeah, the subsequent year, whatever that distribution was, is now showing up as income for the child and probably then disqualifying them from some aid or more grants or loans, whatever that may look like moving forward. Yeah, income portion of how that was treated, that's often along so if it's a grandparent, aunt, uncle, pretty much anybody who is not your direct family, not parents or guardians, if someone else owns a 529 in the student's name, not only is the asset, but now it's also the income will not find its way into that FAFSA calculation. So that's a win from a saving and planning perspective.

Benjamin Haas 16:13

We were kind of fans of this before that change and I would say I'm going to be a super fan now. I know that doesn't work for everyone, there certainly are family dynamics. There's so many other considerations that are not just hey, let's try to beat the system. But if there is an opportunity for my mom and dad on a 529 plan, instead of Desiree and I, it seems like that's a smart thing to do. As you said, there are there are other tradeoffs to consider. But it is, of all these different things, I think it has the biggest potential planning, proactive side of the planning that can go into it and work itself out in a favorable way. Because when we say grandparent owned, let's be clear, they own that asset. Right, and you choose the beneficiary much like you would on a retirement account, a non-retirement account, whatever. But you can change the beneficiary at any time, you could choose to take the money out of their application step, but you really are relying on somebody else to own it and you'd have to be pretty darn comfortable with that.

Adam Werner 17:23

So I think the last major change and they haven't necessarily put out the details, but they're actually changing a part of the federal aid formula, in the hopes of having an additional, you know, 1-2 million students qualify for the maximum Pell Grant. So not alone, it's a grant, this is money that doesn't have to get repaid and it's focused on lower income or middle-income families and students to try to give more free money to kids to pay for college. I don't know that that necessarily has an implication other than like, the FAFSA in general, like many other government programs, is a needs-based system.

Benjamin Haas 18:08

Yes, thank you. We should have said that, like at the beginning. These changes sound so negative but it is a needs-based system. Right? It's like Social Security.

Adam Werner 18:20

So think of the Social Security, we think about it from our aspect, you know, the health care credits, if you're buying private on the health care exchange. Most of the time, though, these programs are all focused on income. There is sometimes a lot more planning opportunities to make yourself look less well off or to make yourself look poor from an income standpoint. But if you still have the asset, it doesn't disqualify you for some of the benefits. Well, in this FAFSA calculation, the fact that income and assets for both the student and the parents are all factored in. It just it gives you less flexibility to really play the planning game, which I'm sure is all part of the intent. There are still some things to plan for but at this point, it doesn't feel like there's as much proactive planning that you can do. Again, I think maybe that's part of the point behind these changes.

Benjamin Haas 19:20

I would say, the proactive part that you can do is to go back to the very beginning and think about what is most important to you and why. I think a lot of our conversations when we do meet somebody that is focused on education and focused on providing that as a gift as a good life starter for their children. It's really hard for an 18-year-old to kind of grasp the impact of those expenses and some institutions are very expensive, you know, community colleges, not as much, trade schools. There are many different ways to go about trying to further your education. I just think it's really important on the front end now and recognize housing, how expensive things are getting. On top of that we would be expected to be paid or loans have to cover those loans, need to be repaid at some point. I think it just forces, I hope people in our profession, to have more of the important conversations on the front end now with this knowledge.

Adam Werner 20:19

Just to that end, I think, you know, just the thought of, I'm thinking my own situation, thinking about having an 18-year-old make a huge life decision. At this point, it's hard to feel confident in any one direction. You know, if the cost of college education continues to rise, at what point does that start to, or I should say, start to continue to preclude some students that may have gone to higher education and now go into the workforce because that's the path of least resistance. That's less of a hurdle from a financial aspect. It'll be interesting to me to see how this ends up playing out in the real world and what the actual outcomes will be for kids.

Benjamin Haas 21:15

Then I'll go out on a limb, this will be my last comment and then we can let this be. I think my planning bias as somebody that hasn't sent kids to school yet, so I'm admitting my bias. We say it in other iterations, it's important to remain flexible. While it's important, I think, to be proactive about the savings and saving for education is a very admirable thing. The point is to help pay for that education one way or the other. You certainly can help pay for it on the back end to their loans. You want to be able to help that child once they graduate and get their financial life started by subsidizing them by you know, making sure that they can pay those loans or you take a portion of it. There are many different ways that you can go about giving that gift. The more you save on the front end, sometimes the more it hurts you in that EFC too so there's no silver bullet here. That's why it's important to have the conversations and figure out what's best for you. It wasn't all negative.

Adam Werner 22:21

No, not at all

Benjamin Haas 22:23

But the title of it is paying for college just got harder.

Adam Werner 22:26

Yes, it certainly did.

Benjamin Haas 22:31

All right, sir, on that note, good luck with all those college bills and congratulations, Ava!

Adam Werner 22:35

I'll let you know when I get the first one. All right. Catch you next year next time!

Benjamin Haas 22:55

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

Source: https://www.wealthmanagement.com/college-planning/fafsa-gets-overhaul

Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.

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Ep # 101: Paying For College Just Got A Lot Harder