Written by: Jack Wang, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
For millions of families across the United States, it's an important question. In the 5,000 or so pages of the second stimulus package were a number of provisions related to financial aid and FAFSA simplification; the FAFSA is the financial aid form that parents fill out to get financial aid.
As part of that simplification process, there were several combined or deleted questions and many technical changes that will have a small impact. Expansion of the Pell grant, which is geared toward low-income families, is also included.
There was another provision in there that really took me by surprise. I was really shocked and haven’t seen any mentions of this in the news. I think it's the biggest thing that changed:
How families with multiple children attending college simultaneously are treated for financial aid, specifically their Expected Family Contribution (EFC).
Note: The legislation also changed the term EFC to SAI, or Student Aid Index, though what the number represents is unchanged. In this article, I’ll use EFC and SAI interchangeably.
In the past, a family’s EFC would be divided by the number of children in college. That figure would be divided by the number of children in college, and the resulting EFC figure would be assigned to each child. For example, for a family with an EFC of $50,000 with 2 children in college, each child would be assigned an EFC of $25,000.
Then, each student could qualify for more financial need-based aid, though, theoretically, the family may still be responsible for paying $50,000 per year combined.
Starting with the 2023-2024 academic year, EFC will no longer be divided by the number of children in college simultaneously.
With our hypothetical family with 2 kids in college, each student’s EFC would stay at $50,000, and therefore less likely to receive need-based aid. More importantly, from the family's perspective, this means that the family might need to pay $100k per year.
Who does this really impact?
Well, obviously, families with multiple children who will overlap in college. It’s a little less obvious from a financial standpoint because there are so many variables, including the college attended (or applied to).
The most expensive college in the country is around $80k. Assuming no merit scholarships, what income would you need to still be able to qualify for some financial aid?
Working backward, a family could have an Adjusted Gross Income of around $300k to have an EFC of around $80k. Many variables, such as family size and amount of savings, can impact this figure.
While not everyone attends the most expensive colleges in the US, the implication is clear - this could impact a significant number of families. According to IRS data for 2017, a $300k annual income is in the top 5% of income and roughly 6% of all taxpayers as presented by the Tax Foundation. Alternatively, over 94% of all US taxpayers have income below $300k, though no data on how many of these families have multiple children.
To be clear, families that attend a college at a cost less than the EFC would not be affected. Since the cost is lower than EFC anyway, they would not qualify for need-based aid.
The families that would be impacted are those who would attend a private college or a flagship public university, where the costs tend to be higher. As an example, for a family with a hypothetical $50k SAI with two overlapping children, this change is now a big deal. To get a $50K SAI, family income would likely be somewhere in the $200k - $250k range, varying with assets and family size.
A common scenario would be a private school near me with a cost of attendance just over $60k, though they give around $20k per year in merit aid. For our hypothetical family with an SAI of $50k and only one college student, the family would not be eligible for any need-based aid. The school would think the family could afford ($50k) more than the net price of $40k ($60k less $20k).
What happens when the younger student goes off to college?
Before this change, the family SAI would be divided by 2, with each student being assigned a $25k SAI. During the overlap years, both students would then be eligible for up to $15k in need-based, shown as follows:
Cost of Attendance — Student1 = 60k, Student2 = 60k
Less: Merit Aid — Student1 = 20k, Student2 = 20k
Equals Net Price — Student1 = 40k, Student2 = 40k
Less SAI — Student1 = 25k, Student2 = 25k
Equals fin aid Eligibility — Student1 = 25k, Student2 = 25k
Assuming that this school meets 100% of need by offering the family $15k in financial aid for each student, the family would be responsible for $50k in total cost, $25k for each student.
Now, under the new regulations, the following would occur:
Cost of Attendance — Student1 = 60k, Student2 = 60k
Less: Merit Aid — Student1 = 20k, Student2 = 20k
Equals Net Price — Student1 = 40k, Student2 = 40k
Less SAI — Student1 = 50k, Student2 = 50k
Equals fin aid Eligibility — Student1 = Not eligible, Student2 = Not eligible
In this case, neither student would be eligible for financial aid. The family would be responsible for a total cost of $80k, or $40k net price for each student.
The family would pay $30k per year more.
What can a family do to mitigate this impact?
Though the regulations do not take effect until the 23/24 academic year, the income used for financial aid will be based on 2021. Thus, any strategies used to mitigate this impact starts immediately.
Lowering college costs truly begins with understanding the family finances, the three numbers, and setting expectations. This will help both the students and family understand what schools may be a good financial fit.
Once families have a reasonable expectation of finances, then conducting a proper search for colleges that really want your student, and asking the right financial questions. All too often, students and parents are focused on the likelihood of getting accepted and academic fit. While this is important, many families end up in the position of facing a college cost much higher than they were hoping for.
Families can also use tools such as TuitionFit, a service that compiles merit and financial aid award letters. Families can compare themselves with other families with having similar financial and academic profiles to see what others really paid for a particular college. Note: I am a subscriber to TuitionFit.
Before or concurrently with the search/research, families can employ strategies, starting now, that may involve income or asset shifting and/or use advanced tax strategies to lower the cost of college. These strategies can help pay the bill in the most financially efficient manner, even for families that will not qualify for need-based aid.
With one student, these steps are important. For families with overlapping multiple students, these steps become critical IF maintaining your lifestyle while the kids are off to college is important as wanting to be able to retire comfortably one day.
Most families conduct the search and research first and worry about financial aid later. Don’t be that family that ends up having to tell your student, “Congratulations on getting in, but sorry, we just can’t afford to send you.”
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Jack Wang, Executive Contributor Brainz Magazine
Jack Wang is a noted expert in helping US-based families with middle to high school age students lower the cost of and pay for college by navigating the complex, stress-inducing financial aid system while still being able to retire. He's helped hundreds of families and students (including his own 2 children) understand financial aid, student loan options, and payment strategies in the context of overall family finances and retirement plans. Jack studied finance at the University of Texas at Austin and started in the banking industry, where he spent 12 years as a commercial banker helping small to medium-sized businesses. Then he transitioned to be a corporate trainer for 10 years before starting his own firm.
