If you plan to pay for kiddo’s college education, then get ready to potentially nearly double what you spent from 0-18.
Right now, the average cost of public in-state 4-year university (tuition, room, board) is $21k per year. Private universities, $49k per year.
When I was in college, it was $12k/year public, $32k private (in today’s dollars)…
So, given how expensive college is (esp private), it’s natural for parents to feel anxious about how to afford college for their kids.
“Will we qualify for enough financial aid?”
“How much will we have to dip into our retirement nest egg?”
“Will we need to have a hard conversation with our kid that we can’t afford her dream school?”
These are common worries parents of college-bound kids grapple with.
Getting a handle on college expense and financial aid is crucial to ensuring you have enough saved to afford it. And it behooves you to start planning WAY in advance so you actually have enough time to optimize your assets, income, and financial situation for the best possible aid package.
So in this week’s podcast, I invited Paula Bishop, a college financial planning consultant and CPA who helps families strategize their college finances, to share tips and insights about college financial aid.
We talk about:
- How the financial aid process works (including timelines)
- What assets and income get reported on FAFSA vs. CSS Profile to compute EFC
- Key differences between FAFSA vs. Profile
- Special situations: rental properties, business owners, divorced parents
- How to appeal financial aid awards
- Why your funding strategy should shift after January of your kid’s sophomore year
Do you plan to pay your kid’s college expenses? What optimizations to family finances should parents be doing to make the cost of college more manageable? What other questions do you want answered about financial aid? Let me know by leaving a comment.
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My guest today is Paula Bishop.
Paula is a CPA whose consulting practice focuses on helping families develop strategies to pay for their kids’ college educations.
She holds a finance degree from the Wharton School and an MBA from Berkeley, and is a board member of the National College Advocacy Group, an organization that provides education and resources for college planning professionals, students, and families.
Paula, thanks so much for joining us today to share insights and strategies about the complex and high stakes college financial aid process.
Paula Bishop 01:52
Thank you for having me.
Andrew Chen 01:53
I’d love to start off first just by understanding a little bit more about your background. Your background combines tax, accounting, college financial aid expertise, which is cross-disciplinary. And certainly not everybody in your field has a varied background like that.
How did you get into becoming an expert on college financial aid?
Paula Bishop 2:10
I’m a CPA. When you think of a CPA that works for themselves, what do you think they do? What do they do most of the time?
Andrew Chen 2:16
Prepare tax returns.
Paula Bishop 2:17
Right. Do you wake up every day saying, “Oh, wow. I can’t wait to jump into a juicy tax return”?
Neither have I. Never.
And so we have to take continuing education. And at the CPA Society in December, that’s our year end, depending on your cycle, there was a class called “Financial Aid for College: The Best Kept Secret in America.”
And being a woman, of course, we like secrets. And I said, “Well, I’ll take this.”
And it’s eight hours. How could there be eight hours of information about college and how to get money from colleges?
So I sat in the front row because that was the only one left, and I went, “Wow. People don’t know how this works.”
And all the forms relate back to a tax return. As much as I just like tax returns, I still probably prepare about 125 tax returns a year because you need it for the forms.
And people aren’t born knowing what is your untaxed income, what is your tax-deferred income, that kind of stuff. So being a CPA, I can help review them. I can pretty much tell what the schools think that they can afford so it works out very well.
So that’s how I got there.
Andrew Chen 3:27
Got it. Cool. Thank you so much.
When we think about financial aid for college, it can certainly be overwhelming for families. There’s all these different things to know about.
There’s need-based aid, merit aid. There’s aid from all different types of sources: from governments, from colleges themselves, from foundations and corporations.
There’s multiple forms asking a whole host of questions about your finances that you have to fill out to qualify for most of this stuff.
So to help just orient listeners before we dive into the meat of it, what’s the one-minute how it works summary for how the college financial aid process works?
Paula Bishop 4:02
There’s, as you mentioned, two types of aid. Need-based, based on your income and your assets. And then merit money, just based on how smart you are.
And there’s about 60 colleges in the United States that only give out need-based aid.
I wrote an article for Money Magazine at the time. Now it’s Kiplinger.
It was called “My Kid Is So Smart. Why Don’t We Get Any Money?”
Well, I know right away, they apply to Harvard and Colgate and all those schools that just do not give out, because they have so many smart kids. They don’t have to.
If you eliminate those, then the rest of the 3000 or so schools can give out merit money.
So the first thing you have to do is look at your income and assets, and figure out whether you qualify for aid or not. What side of the fence are you on: the need-based or not?
About $260,000 of adjusted gross, adding back your 401(k) contributions, you’re out of the range for need-based aid.
There’s a calculator on College Board, and it’s just called EFC calculator. You just Google EFC calculator. It’s usually the first one that comes up.
What it is is your expected family contribution, what the system thinks you can pay for college. And what they think is not what you think.
So you put in your income, your assets, press the Enter key, sit down, and take a deep breath. And on the screen, it tells you that number. And it’s always higher than what you think.
And if the number is $90,000, that means you don’t qualify for aid because no school is $90,000 yet. But if it’s $26,000, it means you probably don’t get any money from your state school, but a lot of the private schools should give you some need-based aid.
So that’s how that thing works.
Andrew Chen 5:50
Can you walk us through, high level, what a typical college financial aid timeline looks like? If I have a college-bound student, what is the lifecycle?
Specifically, what actions will this student be doing each month from the time they start their applications for financial aid to the time their package is finalized?
And also, when does the cycle begin during the year, and when does it end? And what are some of the key dates and deadlines that folks should be aware of?
Paula Bishop 6:24
Kids in freshman and sophomore year, you really don’t have to do anything because you don’t even know their GPA, SAT scores, what they want to study. So just let them do well in school. That’s the biggest priority.
Some parents come to me sophomore year. And those are the ones that are a little bit with it. They’re worried about it because they know schools cost a lot of money and they go to a high school where everybody is competitive and all looking at the big expensive schools.
And then junior year is when they get really serious. So I like seeing kids in junior year, or their parents.
Most schools look at both of the standardized tests plus their GPA to figure out merit money.
Every school has a calculator on their own website called a net price calculator. And the government and the Department of Ed and the colleges agreed that they would put a calculator on their website that mimics how they give out aid for that specific school.
Usually before Christmas, they look at it because the guidance counselors at school are talking about SAT timing and if you should take a review class. They give generalities about college.
Andrew Chen 7:44
Is this in the junior or senior year?
Paula Bishop 7:46
Junior year. Usually the second half of junior year, they do that because the seniors are already done. So junior year is when they’re starting to get serious because senior year, from the get-go, it’s a race to the finish.
Every kid, it seems to me, are convinced you have to apply early decision. And early decision deadlines start October 5th, maybe October 30th, November 1, November 15th because you get an answer before Christmas.
There’s two financial aid forms. They’re available October 1.
Andrew Chen 8:24
The FAFSA and the college scholarship service profile forms, they come up right at the beginning of the senior year. Is that correct?
Paula Bishop 8:30
Right. October 1, they both come online.
Andrew Chen 8:34
Got it. So during junior year, it sounds like you essentially are already pre-filling them so that when the forms open up, that you can just transfer the data over.
Paula Bishop 8:42
Junior year is still open with regards to the tax return. So you don’t have the final numbers. That’s why you should go to the EFC calculator, just using estimates on what the system thinks you can afford.
I want your New Year for you to explore what colleges to put on those sample 10’s because right away, senior year, you need to know what those 10 are because you’re going to apply early decision and you have to sort them out right away. And you need some time to visit them.
That’s why I like them to start in junior year, so you can take Christmas break to go visit colleges that you might want on your list.
Andrew Chen 9:23
I see. Before we jump into the meat of what the forms are and exactly what’s included, just walk us through the rest of the schedule.
Right when senior year opens, you’re filling out the forms. You’re sending in your early action or early decision applications. And then what’s a play-by-play throughout the fall, winter, and spring?
Paula Bishop 9:41
You start filling out the forms in October, right? When do you start school? In September.
Pretty much right away, you should check to see every website to see what the due dates are and if they need a CSS Profile. That’s a parent’s obligation.
If they were accepted early decision by Christmastime, they have an aid award plus their acceptance. And so the next set come after January 1, maybe by January 15, January 31. Those are early action.
And then regular decision usually is January 31st, or the 15th or something like that.
And all of their forms for financial aid are due probably, at the selective schools, by February 15th. If it’s a school like a community college or something, you just apply when you want to. It’s not really a big deal.
Andrew Chen 10:38
Got it. So just to summarize, if I’m understanding correctly, you’re filling out FAFSA before Halloween, and then you’re tiering.
Paula Bishop 10:45
And the profile if you need it, by Halloween. Both of them.
Andrew Chen 10:48
But for just the first set of reach schools or for all the sets of reach, backup one, backup two?
Paula Bishop 10:56
On the FAFSA, you’re allowed to put 10 schools at once. And since you’re already doing it, you might as well put all your schools in there, because if they get it and you haven’t submitted your application yet, they hold on to it until maybe the end of the summer or something, waiting for the whole package to come in.
Because your package in admissions, it’s your test scores, it’s your grades, it’s your recommendations, your application, the essays. So it takes a while for that package to get together so that they admit or deny you. And then it goes over to financial aid.
Andrew Chen 11:31
That makes sense for FAFSA. But what about the CSS Profile? Are you advising parents to fill that out even before…?
Paula Bishop 11:38
Same time. I’d like to review both of them at the same time.
Because this is how I look at both forms. FAFSA goes with a glass of white wine. Profile goes with the whole bottle.
That’s the difference. One is here. One is there.
Andrew Chen 11:51
Basically, those are all getting filled out before Halloween. And then the actual applications themselves will go in roughly three ways: one for early decision, next for early action, and then finally for regular decision. Is that correct?
Paula Bishop 12:03
Yes. Since you’re already applying probably to one of the earlies, you might as well throw all the schools in, so that the data is the same for all the schools.
Andrew Chen 12:13
Got it. Okay, cool. So let’s jump into FAFSA now.
I think most folks have at least heard of it. What’s the quick sentence summary of what its purpose is? And does it need to be filled out every year?
Paula Bishop 12:30
Well, FAFSA is just a Free Application for Federal Student Aid. And it’s government money that’s given out.
But the free money is only Pell Grants and maybe a small supplemental grant, which at the most is $2000. Pell Grant goes up to $6000, but a normal state school costs at least $28,000.
So if you get $6000 from Pell, you get $2000 from the other one, that’s $8000. They give out student loans as well, so $5500 for freshmen. So that’s still only adds up to $11,000 or $12,000.
It gives out government money, whether it’s state money or federal money.
If you’re going to school in 2020, they’re looking two years behind on the base year tax returns, so they’re looking at 2018 because 2018 should be a filed tax return by now.
And so every year you have to fill out the FAFSA because it’s based on the 2019 year, and the 2020 year when you’re a junior and 2021 when you’re a senior.
Andrew Chen 13:29
What assets and income are required to be reported on FAFSA versus can be excluded?
Paula Bishop 13:36
For your income, they start with your 1040 tax return adjusted gross income because that’s just a line that they can match to a tax return.
Then they add back untaxed income. So it’s your contributions to your 401(k).
If you made $100,000, you put $20,000 in your 401(k), your wages is only $80,000. So they want you to add back that $20,000. And that’s a hidden ding to these families because they don’t realize you have to add it back.
And most schools want to see your W-2, so that they can tell from your W-2, you put $20,000 into your retirement account. And also if you’re receiving child support, they call that untaxed income. Those are the two major ones.
So that’s all your income.
And then for assets, they want cash savings in one box, and then they want investments in the other. So it’s stocks, bonds, mutual funds.
On the FAFSA form, it’s also equity in any rental properties or a second home you have.
And sometimes that knocks you out of financial aid because in California, house prices are so high. And maybe if you’ve lived or had a rental property for a long time, you have a $600,000 asset with no mortgage.
The run rate on assets is 5%. So 5% of that $600,000 is $30,000 they want you to pay every year from that asset.
Andrew Chen 15:05
I see. What is excluded?
Paula Bishop 15:08
For the FAFSA form, qualified annuities, which are retirement, and also unqualified annuities are excluded in your 401(k). Any type of retirement product.
Andrew Chen 15:19
I see. So that would include your 401(k), any IRAs, 403(b), Roth accounts. Those are all excluded, right?
Paula Bishop 15:26
Andrew Chen 15:27
What about HSAs?
Paula Bishop 15:30
They don’t care about HSAs. It’s excluded for FAFSA purposes because there’s no line on the FAFSA for HSA.
And also, if you have a small business. Because there’s a line. What is the net worth of your business?
And people don’t read the help screen. Because if your business is under 100 employees, and that’s most of them, right?
Andrew Chen 15:53
Yeah. You do not have to include small business equity, like your ownership stake, if it’s under 100 employees?
Paula Bishop 15:58
Andrew Chen 15:59
Got it. What about primary residence?
Paula Bishop 16:02
Your home, your primary residence is also an exempt asset that the federal government decided you shouldn’t have to mortgage your home to go to college.
Andrew Chen 16:11
I see. So basically, at least for FAFSA purposes, what you’re including are your wage income or your self-employment income and any taxable accounts, not retirement accounts, and any rental properties, but not your primary residence. Is that correct?
Paula Bishop 16:26
Yeah. But if you have income generated from the rentals, that would be on your tax return part of adjusted gross income. If you have stocks, bonds, mutual funds, they generate income.
Andrew Chen 16:36
So the CSS Profile form, as you mentioned earlier, is only used by a limited number of schools, but I think a lot of the fancy ones use it.
What are the key differences between that and the FAFSA?
Paula Bishop 16:50
Well, we forgot about one interesting attribute about the FAFSA. If you’re divorced, they only look at the income and assets of the custodial parent. And the custodial parent is where the child lives one more night than the other family.
We want the child to live with the lower income family. That would help.
Now, for the profile, many of the schools, 90% of them, look at the income and assets of both parents, even if they’re divorced, the custodial and the noncustodial. Two parents’ income is always higher than one.
Andrew Chen 17:30
If you’re targeting a CSS Profile school, are they only looking at the data from that form, and they’re not looking at the FAFSA form?
Paula Bishop 17:37
They’re looking at both because FAFSA has a different formula for aid, but they want to give away somebody else’s money first. So if they can package you with a Pell Grant, with a state grant, with a loan, and then they use their own money.
And even federal work study is federal, so that’s government money. So you get a job at campus.
So then the remainder comes from their own endowment funds that they’ve spent years begging for.
Andrew Chen 18:03
I see. So the CSS Profile has its own notion of EFC or expected family contribution, but they’re going to still try to award government money first before they tap their own.
Paula Bishop 18:12
Yeah, based on the federal formula. And then they augment it, if they want to, with their own money.
Andrew Chen 18:19
And the EFC for the CSS Profile is generally going to be higher because it sounds like it’s going to include at least your primary residence home equity and some other things.
Paula Bishop 18:27
Right. And that EFC calculator on College Board, it says FM and IM on the column.
FM is federal method. IM is institutional. Institutional means the CSS Profile.
But you put in what your equity is.
Say it is $700,000. I don’t want you to put in $700,000 because most of the schools put a cap on what they’ll look at on your home. So if you’re only making $50,000, they might put $50,000 as the cap for your home equity even if it was $400,000.
Andrew Chen 19:01
How do they know that? You’re not going to re-appraise the home. So do they just do it based on book value when you purchased versus the remaining mortgage balance?
Paula Bishop 19:10
They look for reasonableness.
Because if you’re in California, say your house is worth $200,000, they’ll go, “Wait a second. What is your ZIP code?” and they can look it up on Zillow.
Only if they’re questioning it. But their offices are so busy that very seldomly…
I look at what could I sell the house for in 30 days in a distress sale? That might take 10% or 15% after tax. So that might take 15% off of what Zillow would say.
They say don’t use your property tax, but I would because that’s at least a firm number. And most people look at their property tax.
Andrew Chen 19:47
Sure. Yeah. It seems like a good rule of thumb.
Paula Bishop 19:49
And Zillow is trying to get you to be proud of your house. But for financial aid, you want it to be low, not high, right?
Andrew Chen 19:56
Right. What other assets or income does the CSS Profile include that do not get included on the FAFSA form?
Paula Bishop 20:12
When you file the FAFSA, you get the EFC on the screen when you submit. Profile, you don’t because you’re applying to all different schools that have different formulas.
So they just take the information and then they calculate their own EFC, because some don’t use home equity. Some do use equity. They ask all the questions, so you don’t know what they’re using.
They all look at your rental properties or a second home because it asks, “When did you buy it? What did you buy it for?”
“What was the purchase price? What’s your mortgage on it? What’s the current market value?”
So they have data that they can manipulate whatever they want on that. They just don’t tell you.
Andrew Chen 20:55
So on the FAFSA form, you’re not even going to put in your retirement account, your HSA, your small business equity. But are you going to include all that on the CSS Profile form?
Paula Bishop 21:04
If you have a second home or rental properties, you need to put them in.
Now, one big question that always comes up, “If I have three rental properties, is that a business? And if it’s a business, could I exempt it from putting it down as an asset on the FAFSA form?”
A lot of colleges don’t want you to do that because they give out less money. Three rental properties probably has a lot of value to them.
Andrew Chen 21:29
But just to clarify, I understood that you said a moment ago, on FAFSA anyway, you’re going to have to put rental properties. So on both forms, you’re putting on rental properties.
Paula Bishop 21:39
Well, if you only have one, they look at it as an investment. But say you had 15 of them. That’s really a business because you’re spending all your time managing them, fixing them up, whatever.
But you would want a separate tax return for that. You’d want a Sub S or a partnership return or something. You don’t want it to be Schedule E of your own tax return because that looks like an investment.
But then you have to plan that at least two years in advance because they’ll be looking at a tax return two years earlier.
Andrew Chen 22:10
If it’s an investment, then you have to put it on the FAFSA and the CSS Profile. If it is a business, you don’t put it on the FAFSA, but you have to put it on the CSS Profile. Is that correct?
Paula Bishop 22:20
Andrew Chen 22:21
Got it. What else?
What about retirement accounts? Does that also go on the CSS Profile?
Paula Bishop 22:27
Let me just give you a reason why all retirement accounts are exempt. Because people used to have pensions.
You would get maybe $4000 a month until you die. But when you die, it stops. So they couldn’t figure out an equitable way of putting a dollar value to your pension.
For that reason, they exclude retirement accounts.
Because some people have $2 million in their retirement account. You put it on the profile, so it looks like they attach it. But they’re just looking supposedly for the financial strength of the family by saying, “Wow, you have $2 million.”
So maybe if they have to give out their last dollar, they would give it to a family that wiped out their retirement starting a business or a business that failed. But I’m sure they’re salivating when they see somebody with $2 million and know that their policy is to exempt it, and we have to give them aid.
Andrew Chen 23:25
Paula Bishop 23:26
And I can tell if the college attached or used it as an asset because I already know, because I figure out their EFC even for profile forms. And if the aid package isn’t close to what I think it is, something happened.
And then we can question them on “Did you use the retirement accounts?” And I had a college the next day give them a revised aid award. So we caught them.
Andrew Chen 23:52
So let me just get this straight. CSS Profile schools are not supposed to use retirement accounts, but you still put it on the form. And sometimes that might actually tip…
Paula Bishop 24:04
They’re not supposed to. The rule is they’re not supposed to.
It’s an agreement they all made that they don’t attach because it wouldn’t be fair for the family that has a pension because it’s not their money yet. The government still owns it.
Andrew Chen 24:18
If they’re not supposed to look at it, why even require you to list it?
Paula Bishop 24:24
I know. They look at it as the financial strength of the family.
Andrew Chen 24:27
Which sounds to me like they’re taking it into account.
Paula Bishop 24:29
I know. Call one of them and ask them. Just call them blindly.
I have an email address that doesn’t have my name in it, that’s my disguised one.
And they’ll tell me. And then I’ll have it in an email back on paper that they don’t use it.
Andrew Chen 24:54
Got it. So it sounds like you’re doing your own calculation and making sure that the final EFC approximately matches.
And if it’s very far off, then you’re inquiring to say, “Hey, did you look at retirement accounts?” and things like that.
Paula Bishop 25:08
Yeah. Or your home.
Because if they tell me they limit the equity in your home to two times your earnings and you’re making $100,000, they should use $200,000 as the equity. But even though your equity might be a million dollars, they should exempt $800,000 of your equity.
But if your aid award comes out really not close to what I think it is, I’ll call them or I’ll have the parent call them. They don’t like having a hired gun call them.
Andrew Chen 25:36
I see. Why is that?
Paula Bishop 25:39
Because they have an unfair advantage that they’re hiring somebody to fight for them. It’s like a lawyer, right? They usually get a better deal from you than if you just represent yourself.
Andrew Chen 25:49
Well, as a parent, isn’t that the point? I want somebody who can get a better deal.
Paula Bishop 25:53
I know. But don’t brag about it to the college because why pay me? If you have questions, just call them.
Well, they’re not that well-versed. I gave a class to financial aid people at a conference. There were 100 people in the room on how to read a tax return.
I was blown away. They didn’t know how to read it, but they’re responsible for them.
Andrew Chen 26:19
Yeah, that’s pretty scary.
So FAFSA, as I understand, requires you to list assets as of the date of the file, but it only looks at prior-prior year wages.
Paula Bishop 26:34
Income. Don’t just say wages because people have other stuff.
Andrew Chen 26:38
Sure. So if you’re going to file in, say, the fall of 2020, then you’re looking at tax year 2018 income.
Paula Bishop 26:48
Well, if you’re going to school in fall of 2020, you look at 2018. The seniors now are looking at 2018.
Andrew Chen 26:56
I see. So you’re filling out in 2019, looking at 2018, but going to enroll in 2020. Gotcha.
Is that also true for the CSS Profile form?
Paula Bishop 27:05
Yes. Thank God.
Because this has only been around for five or six years. If it wasn’t that way, they would be looking at 2019’s.
And when do the kids or their parents fill out the FAFSA and profile? In 2019.
All FAFSAs and profiles were done on estimates. So I would spend all my time estimating people’s tax return based on the previous year, and then colleges are basing their financial aid awards on estimates. And then when they file their tax return, they had to update the awards and we had to update the FAFSA.
So every family had to do it twice. Some brilliant person said, “Why don’t we just go back two years?”
So we might have more appeals because what if now you’re divorced or what if now you’re disabled or unemployed or something like that? So they have a lot more appeals to aid awards, saying, “My current income is this now. Please use 2019 instead of 2018.”
But at least they have a file tax return and it’s much easier for everyone involved.
Andrew Chen 28:10
Are there any other key differences that folks should be aware of between FAFSA and the CSS form?
Paula Bishop 28:17
I would say don’t be afraid of the profile form because those schools have more money. They, in general, fill all of your need.
And I’ll just give a small example of what your need is. If the school costs $60,000 and they think you can afford $20,000, you have $40,000 of need.
Now, a profile school will give you the whole $40,000. It might be some loans or work study or whatever, but they’ll fill the whole $40,000. A lower end FAFSA school might only give you 85% of that need or 60%, depending on how much they want you.
So even for the same EFC, a 3.0 kid would get a different award than a 3.8 because they want to up their stats in U.S. News and World Report or whatever they want to do.
Andrew Chen 29:09
Right. Any differences between the forms to be aware of?
Paula Bishop 29:13
One is only six pages, and one is about 15 pages. So you don’t just start on Sunday night saying, like your tax return, “I’m going to do it Sunday night.” You should start Saturday morning.
Because a lot of it is they want to know every person in the household. What’s their age? What’s their name?
What schools do they go to? If they go to college, how much was their scholarship? How much do you pay out of pocket?
And on the FAFSA, you just put “I have two in college, or one.” They don’t want any backup, so it’s much easier.
Andrew Chen 29:41
I see. Is the CSS form asking this question even for other family members who have already graduated maybe even long time ago?
Paula Bishop 29:48
No. They say, “How many are in the household?” So if there’s four in the household and only one student going to college, they want to know how old is the other child.
Andrew Chen 29:58
I see. So they’re only asking about presently attending college students.
Paula Bishop 30:02
Yeah, or presently in the household. Because if you have a junior and the senior, they’ll know that next year you’ll have another child in college. And part of the formula has an allowance from your assets for savings for future students.
Andrew Chen 30:19
What does that mean? Say more.
Paula Bishop 30:22
FAFSA, pretty much what your assets are, they might have a protected asset allowance of $6000.
Forget it. That’s nothing. They don’t want to take your last dollar, so they exempt $6000.
Profile form exempts maybe $80,000 because the parents have to survive. So they have an asset allowance for the parents, and then they have an educational allowance for the other three years for college for that student and any other siblings that you might have, because they’ll assume that they’re going to go to college too.
So even though they look at your equity in the home, most of them, it might be equal what the contribution from assets are because there’s a lot more exempt assets on the profile side.
Andrew Chen 31:11
Interesting. So am I understanding correctly that if there’s four kids in my household and I’m going to be the first to go to college, on the CSS form, am I getting a shadow credit?
Paula Bishop 31:25
Yeah. You’re getting about $130,000 subtracted from your assets to pay for those four kids.
That’s a lot of money. That’s why people don’t have four kids anymore.
Andrew Chen 31:35
Sure. But even though they may still be in junior high or high school?
Paula Bishop 31:37
Andrew Chen 31:38
Gotcha. I see.
Paula Bishop 31:42
And FAFSA doesn’t have any allowance for that. FAFSA has old formulas that haven’t been revised since the ‘60s.
Other than that, asset protection allowance is just going down and down and down. I think in two years, they won’t even have one because $6000 is really nothing for a family of four.
Andrew Chen 31:58
Right. So then in the same example, if I’m in a household of four college-bound kids, I’m the last one to go to college. Let’s say two of them are already graduated, so they’re no longer on the payroll, so to speak.
One of them is a senior. I’m about to be a freshman. How does the CSS Profile evaluate in that situation?
Paula Bishop 32:17
Well, you put down that you have one in college next year because if you have a senior, that will be out, and the freshman is just coming in. Unfortunately, you should only have one.
You have to do proper prior planning. You should have quadruplets, so they’re all in college at one time. So then your EFC is divided by four.
So if you had two in college, that’s divided by two. And one in college. Never have your kids five years apart.
Andrew Chen 32:42
I see. So in that example, if two are already out, already graduated, and one is a senior…
Paula Bishop 32:46
They don’t care.
Andrew Chen 32:47
So then they’re just looking at you as the last one to attend college, almost as if you’re a single child. Is that correct?
Paula Bishop 32:54
Yep. Your asset protection allowance is much lower at that point. It might only be $30,000 or something instead of $120,000.
Andrew Chen 33:03
Got it. That’s a pretty important distinction. Are there any other key differences between CSS and FAFSA that folks should be aware of?
Paula Bishop 33:13
Well, they ask for the retirement accounts, and you really don’t know what to do. They want the value of your business.
Many people have a surface business. Like you, what would you say your assets are?
Andrew Chen 33:27
It’s mostly intellectual capital.
Paula Bishop 33:29
Right. So zero.
Then they ask, “What kind of tax returns do you report your business on, whether it’s a Schedule C or a Subchapter S or a corporation?”
“What are your revenues? What are your expenses?”
And then they ask, “What are your assets?”
And they give you a line to describe your business. So I say that it’s a service business, minimal assets.
Because even a real estate agent, they want you to put that. Because usually they’re Schedule C in a tax return, and they don’t really have any assets.
They’ve got a computer. It’s not worth much.
Andrew Chen 34:08
Got it. So basically, you’re including all financial information on the CSS, but there’s nothing that’s really exempted except for retirement accounts?
Paula Bishop 34:15
Yeah. And it asks you specifically.
If they have a question, they can say, “What about this business?”
“What kind of business is it? Why do you have no assets?” They can call you on that.
On the FAFSA, you wouldn’t put it because it’s under $100,000. But even your investments, you could put $100,000. They don’t know that you forgot to put your rentals because they didn’t ask for rentals.
I don’t know if you’ve noticed this, because you deal with people that know something about finance, right? The average parent is clueless about their own money. They really are.
Andrew Chen 34:53
That’s pretty sad.
Paula Bishop 34:53
I meet people with $300,000 and $400,000 of income, and they might have $20,000 to their name. So they can easily forget to put in their rentals.
Another thing that they forget is their 529 college savings: that is an asset.
Because it’s for college, a normal person would expect that they want to know about how much you have saved for college. But parents might push back and say, “Well, no, that’s growing tax-free.”
Well, big deal. It’s still an asset.
Andrew Chen 35:23
How is that not fraud? Maybe you forgot, but that looks like fraud.
Paula Bishop 35:27
Because people don’t know anything about their money.
Andrew Chen 35:35
I get that. But I guess my question is it seems very “convenient” for me as a parent to “forget” and then claim that I didn’t know.
So how is that not fraud? Because that just looks like fraud.
Paula Bishop 35:48
I know. It is. And you just hope that they don’t find out.
They will find out maybe when you withdraw money from your 529 to pay for college, and they’ll say, “Well, where did this come from?”
But a place like UT Austin or Berkeley, they don’t have people looking at checks that come in. They have no clue. It goes into some kind of lockbox or something.
Andrew Chen 36:07
Yeah. How does this work?
Paula Bishop 36:09
They just get away with it.
Andrew Chen 36:15
Is that also true for the CSS Profile? Or is there some more stringent enforcement for that?
Paula Bishop 36:21
Usually, the financial aid people at a profile college have been there longer and are smarter.
I’ve had to argue with Harvard several times. They’ve been there for 20-30 years. They’ve seen it all: trusts and things.
Sometimes people have a trust where you don’t get the money until you’re 25. And the average parent wouldn’t put it on there, saying that “I won’t get it until 25. I can’t use it now.”
Well, the school wants you to put it down because what if it’s $5 million? That way, take out loans now and pay it off with your $5 million.
So you have to put it down, but they’re not born knowing that.
Andrew Chen 36:58
I see. Generally, is it safe to say there’s going to be more rigorous enforcement for CSS schools?
Paula Bishop 37:05
Yes, I think so.
Andrew Chen 37:07
But at FAFSA schools, as long as it’s not completely ridiculous. It sounds like it’s more like the honor system.
Paula Bishop 37:16
That’s why they question if you have $6000 in interest in dividends and you say you have no assets. But the 529s don’t generate interest in dividends while you’re in school. So they wouldn’t notice that.
And if you have three kids, they want your 529 for all three kids added together because you can change the beneficiary at any time because you still own the 529.
Andrew Chen 37:38
For sure. So it sounds like as long as it’s internally consistent, then it’s unlikely that FAFSA folks are going to come after you?
It would be fraud, so if you’re caught, you go to jail. But it sounds like there’s not really…
Paula Bishop 37:54
There is a verification system, and they pretty much verify a third of everyone. But the things that they verify are not money. It’s how many kids in the family.
Because on the FAFSA, you just put five people, and two in college or one in college. So they want to know what are their names, how old they are, what school they’re going to, and if they’re going to college. That’s the only thing that they verify.
And they also want you to upload your tax data into the FAFSA because it’s an IRS data retrieval process. They want to see a filed tax return.
Because so many people do their tax return on TurboTax. You can print out anything, right? So now they want it uploaded from the IRS.
Andrew Chen 38:36
Okay. So now let’s say the student gets their financial aid package back. Is it negotiable?
Paula Bishop 38:43
Don’t say the word negotiable. They hate that word.
Andrew Chen 38:45
Okay. Well, is it appealable?
Let’s say you get an aid package of 1x from your top school, but an aid package of 2x from your second choice. Can you appeal? And what are the factors that makes somebody successful in appealing?
Paula Bishop 38:58
Some schools say, “No way. We don’t look at any other awards.”
But if you got into Yale and also Harvard, and you’d rather go to Yale than Harvard, they might match Harvard’s award because it’s the same type of school, highly selective, Ivy League. So they might.
Because I’ve had that, and then I had one for Penn. I think they just messed up on the award. So the next day, we emailed them, Williams and Pomona, which are highly selective schools, and the girl got $16,000 the next day.
But if you’re comparing, say, a Loyola Marymount with an American University, they’re not going to match it at all because Loyola gives more merit awards. They won’t match a merit award school with something that’s a need-based school at all.
So most of them say, “We don’t consider other offers, but you could try.”
I have the family run it by me first to see if they have something to stand on.
Andrew Chen 39:59
I see. So other than that, though, it would only be if they made a mistake, such as they took into account your retirement accounts or something like that?
Paula Bishop 40:07
Well, it depends on if they want the student. Say they’re a high-end student, and one school gave them $25,000 as a merit and one school gave them $30,000. And they really want that student.
And I’m not one on the inside as to know why they want that student, but they might add another $5000 because they figure, “Throw another $5000 at him. We have that award-winning writer.”
Or they saved the world already and cured cancer or something like that. They pay for top students.
But Harvard wouldn’t because it’s need-based only. So if you’re rich, or if you’re over $260,000 and $260,000 doesn’t go that far in California, right?
Is that low income in Silicon Valley? I don’t know.
Andrew Chen 40:51
I don’t think that’s low income.
Paula Bishop 40:54
But they don’t happily write a check for $75,000-$80,000 a year, do they?
Andrew Chen 40:59
Paula Bishop 41:00
A parent in Silicon Valley. Their child wants to go to, say, Yale. Do they happily write a check for $80,000?
Andrew Chen 41:08
It’s family by family, but that’s certainly an expensive cost to bear for even the average California family. Definitely the average California family, for sure.
Paula Bishop 41:20
But it’s a win if you’re low income because you might get a full ride to go to Yale.
Andrew Chen 41:24
So if I’m hearing correctly, it sounds like there’s no harm in asking, so you might as well ask.
Paula Bishop 41:30
Right. Because they’ve already admitted you, right? They’ve already given you an award, so they can’t take it back.
But if it’s just “Oh, my kid is so wonderful,” I have the parent write it because I don’t know their child. I haven’t lived with them for 18 years to know how really wonderful they are.
Andrew Chen 41:46
What strategies can parents implement? Now that we know what’s required on FAFSA versus CSS, what are some strategies that parents can implement in the years before their child is college-bound to minimize their EFC and maximize their financial aid?
Paula Bishop 42:06
Well, the problem is usually their income from work. Here we have Amazon, Microsoft, and you have all those companies where you are. And if each of them are earning $150,000-$200,000, I don’t want them to quit their job because they’re out of the workforce just to get some money.
You’re better off working than not working to get some aid. It’s not a good tradeoff because you also don’t know where the child is going to school.
And sometimes when you’re out of the workforce, it takes a lot to get back in, especially if you’re a contractor or something like that. Pretty much your options are gone for moving around your money.
Say you had some cash. You could pay down your mortgage.
Because even Harvard and Stanford, they don’t look at home equity. University of Chicago doesn’t. There are some that don’t look at home equity, so you could pay off your mortgage.
But that only gets you so far because your income could knock you out of the game. So there really aren’t a zillion strategies to fool around with your money.
Andrew Chen 43:12
And just to be clear, most schools are not accounting for primary residence home equity. Is that right?
Paula Bishop 43:21
Well, only 250 might not. They might look at your primary residence.
77% of the nation kids go to public school, so the majority don’t look at it. Only less than 1% go to the highly selective schools, and about 20% go to the mid-range private schools.
Andrew Chen 43:46
If parents were already thinking about retiring, maybe they were planning to retire sometime in the child’s junior year of college, would you suggest that they consider retiring early so that their income goes down?
Paula Bishop 44:01
Well, I would write an appeal to say, “Use our 2019 and 2020 income when I’m retired” versus no. But sometimes when people retire, they make more money than when they were working, depending on their pension sometimes.
And they take out Social Security, and then they have minimum distribution on your 401(k)’s. When you add that in, it could be more money than when you were working.
Andrew Chen 44:24
So it sounds like there may not be a ton of strategy certainly as you are nearing the college enrolment date.
But let’s say you’re 10 years out. Your child is eight, so they have 10 years before they go to college. Are there things that very proactive parents can be thinking about to amortize their way to a favorable position?
Paula Bishop 44:46
Well, if you have rentals, I would put them in a separate tax return so that you could regard it as a business. But in general, those kinds of parents want the child to go to a profile school.
Andrew Chen 45:00
In which case, you would be reporting that anyway.
Paula Bishop 45:02
Yeah. Because I do meet with young parents sometimes, and we just more or less agree that they don’t qualify for aid.
Because the bar for need-based aid is so low, in my opinion. Give it up, right? Just look for schools that want your child and want to give you $20,000 or $30,000 for a merit award.
And only 60, say, give need-based aid. There’s 3000 colleges you could consider, or the public schools. A lot of public schools are “Public Ivy.”
And there’s reasonable ways of doing it. No one is forcing you to go to these high-end, expensive schools because there’s no guarantee that you’ll be overly successful.
And I show them the book “40 Colleges That Change Lives.” They’re small liberal arts colleges that really do have an impact on the student.
Andrew Chen 45:59
So it sounds like you could move rental properties over to a separate tax return. But for CSS schools, it’s not going to help you anyway.
Paula Bishop 46:09
They do discount the first $500,000 of a business by half, so that it would cut the equity in your rentals by half. So that’s a good strategy if your income is low enough to still be a need-based candidate.
Andrew Chen 46:23
Any other strategies?
Paula Bishop 46:27
Since the profile asks 18 pages of your financial data, there’s not much you can change. And really, it’s your wages that knock you out. If you have small kids, you probably don’t have a senior going to college.
Andrew Chen 46:43
How should folks be thinking about it’s common for grandparents to set up 529s?
Paula Bishop 46:52
That’s an interesting thing because a lot of grandparents want to help. I would rather have them contribute money to the parents’ 529, even though now they have to put it on their FAFSA form and their profile form. But then the parents know how much is in there.
I’m always in a meeting and they say, “The grandparents are saving money for our children.”
“How much?” “We don’t know.”
“Did you ask them?” “Well, they don’t want to discuss it.”
You don’t know if it’s $5000 or $50,000 or $100,000.
And so this way, the parents can see how woefully low it is and then put more money in it. I know it doesn’t get included in the assets of the parents if the grandparents own it, but at least it’s visible to the parents, so they save more.
But later on, when the grandparents are 80 or 90 and you need money for school, you got to call them, they got to withdraw it, they don’t want to have to deal with any of that. So it makes it easier for the grandparents that they don’t have to deal with it but they’re still helping out.
And later on, if a grandparent withdraws money, you’re supposed to record it on your FAFSA as untaxed income on the child’s level. The child’s income gets dinged at 50%. So you possibly could lose 50% of whatever the grandparents give that year.
So the strategy is to wait until you’ve filled out your last FAFSA form, and then the grandparents can give as much as they want.
Andrew Chen 48:28
I see. So just to be clear, a grandparent-funded 529 does not get included in assets for both FAFSA and the CSS, right?
Paula Bishop 48:37
Andrew Chen 48:37
But then when they actually distribute money out to fund the kid’s education expenses, that’s going to get hit at 50% of that untaxed income amount. Whereas if the parent just held the 529, it would be counted as an asset.
Paula Bishop 48:53
Right, because they’re savings.
Andrew Chen 48:54
Dinged at 5%.
Paula Bishop 48:57
Andrew Chen 48:57
Paula Bishop 48:58
But if you use it, then you don’t have it anymore. So your 5% goes down by how much you used.
Andrew Chen 49:03
Sure. I see.
Paula Bishop 49:05
But if it’s a wealthy family and they want to, they can gift up to five years’ worth. Well, they can give $75,000 out of their estate.
So maybe that’s an estate planning tool. Because many families just pay for college.
Andrew Chen 49:22
And then if you do have a grandparent-funded 529, once the kid is a junior, they could start distributing that income because, assuming the kid graduates in four years, that should not hit any more forms because the forms are taking into account prior-prior year income. And by the time that untaxed income gets recognized, the kid will have already graduated, so there’s no penalty for that.
You alluded to the Secure Act before where the RMDs for retirement accounts or 401(k)’s anyway are increasing to 72. There is a new rule where now 529s can also be used for up to $10,000 in student loan debt, which is really nice.
Paula Bishop 50:10
That just happened about December 20th or something. But most kids have more than $10,000. But it helps.
Andrew Chen 50:17
Yeah, it helps, every bit.
Okay, cool. Well, thank you so much for taking the time to chat with us. Where can people find out more about you and your work and services?
Paula Bishop 50:27
My website is just paulabishop.com.
Andrew Chen 50:31
All right. Well, we’ll definitely link to that in the show notes, and hopefully, folks can find you there.
Paula Bishop 50:35
And I work with people all over the country, so it doesn’t matter that I’m in Seattle.
Andrew Chen 50:39
Okay, perfect. Paula, thanks so much for taking the time to chat with us. And we’ll see you soon.