PAY Matters
Payroll Can Help Families Pay for College
BY HOWARD FREEDMAN, CPP




Have you ever realized how important payroll can be in helping families pay for a college education? It’s all in the paystub. The payroll check stub provides the critical data for the financial aid applications that can make college educations more affordable.
With college costs continuing to escalate, financial aid is as necessary to pay for college as a mortgage is to pay for a home. Families from all economic classes are realizing that financial aid is not charity but a necessary resource to fund a college education.
FINANCIAL AID BASICS
Financial aid is based on merit or financial need as calculated by a FAFSA (Free Application for Federal Student Aid). The FAFSA is a U.S. Department of Education form available at www. fafsa.ed.gov for online submission each January 1.
The FAFSA is used to calculate a student’s Expected Family Contribution (EFC), the amount a family “should” be able to contribute to the cost of a college education, which is subtracted from college costs to determine financial need. Not every family will feel that they can afford the stated contribution. But the EFC provides a
Howard Freedman, CPP, is President of Financial Aid Consulting and a member of APA’s Board of Contribut- ing Writers for PAYTECH. He can be reached at hrfreed@comcast.net or his website www.financialaid results.com.
The FAFSA form is used to calculate a student’s expected family contribution.
good, but not perfect, estimate of their ability to pay.
For example: If the cost of attending a college is $40,000, financial need would be determined by deducting a family’s EFC of $15,000, resulting in a need for financial aid of $25,000. Colleges can fully or partially fill that need with loans, grants, scholarships, and work-study programs.
Chances for a better financial aid package improve the earlier that a FAFSA is submitted. Employees can refer to their year-end paycheck stub without waiting for their Forms W-2. Information such as gross and taxable income, pre-tax contributions, and federal withholding can be estimated, and later adjusted, on the FAFSA after their 2010 tax returns are filed.
The FAFSA recognizes ordinary living expenses and taxes by providing an income protection allowance depending on family income and size, number of working parents, number of children in college, and federal income taxes paid. The net result is then multiplied by a sliding scale of 22% to
47% to determine their EFC. Students receive an income protection allowance of up to $4,500 without impacting their EFC. Amounts more than $4,500 are multiplied by 50%. For example, only $250 would be included in their portion of the EFC if they earned $5,000.
Allowances are also applied to certain parental assets that are only multiplied by 5.6%. This is why payroll data has a more powerful impact on a family’s financial need.
Some private colleges use another form called the CSS/Financial Aid Profile that is available each October from the College Board. It is used for institutional financial aid controlled by the college. There is also a different formula for calculating need that takes into account more detailed questions. Unlike the FAFSA, it requests information about consumer debt, home ownership, medical expenses, prior and future income, and educational costs.
There is also about a nine-month time lag between when the FAFSA is filed and the student begins classes. The span of time the FAFSA covers is even greater considering that starting in January 2011 earnings are used for financial aid for the 2011- 2012 academic year. Since job losses, underemployment, unexpected expenses, increased debt, changes in family status, and other issues can occur after the FAFSA is filed, employees should retain their check stubs. By referencing a check stub, colleges can use a process called Professional Judgment to override or
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reduce a family’s EFC when supporting documentation is provided.
Parents may think they do not qualify for financial aid, but they should still fill out a FAFSA if educational financing is on the table. Regardless of parents’ income, students can qualify for at least $5,500 in unsubsidized Stafford Loans their freshman year, with annual increases up to $7,500 in their junior and senior years. Students can also use Stafford Loans to assume some financial responsibility for their education while building a positive credit history when repayment occurs.
POINTS TO PONDER
Since the financial aid and tax year- end processes are on a similar time
schedule, families of college-bound students do not need their W-2 forms or have to complete their tax returns before turning in the FAFSA. Also, families don’t need to wait for the student to be accepted before submitting the form. The check stub provides more than enough data for submitting a FAFSA ahead of the crowd.
The stub includes pre-tax retirement contributions, which are added to taxable wages to calculate a true gross. This does not impact tax filing but provides a basis for an employee’s wages whether or not an employee is a plan participant.
Child support withheld from a non- custodial parent’s pay must be reported on the FAFSA by the student’s custodial
parent. This is not taxable income but a financial resource that can be used for college.
Colleges go through a verification process to ensure the data on the FAFSA agrees with a family’s income tax returns and tax statements. Verification does not occur until early spring when these forms are available.
Now you know how payroll plays a critical role in educating our next generation of students. This is an annual process that can be addressed within a year-end schedule, through a check stub message or through human resource initiatives as the payroll professional strives to service the many needs of its employees. ?
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