How to best use gifted money to pay for our kids college?

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jb3
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How to best use gifted money to pay for our kids college?

Post by jb3 »

Ages: Me and wife both 50
State: NJ
Married, filing jointly
Combined income: 173k
Kids: Two, ages 13 and 15
AA: All Retirement assets in 2030/2035 TR funds
529s: Each child has 75k in Utah 529 (age-based moderate)
Taxable Accounts: None
Home: Mortgage 345k, value 720k
Other Debt: None

We are fortunate to have gifts totaling 50k for each of our two children to use now -- or later -- towards their college.

How should we best use it?

We recently went to a fee-based financial planner and he suggested:
-Invest 30k by putting $10K annually in NJBest 529 over the next three years to get a 6.65% return (NJ state income tax rate)
-Contribute 20k in ibonds this year (total, me and wife)

We already max our Roth IRAs.
Last edited by jb3 on Sat Jan 22, 2022 12:58 pm, edited 1 time in total.
sailaway
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Re: How to best use gifted money to pay for our kids college?

Post by sailaway »

Are you maxing our retirement accounts?
dbr
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Re: How to best use gifted money to pay for our kids college?

Post by dbr »

You wouldn't want the grandparents to just contribute to a 529?
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jb3
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Re: How to best use gifted money to pay for our kids college?

Post by jb3 »

dbr wrote: Sat Jan 22, 2022 12:53 pm You wouldn't want the grandparents to just contribute to a 529?
I don't know if there is an impact on possible financial aid if grandparents have a 529.

I think our advisor suggested we put 10k a year into NJBest 529 to get the state tax benefit.
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JoeRetire
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Re: How to best use gifted money to pay for our kids college?

Post by JoeRetire »

jb3 wrote: Sat Jan 22, 2022 1:09 pm I don't know if there is an impact on possible financial aid if grandparents have a 529.
There used to be. No longer.

https://www.forbes.com/sites/robertfarr ... afsa-form/
Last edited by JoeRetire on Sat Jan 22, 2022 1:20 pm, edited 1 time in total.
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JoeRetire
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Re: How to best use gifted money to pay for our kids college?

Post by JoeRetire »

jb3 wrote: Sat Jan 22, 2022 12:18 pm We recently went to a fee-based financial planner and he suggested:
-Invest 30k by putting $10K annually in NJBest 529 over the next three years to get a 6.65% return (NJ state income tax rate)
-Contribute 20k in ibonds this year (total, me and wife)
Seems like a very reasonable suggestion to me.

Nice gift!
Make sure you (and the kids) provide many thanks to the giver(s).
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delamer
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Re: How to best use gifted money to pay for our kids college?

Post by delamer »

Sounds like good advice from the planner.

You want to keep the risk level low on the 529 funds, particularly for the 15 year old.
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Navillus1968
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Re: How to best use gifted money to pay for our kids college?

Post by Navillus1968 »

jb3 wrote: Sat Jan 22, 2022 12:18 pm <snip>
Kids: Two, ages 13 and 15
AA: All Retirement assets in 2030/2035 TR funds
529s: Each child has 75k in Utah 529 (age-based moderate)
<snip>

We are fortunate to have gifts totaling 50k for each of our two children to use now -- or later -- towards their college.

How should we best use it?

We recently went to a fee-based financial planner and he suggested:
-Invest 30k by putting $10K annually in NJBest 529 over the next three years to get a 6.65% return (NJ state income tax rate) on our money.
-Contribute 20k in ibonds this year (total, me and wife)

We already max our Roth IRAs.
Was the money gifted to you or to your kids? If the money was legally gifted to your kids, I don't see how that allows you to take a NJ deduction unless I'm missing something. If it's your money, all good.
The 6.65% return is the tax deduction, correct? Once the money is in the 529, you probably want to invest in an 'Age Based Portfolio' by kid's age.
https://www.njbest.com/njbest/products/ ... -and-price

Eldest kid is 3 years from college. Money for his freshman, sophomore & probably junior years needs to be out of stock market, unless you feel lucky!

Same goes for freshman year funds for younger kid. This assumes using a 5-year time horizon, some people use 7, or 3, 10, YMMV.
https://www.savingforcollege.com/articl ... me-horizon

If your Utah 529s are using target date funds, this is probably no factor.

This article has some ideas, including possibly buying I-Bonds in your kids' names: https://thefinancebuff.com/buy-i-bonds- ... or-college

Your advisor's plan doesn't seem to invest the full $50K this year.
Why not make 2x $5k NJ 529 contributions to max the state tax deduction & buy I-Bonds 2x $10k & put the remaining $20k into a bond fund or a couple of CDs, to be used in year 2 & 3 to fund the NJ529? That way, the money isn't sitting idle in a money market fund.

Note: I-Bonds bought in your names & used for education have tax advantages that I-Bonds bought in your kids' names may not. Caveat- MAGI less than $154,800 is required. (See IRS Form 8815, linked at site below). If you can reduce your $173K MAGI by $18k via 401k contributions, might be worth looking at.
https://www.treasurydirect.gov/indiv/pl ... cation.htm

Also-If you cash I-Bonds before five years, you lose the previous three months of interest. Not fatal, but worth knowing. Use the I-Bonds after 5 years to avoid the hit.
dred pirate
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Re: How to best use gifted money to pay for our kids college?

Post by dred pirate »

FWIW - we have a grandparent who gifts about $6k a year to our daughter (she is only 3) specifically earmarked to "college fund". We talked to him to make sure we are meeting his expectations, and contribute to a 529 plan (even though those are our assets).
Other cash gifts that are given we have put into a UTMA account in an index fund.
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jb3
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Re: How to best use gifted money to pay for our kids college?

Post by jb3 »

Navillus1968 wrote: Sat Jan 22, 2022 2:11 pm Your advisor's plan doesn't seem to invest the full $50K this year.
Why not make 2x $5k NJ 529 contributions to max the state tax deduction & buy I-Bonds 2x $10k & put the remaining $20k into a bond fund or a couple of CDs, to be used in year 2 & 3 to fund the NJ529? That way, the money isn't sitting idle in a money market fund.
I *think* that the idea was to not have these funds from my grandparents (who are the ones offering to help) included in my assets. So it would not be counted in the FAFSA or CSS. It would not be used until it was needed to actually pay for tuition. But I'm not really clear on how all this works...it seems more complex than I had imagined.
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Re: How to best use gifted money to pay for our kids college?

Post by Pdxnative »

jb3 wrote: Sat Jan 22, 2022 8:22 pm
Navillus1968 wrote: Sat Jan 22, 2022 2:11 pm Your advisor's plan doesn't seem to invest the full $50K this year.
Why not make 2x $5k NJ 529 contributions to max the state tax deduction & buy I-Bonds 2x $10k & put the remaining $20k into a bond fund or a couple of CDs, to be used in year 2 & 3 to fund the NJ529? That way, the money isn't sitting idle in a money market fund.
I *think* that the idea was to not have these funds from my grandparents (who are the ones offering to help) included in my assets. So it would not be counted in the FAFSA or CSS. It would not be used until it was needed to actually pay for tuition. But I'm not really clear on how all this works...it seems more complex than I had imagined.
These funds will be reported as parental assets on most all financial aid forms. Still, seems like the advisor’s plan is a good one. Assets are assessed at 5-6% so the marginal effect on any hypothetical financial aid isn’t huge.
liynus
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Re: How to best use gifted money to pay for our kids college?

Post by liynus »

1) 529 to get tax deduction maxed for grandparents do it so you can still get fin aid 5K x 2 = 10k
2) 529 from parents for tax deduction 5K x 2 = 10k
3) ibonds from grandparents to be gifted but not redeemed in child’s name = 20k
4) ibonds parents to be gifted to child = 10k

Gift / redeem 10k per year (which is limit) of ibonds during the next 3 years
Ibonds have no penalty when redeemed for college cost just like 529
After 5 year ibonds don’t have penalty to be redeem kids make no income
Ibonds are currently 7% for 6 months.
Would look at 529 they have now and balance portfolio as whole. So if you want to be 50/50 stock bonds the ibonds can be part of the 50% and you can make more of the 529 stocks

Good luck
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Re: How to best use gifted money to pay for our kids college?

Post by BernardShakey »

JoeRetire wrote: Sat Jan 22, 2022 1:15 pm
jb3 wrote: Sat Jan 22, 2022 1:09 pm I don't know if there is an impact on possible financial aid if grandparents have a 529.
There used to be. No longer.

https://www.forbes.com/sites/robertfarr ... afsa-form/
Thanks for posting this link. Very helpful for my long term planning. :beer
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Re: How to best use gifted money to pay for our kids college?

Post by Navillus1968 »

jb3 wrote: Sat Jan 22, 2022 8:22 pm
Navillus1968 wrote: Sat Jan 22, 2022 2:11 pm Your advisor's plan doesn't seem to invest the full $50K this year.
Why not make 2x $5k NJ 529 contributions to max the state tax deduction & buy I-Bonds 2x $10k & put the remaining $20k into a bond fund or a couple of CDs, to be used in year 2 & 3 to fund the NJ529? That way, the money isn't sitting idle in a money market fund.
I *think* that the idea was to not have these funds from my grandparents (who are the ones offering to help) included in my assets. So it would not be counted in the FAFSA or CSS. It would not be used until it was needed to actually pay for tuition. But I'm not really clear on how all this works...it seems more complex than I had imagined.
Yes, quite complex.
Some potentially useful articles-

https://www.savingforcollege.com/articl ... ancial-aid
Money quote- "The FAFSA uses income information from the calendar year that is two years prior to the academic year. For example, the 2021-2022 FAFSA will be based on 2019 income information. So, a possible workaround is to give the gift to the student on or after January 1 of the sophomore year in college. If the student will graduate within four years, there will be no subsequent FAFSA to be affected by the gift."

https://www.savingforcollege.com/articl ... ancial-aid
https://www.savingforcollege.com/articl ... -529-plans
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Re: How to best use gifted money to pay for our kids college?

Post by vineviz »

jb3 wrote: Sat Jan 22, 2022 12:18 pm
-Contribute 20k in ibonds this year (total, me and wife)
Currently you can not exclude interest from savings bonds from taxation if your modified gross income is above $154,800. This limit is indexed for inflation, so expect it to be higher when your children are in school.
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Re: How to best use gifted money to pay for our kids college?

Post by JoeRetire »

BernardShakey wrote: Sat Jan 22, 2022 11:34 pm
JoeRetire wrote: Sat Jan 22, 2022 1:15 pm
jb3 wrote: Sat Jan 22, 2022 1:09 pm I don't know if there is an impact on possible financial aid if grandparents have a 529.
There used to be. No longer.

https://www.forbes.com/sites/robertfarr ... afsa-form/
Thanks for posting this link. Very helpful for my long term planning. :beer
Same here.

Previously, I had only planned on funding the final year of my grandchildren's college education through 529s. Now, there's no advantage to limiting it this way.
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JoeRetire
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Re: How to best use gifted money to pay for our kids college?

Post by JoeRetire »

Navillus1968 wrote: Sun Jan 23, 2022 1:17 am
jb3 wrote: Sat Jan 22, 2022 8:22 pm
Navillus1968 wrote: Sat Jan 22, 2022 2:11 pm Your advisor's plan doesn't seem to invest the full $50K this year.
Why not make 2x $5k NJ 529 contributions to max the state tax deduction & buy I-Bonds 2x $10k & put the remaining $20k into a bond fund or a couple of CDs, to be used in year 2 & 3 to fund the NJ529? That way, the money isn't sitting idle in a money market fund.
I *think* that the idea was to not have these funds from my grandparents (who are the ones offering to help) included in my assets. So it would not be counted in the FAFSA or CSS. It would not be used until it was needed to actually pay for tuition. But I'm not really clear on how all this works...it seems more complex than I had imagined.
Yes, quite complex.
Some potentially useful articles-

https://www.savingforcollege.com/articl ... ancial-aid
Money quote- "The FAFSA uses income information from the calendar year that is two years prior to the academic year. For example, the 2021-2022 FAFSA will be based on 2019 income information. So, a possible workaround is to give the gift to the student on or after January 1 of the sophomore year in college. If the student will graduate within four years, there will be no subsequent FAFSA to be affected by the gift."

https://www.savingforcollege.com/articl ... ancial-aid
https://www.savingforcollege.com/articl ... -529-plans
When researching online, be very careful, as some of the information can get outdated quite swiftly.

For example: https://www.savingforcollege.com/grandparents
"Fortunately for grandparents, the FAFSA simplification scheduled to be implemented for the 2024-2025 award year will no longer require their financial support to be reported."
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jb3
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Re: How to best use gifted money to pay for our kids college?

Post by jb3 »

Does some of the strategy here require guessing if we'll end up with a college that uses FAFSA or that uses CSS?

For example, having grandparents open 529s will only be sheltered in FAFSA.
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Re: How to best use gifted money to pay for our kids college?

Post by KlangFool »

OP,

You should think about AOTC too. You may want to reserve 4K per year paying out of your pocket to capture the full $2,500 tax credit. You might be able to do it with 529 money but it could be very complicated.

https://www.irs.gov/credits-deductions/individuals/aotc

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Re: How to best use gifted money to pay for our kids college?

Post by teen persuasion »

jb3 wrote: Sat Jan 22, 2022 8:22 pm
Navillus1968 wrote: Sat Jan 22, 2022 2:11 pm Your advisor's plan doesn't seem to invest the full $50K this year.
Why not make 2x $5k NJ 529 contributions to max the state tax deduction & buy I-Bonds 2x $10k & put the remaining $20k into a bond fund or a couple of CDs, to be used in year 2 & 3 to fund the NJ529? That way, the money isn't sitting idle in a money market fund.
I *think* that the idea was to not have these funds from my grandparents (who are the ones offering to help) included in my assets. So it would not be counted in the FAFSA or CSS. It would not be used until it was needed to actually pay for tuition. But I'm not really clear on how all this works...it seems more complex than I had imagined.
Assets in either a parent's or a child's name are treated as parental assets on FAFSA. That's better than treated as the child's assets (20% included), but it is still 12% of assets included in the formula. Then a progressive rate from 22 to 47% is applied to the total of Available Income and Available Assets. Your income is the bigger hurdle to eligibility for aid, though.
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Re: How to best use gifted money to pay for our kids college?

Post by vineviz »

teen persuasion wrote: Sun Jan 23, 2022 10:46 am Your income is the bigger hurdle to eligibility for aid, though.
Exactly. Most schools will not offer need-based aid to households with taxable income over, say , $110k. And most of the offered aid will be loans anyway.

It seems to me unlikely that the OP will see much benefit from trying to optimize these assets for the FAFSA.
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Re: How to best use gifted money to pay for our kids college?

Post by jb3 »

I think the idea is not to get aid but to reduce the expected cost.
Last edited by jb3 on Sun Jan 23, 2022 11:47 am, edited 1 time in total.
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Re: How to best use gifted money to pay for our kids college?

Post by Minty »

vineviz wrote: Sun Jan 23, 2022 11:10 am
teen persuasion wrote: Sun Jan 23, 2022 10:46 am Your income is the bigger hurdle to eligibility for aid, though.
Exactly. Most schools will not offer need-based aid to households with taxable income over, say , $110k. And most of the offered aid will be loans anyway.

It seems to me unlikely that the OP will see much benefit from trying to optimize these assets for the FAFSA.
As a parent 13 semesters into a 16-semester financial aid adventure with two children, this has not been my experience. One data point: The University of California system is not rich compared to the elite privates, but it is well off for a state system. It offers grants (in addition to loans of course), to families with income and assets up to $191K. Princeton is perhaps the wealthiest and most generous college, and it considers those with $110K in family income to be sufficiently needy that they are not expected to pay any tuition, so award an average grant (not loan) of "Full tuition. 54% room + board." 100% of families with incomes up to $180K receive grants, according to the website. Put another way, anyone hoping for need-based grant aid is probably going to get it from an affluent, expensive school, and such schools understand that a family with a low six-figure income cannot be expected to pony up what is now a nearly $80K after-tax sticker for one year of college.
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Re: How to best use gifted money to pay for our kids college?

Post by vineviz »

Minty wrote: Sun Jan 23, 2022 11:41 am
As a parent 13 semesters into a 16-semester financial aid adventure with two children, this has not been my experience.

There are definitely schools which will grant some aid to households with higher incomes, but it's not the rule across the country.

At the University of Maryland, for instance, the school's net price calculator estimates a total grant of $351 for households with income over $99,000. At UC Berkley a household with income of $110k and assets of $250k can expect a grant of about $7,268 out of a total cost of $42,890.
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Re: How to best use gifted money to pay for our kids college?

Post by teen persuasion »

jb3 wrote: Sun Jan 23, 2022 11:37 am I think the idea is not to get aid but to reduce the expected cost.
Expected cost *is* full cost - aid.

In other words, aid is the mechanism to reduce expected costs. There are many forms of aid (loans, scholarships, grants), and not all of them are need-based. But if you are concerned about how a school views 529 funds, whether a school uses CSS in addition to FAFSA (not instead of), you are talking about trying to maximize the financial aid application/evaluation process.
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Re: How to best use gifted money to pay for our kids college?

Post by abuss368 »

vineviz wrote: Sun Jan 23, 2022 12:16 pm
Minty wrote: Sun Jan 23, 2022 11:41 am
As a parent 13 semesters into a 16-semester financial aid adventure with two children, this has not been my experience.

There are definitely schools which will grant some aid to households with higher incomes, but it's not the rule across the country.

At the University of Maryland, for instance, the school's net price calculator estimates a total grant of $351 for households with income over $99,000. At UC Berkley a household with income of $110k and assets of $250k can expect a grant of about $7,268 out of a total cost of $42,890.
Interesting and thanks Vince. I beleive you noted way back you are Maryland or Baltimore based. Are the schools in Maryland very high tuition wise?

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jb3
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Re: How to best use gifted money to pay for our kids college?

Post by jb3 »

teen persuasion wrote: Sun Jan 23, 2022 12:46 pm
jb3 wrote: Sun Jan 23, 2022 11:37 am I think the idea is not to get aid but to reduce the expected cost.
Expected cost *is* full cost - aid.

In other words, aid is the mechanism to reduce expected costs. There are many forms of aid (loans, scholarships, grants), and not all of them are need-based. But if you are concerned about how a school views 529 funds, whether a school uses CSS in addition to FAFSA (not instead of), you are talking about trying to maximize the financial aid application/evaluation process.
I see, thank you. Are you then saying given our income that it doesn't make much sense to be concerned about FAFSA or CSS when deciding where to put this money?
Last edited by jb3 on Sun Jan 23, 2022 1:13 pm, edited 1 time in total.
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Re: How to best use gifted money to pay for our kids college?

Post by Pdxnative »

jb3 wrote: Sun Jan 23, 2022 9:31 am Does some of the strategy here require guessing if we'll end up with a college that uses FAFSA or that uses CSS?

For example, having grandparents open 529s will only be sheltered in FAFSA.
Most of the very generous schools will use css and/or their own form to get at the question of expected outside support. Most of those are very selective. You can’t know if your kids will be admitted but you probably have an idea by now if a school like that is likely to be a good fit. Basically , these schools are using their endowment money to make college affordable. They are pretty good at identifying and closing giant loopholes in their formulas.

Really the only places to shelter money from Need-based aid calculators is in retirement accounts, which you’re already doing. Home equity is next best. But if you’re going to actually need the money you have to then figure out how to tap into that.

FAFSA optimizing might make some sense for those in states that have moved to need based aid at state schools. For most others in your income range and assets it probably isn’t going to move the needle much. Merit money and discounting is the more likely source of aid.
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Re: How to best use gifted money to pay for our kids college?

Post by teen persuasion »

jb3 wrote: Sun Jan 23, 2022 1:00 pm
teen persuasion wrote: Sun Jan 23, 2022 12:46 pm
jb3 wrote: Sun Jan 23, 2022 11:37 am I think the idea is not to get aid but to reduce the expected cost.
Expected cost *is* full cost - aid.

In other words, aid is the mechanism to reduce expected costs. There are many forms of aid (loans, scholarships, grants), and not all of them are need-based. But if you are concerned about how a school views 529 funds, whether a school uses CSS in addition to FAFSA (not instead of), you are talking about trying to maximize the financial aid application/evaluation process.
I see, thank you. Are you then saying it doesn't make much sense to be concerned about FAFSA or CSS when deciding where to put this money?
At your income level, it probably won't move the needle much. For FAFSA, 12% of parental assets are included as Available Assets. At your income, the highest rate applied, 47%. So .12 * .47 * $50k = $2820 increase in EFC (or new term, SAI). But if your EFC is already $50k from income and existing 529 balances, is that important?

Best aid comes from when EFC is low enough to be eligible for PELL grants, which phase out a bit above $6k EFC. There may be state grants, too, in that same range, like TAP in NYS. Once those are out of the picture, aid will be primarily school-based aid, and loans.

FAFSA is designed for federal aid eligibility (PELL, loans). Many schools use it, too, for their school-based aid. Others use CSS, to gather more information. But every school has its own proprietary Institutional methodology for determining aid eligibility. So CSS is not one monolithic set of rules, it's different at each one. No way of knowing what's better or worse at each school, effectively.
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