A Simple Guide to Understanding Your FAFSA

A Simple Guide to Understanding Your FAFSA If the cost of college seems daunting, just wait until you get to wade through the process of applying for financial aid and sorting through financial aid packages from schools. But unless you can afford to pay cash for your higher education or get an academic or athletic scholarship that covers your costs, you’ll want to apply for federal aid by filling out the FAFSA. Here are some basic terms you’ll encounter, along with tips you won’t see on the form itself.

FAFSA is the Free Application for Federal Student Aid. It is the form prospective and current college students fill out to apply for federal student aid, such as grants, loans and work-study. In addition, schools often use information from FAFSA to grant nonfederal aid. Private schools often use a combination of information from the FAFSA, the CSS/Financial Aid Profile and their own proprietary formulas to determine aid. Students do not have to fill out the FAFSA to receive merit aid (aid based on academic achievement).

EFC stands for “Expected Family Contribution.” Information in the FAFSA will be used to calculate the EFC — the amount the family is expected to contribute to college costs. Many students and parents will find that the EFC doesn’t realistically reflect what they feel they can actually afford to pay for college.

It is almost always worth your while to fill out the FAFSA, even if you don’t expect to receive a lot of aid based on income or assets. “Unless you are very wealthy, you should fill out the FAFSA,” says Lynn O’Shaughnessy, author of The College Solution.

On her blog, TheCollegeSolution, she elaborates on a reader question about why families should fill out the FAFSA even if their EFC is high:

“If your EFC is very high, the reason to file would be to gain access to federal college loans. The federal Stafford Loan is only available to students who complete the FAFSA. A child also can’t get a work-study job on campus without completing the FAFSA.

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What’s more, if a student applies to a very expensive school, a wealthy child might still qualify for need-based aid if the EFC is lower than the cost of attendance. And wealthy families can sometimes qualify for need-based aid if more than one child is in college simultaneously. That’s because your Expected Family Contribution for each child will drop roughly 50% via the FAFSA methodology and about 30% for the PROFILE methodology.”

FinAid.org publisher Mark Kantrowitz says that “at least 1.7 million students fail to file the FAFSA each year because they incorrectly believe themselves to be ineligible.”

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Deadline: The FAFSA lists deadlines for federal and state aid. For July 1, 2013 — June 30, 2014, for example, the form lists a federal deadline of June 30, 2014, with state deadlines as early as Feb. 15. However, students should fill out and submit their FAFSA form as soon as possible. In some cases, aid is distributed on a first-come, first-served basis for those who qualify.

The FAFSA generally requires parents and students to report information from their tax returns. However, parents who have not yet filed their tax returns can still fill out the form based on last year’s information, then update the FAFSA after they file. “If you know you will be late filing your taxes, it is better to complete your FAFSA with estimated information than to wait until your taxes have been filed,” advises the National Association of Student Financial Aid Administrators.

If you have filed your tax returns before you complete the FAFSA and you complete the FAFSA online, you can use the IRS retrieval tool to import your tax return information. This can speed the process and minimize errors. Fill out your FAFSA form online and use the IRS Data Retrieval Tool if you can.

Net Worth/Investments: The FAFSA will ask questions about both the student’s and parent’s assets, including investments. Investments do include real estate, trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, etc. They also include qualified educational benefits or education savings accounts (e.g., Coverdell savings accounts, 529 college savings plans and the refund value of 529 prepaid tuition plans).

Investments do not include the value of the home you live in, cash value of life insurance, value of retirement plans, cash, savings and checking accounts.

The perception that FAFSA favors students and parents who spend rather than save is a “common misperception” says Kantrowitz who notes that the “federal needs analysis formula is much more heavily weighted toward income than savings.”

Some parents or students try to strategize so their savings or investments don’t “penalize” them. But this can be tricky, as Kantrowitz explains on his site FastWeb.com: “There are ways of reducing the impact of parent assets to zero, but each method has its own flaws. Most approaches involve saving or investing the money in a non-reportable asset, such as a qualified retirement plan account.”

While trying to plan to get the maximum amount of aid can be tricky, there are ways you may want to try to increase your likelihood of receiving need-based aid. FinAid.org, for example, publishes their top 10 strategies for maximizing financial aid, and they include, “Pay off consumer debt, such as credit card and auto loan balances; and save money in the parent’s name, not the child’s name; maximize contributions to your retirement.” Many of these strategies are good financial strategies generally.

Get Help: On the form, you’ll see a notice that says: “For help in filling out the FAFSA, go to www.studentaid.gov/completefafsa or call 1-800-4-FED-AID (1-800-433-3243).” If you need more help, then there are several resources that can be useful:

The Department of Education’s guide, Completing the FAFSA, is available online and contains answers to frequently asked questions.

The College Solution: Finding the Right College at the Right Price and Shrink The Cost of College (workbook) by Lynn O’Shaughnessy are excellent resources for getting an affordable education. Both are available on her blog, where you can also download a free chapter of the workbook.

FastWeb.com and FinAid.org offer a wealth of information about college financial aid, as well as student loan resources.

College Goal Sunday sponsors free events across the country. Students and parents get free, on-site professional assistance completing the FAFSA, and can talk with financial aid professionals about financial aid resources and how to apply.

(Wondering how student loans may be impacting your credit? Check out Credit.com’s truly free Credit Report Card for an easy to understand overview of your credit, along with your credit scores.)

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