It is October which means the beginning of the financial aid season for college bound students. The FAFSA, short for Free Application for Federal Student Aid is the first step in the process for financial aid. The FAFSA form became available for families to fill out on October 1 and must be filled out in order to be considered for financial aid. Each year the US Department of Education doles out almost $30 billion in grants and another $100 billion in loans. Here are 10 things you need to know about the FAFSA.
1. The goal of the FAFSA is to determine your EFC (Expected Family Contribution). The
output of the FAFSA is your EFC which is the amount the US Dept. of Education calculates you should be able to contribute towards the cost of college for your family in the upcoming school year. This does not mean you have to pay that much towards the cost of college just that this will be the number used to determine your eligibility for various forms of need-based aid.
Here is how it works. Say your EFC comes back at $30,000. This amount will be the same for each school. School one has a cost of attendance (COA) of $28,000. Since the formula indicates you should have the resources to pay the full amount and will not be a candidate for need based aid. But at school two, which has a COA of $55,000, you have a demonstrated need of $25,000 which leaves you as a candidate for need based aid.
2. The FAFSA information is shared with individual schools so they can prepare your financial award package. On the online FAFSA form, there is a section where you can provide the code of the various schools you want the FAFSA information to be sent. The Dept. of Education will share this data with those schools allowing them to prepare a financial award package specific for you.
3. The primary drivers of the EFC calculation are income and certain assets. Both the parents and the student’s data is taken into consideration. For most people, their income will the primary driver. Retirement funds and home equity are not considered which for most people are their two largest assets. Non-retirement investment accounts, vacation or rental properties, and the value of a business are considered though.
In general, assets in the parent’s name are considered at a rate of 5.6% while those belonging to the student are considered at 20%. So the general rule of thumb is that an advantage to have assets in the parent’s name than the child’s.
4. In the case of divorced parents, the only parent who needs to report income and assets is the custodial parent. Even if the non-custodial parent provides more than 50% of the financial support and/or claims the child as a dependent for taxes, only the custodial parent needs to report data for the FAFSA. In addition, if the custodial parent has remarried, it is still only the custodial parent who needs to report data and not the step parent.
5. 529 plans are treated as an asset of whoever is listed as the account owner. In most cases, these belong to the parents and are assessed at the 5.6% rate. If a 529 plan is owned by a grandparent it is not counted as an asset on the FAFSA but once funds are taken out and used for the student then that will be treated as income for the student and will be assessed at 20%.
6. When filling out the FAFSA you will use the income reported on your prior, prior year tax return. This can be a bit confusing but here is how it works. If you are applying for financial aid for the 2021-22 school year you will use the data from your 2019 tax return so at the time the aid will be received it will be based on the prior, prior year. If you file the form this fall the 2019 return will be your most recent return.
7. During the process of filling out the online form you will have the option to use a data retrieval tool to get your IRS tax return information. This will greatly reduce the amount of time required to fill out the form. You can expect the process to take 1-2 hours depending upon the complexity of your information if you use data retrieval.
8. You may need to file a separate form depending upon the schools you are interested in applying to. FAFSA is widely used by most public schools but many private schools use a form called CSS that has a slightly different formula it uses and some of the assets that are not considered by FAFSA will be considered on the CSS.
9. You will need to refile the FAFSA every year you want financial aid. This is not something you do prior to your freshman year and have the totals carry over each subsequent year. Your financial details will vary year by year so might your ability to qualify for needs based aid.
10. Everyone should be urged to fill out the form regardless of whether you think you are a need based candidate or not. The FAFSA is the basis for determining other types of aid as well including some non-need based aid. For instance, to qualify for the Unsubsidized Federal Direct Loan you will need to have filled out the FAFSA and this is a loan that is available to everyone regardless of your financial situation. So even if you are sure you won’t get grants that is no reason to not fill out the form.
If you are unsure of how to complete the form or have questions please reach out to info@7thstfinancial to get the guidance you need. Make sure you have the correct information so you are in position to get financial aid you have coming to you.