On October 1, 2018, the Federal government will release the 2019-2020 FAFSA (Free Application for Federal Student Aid) and with it will come an onslaught of warnings that students and parents must submit their FAFSA as soon as possible or they’ll miss out on much-needed dollars.
This is mostly true, but here’s the rest of the story.
Yes, ALL Students Should File the FAFSA
The FAFSA analyzes parent and student income and assets to calculate your EFC, Expected Family Contribution, the minimum amount of money your family is expected to pay each year toward the cost of college. The size of your EFC determines your eligibility for federal, state, and college need-based aid. The smaller the EFC, the more aid you qualify for.
All students should file a FAFSA, no matter the family income. This is because:
- Some scholarship and financial aid programs require a FAFSA, even if the award is not income-based.
- Filing may give you an admissions edge. Colleges believe that students who don’t submit the FAFSA are less likely to enroll and they don’t want to waste an acceptance on a student who is unlikely to attend.
- Most students DO qualify for some form of need-based aid–grants, loans, and/or work-study.
- All students who file the FAFSA qualify for Federal Direct student loans which come with the most favorable terms.
- Parents of dependent students who file the FAFSA will qualify for Federal PLUS loans.
No, You Don’t Have to File Immediately
There are two deadlines you must meet in order to get all the aid you qualify for: the colleges’ and your state.
College deadlines may be early but rarely come in October. Learn the deadlines for every college of interest and make sure you file before the earliest.
The next deadline to note is your state of residence. You can discover your state deadline here.
While there is a federal deadline, it is very late, and if you meet the college and state deadlines you will be well within the federal deadline.
Yes, Some Aid is Awarded on a First-Come, First-Served Basis
This is definitely true. There are some types of federal, state, or college aid that can run out, and even a student who qualifies can miss out if all the money is gone by the time he or she applies.
However, don’t submit the FAFSA until you take action to qualify for the most financial aid possible.
Your Action Plan
1. Understand what’s behind your EFC!
While you can get a good estimate of your EFC with the government’s free EFC calculator, the FAFSA4caster, this tool just spits out a number. You really need to go beyond that and see what’s in the formula behind the EFC so you can discover what steps you can take to reduce it. We are often told our article is the best explanation of EFC around: Your EFC: What It Is, How It’s Calculated, and Why It Matters. And, to get a full understanding of financial aid, check out the course Untangling College Financial Aid.
2. Examine Income
Income reported on the FAFSA is prior-prior year (two years prior to the college year for which the student is applying for aid). If you are entering college in 2019, your first FAFSA analyzes income from 2017. Although it’s too late to change either parent or student income from 2017, consider that you may be able to affect 2018, 2019, and 2020.
Assuming a 4-year college graduation plan:
Some important things to keep in mind about parent income:
- Parent Income has the greatest effect on EFC, as shown in this graphic.
- The EFC goes up about $3,000 for every $10,000 earned over the Parent Income Protection Allowance ($18,000 – $39,000)
- Capital gains and stock options are counted as income
- Contributions to retirement accounts made in the year being reported still count as income on the FAFSA.
- Income earned after the student’s sophomore year will not be reported
✔ Avoid parent income balloons until after the sophomore year.
Some important things to keep in mind about student income:
- Half of every dollar earned above the Student Income Protection Allowance ($6,600) goes into the EFC until after the student’s sophomore year.
- A hidden danger is untaxed student income (cash gifts or any money received or paid on the student’s behalf by anyone other than the custodial parents), which can quickly exceed the income protection allowance and balloon the EFC
✔ Be cautious about the student earning income over $6,600 until after the sophomore year.
✔ Ask relatives to wait until after the sophomore year before giving the student large cash gifts; or have the gift-giver make the cash gift to the parents, which is not reported on the FAFSA
✔ Don’t allow anyone other than the parents pay tuition until after the sophomore year.
3. Examine Assets
Income reported on the FAFSA is from prior-prior year, but assets are reported as of the day you file. This is something many families can take advantage of for all four years. Consider the following:
Tuition Savings Accounts
Parents’ 529 accounts
- Reported as a parent asset on the FAFSA
- About 5% will go into the EFC
- Distributions do not count as student income
Non-parent 529 for which the student is a beneficiary
- The value of the account will not be reported on the FAFSA
- Distributions, which may be very large, must be reported as untaxed student income
✔ Switch ownership of 529 to the parents or wait until the student’s junior year in college to begin taking distributions from a non-parent owned 529
Parent assets include savings and checking balances, stocks, bonds, CDs, businesses, real estate investments, education savings accounts, etc. Excluded parent assets include the value of your retirement accounts, primary residence, insurance policies, and annuities.
Only a maximum of 5.6% of parent assets is included in the EFC. But it can still help to reduce them as much as possible. Before filing the FAFSA each year consider whether you can:
✔ Pay down consumer debt
✔ Pay off student loans, mortgages, and medical debt*
✔ Make large planned purchases– new roof, car, home renovations, etc.
✔ File the FAFSA right before payday to minimize cash on hand
✔ Maximize savings in IRAs and other retirement accounts.
Student assets include savings and checking balances, savings bonds, other investments. With no asset protection allowance, 20% of the value of student assets goes directly into the family’s EFC. And, unspent student income is assessed twice–first as income and then as an asset. Excluded student assets include IRAs. Before filing the FAFSA each year consider whether you can:
✔ Spend down student assets on things the student needs such as clothing, computer, books, supplies, a car, bedding, appliances for a dorm room, braces, money for an unpaid internship, or tuition for a summer academic program.
✔ Move unspent earned student income into a Roth IRA
✔ Use all student money before parent money to pay college costs
4. Other Strategies to Minimize EFC
The EFC formula has a few quirks that make college significantly cheaper under the following unusual, but not unheard-of situations. See if either of these could work for you:
More Than One Child in College at the Same Time
The parents’ yearly contribution to EFC is split between the children in college. This greatly reduces each child’s individual EFC and increases their eligibility for financial aid. If an older student is able and willing to take a gap year in order to increase the overlap years in college with a younger sibling, the family will see significant savings.
Student Becomes Independent (as Defined by the FAFSA)
If a student is already planning to get married or join the military, do that before filing the FAFSA. Married students and members of the military are considered independent for financial aid and are not required to report parent financial information. Usually, this drastically lowers a student’s EFC.
Not all these strategies will work for every family. But if you take the time before filing your FAFSA to understand the EFC and how it’s calculated, you may be able to discover ways your family can save real money in overall college costs.
*Special financial circumstances that aren’t taken into consideration in the EFC formula such as high medical debt should be discussed with each college’s financial aid office. While not guaranteed, colleges may consider special circumstances and reduce your EFC.
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