15 things you need to know about financial aid
Timothy M. Hayes, MBA, CFP®,is the founder and President of Landmark Financial Advisory Services, a member of the Garrett Planning Network of fee-only advisors, and an expert in navigating the financial-aid application process.
Every January, students and their parents face the daunting prospect of preparing the various financial-aid applications that are required to be submitted in order to determine their eligibility for federal and/or institutional financial aid. Most families find the process, at best, mystifying and at worst, overwhelming. Worse yet, many rely on inaccurate information from well-meaning friends or the college's own financial-aid office when completing the applications, leading to a potential loss of aid.
To better assist students and their parents in the preparation and submission of the various financial-aid applications — including the Free Application for Federal Student Aid (FAFSA) — we offer the following caveats, tips, and recommendations:
- Always remember that higher education is a BIG business and the college's financial-aid officer (FAO) is not necessarily your friend. They represent the interests of their employer — not you. While they won't intentionally give you erroneous information, they may overlook or misunderstand your particular situation and give you generalized, rather than specific, input or answers to your questions or concerns. Double-check the accuracy of any information you receive from the FAO with the FAFSA answer key available on the Department of Education's website. And always be careful not to disclose any specific information about your finances to the FAO until you're certain that it's accurate.
- Apply for aid even if you don't think you'll be eligible. Given the costs today, most families qualify for some form of assistance. Even if that assistance is nothing more than an unsubsidized Stafford loan, the interest rate on the loan may be less than what you'd pay on a private loan.
- There are two kinds of financial aid: gift aid (i.e., “free” money) and self-help aid (i.e., loans). Most aid today is self-help aid. Your family's financial need is the dominant factor in determining your eligibility.
- The income and assets of the student are weighed more heavily than the parents' are in the assessment of your eligibility. Consequently, strictly from a financial-aid eligibility perspective, it's often better to minimize (where practical and possible) the student's income and assets when applying for aid.
- The parents' home equity is not assessed in the federal needs-based (FAFSA) calculation. Don't allow unscrupulous lenders or promoters persuade you to draw equity out of your home (usually to purchase expensive investments or insurance) in order to “qualify” for more aid.
- If the parents' earned income and adjusted gross income (AGI) are both less than $50,000, the student will qualify for the Simplified Needs Test, which ignores the assets of the parents and the student in the computation of the Expected Family Contribution (EFC). For those families with an AGI of less than $31,000, there will be a “Zero EFC.” In both cases, the student will receive more aid.
- Harvesting tax losses on investments before the year you apply for aid (i.e., the “base” year) will reduce your AGI and increase your aid eligibility. For those families who will be completing the FAFSA in January of 2013, the base year is 2012 — which means that any losses must be taken before Dec. 31, 2012.
- If your parents are divorced, report only the income and assets of the parent with whom you lived during the past 12 months. This may not be the same parent who “claims” you as a dependent for income tax purposes. Strictly from an aid-eligibility standpoint, the best strategy is for the student to live with the lower-earning spouse.
- Be sure to compare all of whatever aid awards you might receive from various schools before accepting any awards. You generally have until May 1 to respond, but may request an extension if you have not received information from all of the schools by then.
- If you or your family have experienced any kind of extenuating circumstances in the time since you applied for aid — like a death in the family, extraordinary medical expenses, or the loss of a job — be sure to contact the FAO to explain your special circumstances and to ask them to use their “professional judgment” to reconsider your package in light of the new information.
- Withdrawals from a 529 plan in one year (i.e., the base year) do not count as income to the student in the next year, unless the 529 is owned by someone other than the student or the parent (for example, a grandparent).
- Income information in the FAFSA will always be from the base year, but asset information is as of the date the FAFSA is signed by the parents.
- Some assets are not included in the financial-aid calculation, such as personal property, annuities, the cash value of life insurance, retirement accounts, and 529 accounts owned by people other than the student or parents. Thus, before signing the FAFSA, reduce assets by buying a car, computer, or other personal property that you would be buying soon anyhow, or by purchasing life insurance if you need it.
- Loans are not treated as income, whereas gifts of cash are. Consequently, a grandparent wanting to help with tuition could loan the money to the student rather than gifting it. It does have to be a bona fide loan — they can't just call it a loan — and the grandparent has to charge a market rate of interest on the loan. Also, the student would have to spend the money before signing the application; otherwise, the loan will be assessed as an asset of the student (equal to the amount of the loan still remaining in the student's bank account). The grandparent might then later forgive the loan in blocks of $13,000 (the current annual gift exclusion), after all aid applications have been filed.
- Some financial aid — like Work-Study, Federal Perkins loans and/or college grants or “tuition discounts” — is awarded at the school's discretion. If you don't receive any of these awards, don't be afraid to contact the FAO and ask why you didn't receive them.