As the price of a college education continues to soar, many American families are counting on significant outside help to foot the bill. Consider that the average cost for tuition and fees at an out-of-state public university is now nearly $24,000 per year, according to The College Board. For private schools, tuition and fees average almost $32,500.
For students who haven't earned lucrative scholarships, need-based financial aid can play a vital role. The key to receiving a generous package rests in large part on the Free Application for Federal Student Aid form, better known as the FAFSA. This is the document that schools use to determine federal aid, including Federal Direct Loans and Pell Grants. Many institutions also use it to decide whether students are eligible for any of their own scholarship funds.
Much of the time, parents don’t give the FAFSA much thought before the deadline. By understanding how the form works, however, you’ll have a better chance of meeting the criteria for aid. It’s also important to look beyond the form itself and realize that finding the right school can be just as important to your aid prospects as what you put in the document. Here are some basic steps for ensuring that you get the best combination of grants, loans and work-study programs possible.
1. File Early
Perhaps the easiest move you can make is to fill out the FAFSA as early in the year as possible. That’s because many federal loans and grants are awarded on a first-come, first-served basis. Even if the university has a much later deadline, it helps to submit the document as soon after Oct. 1 (the new, earlier FAFSA filing date) as possible.
Many parents assume they have to put the FAFSA on hold until they complete their previous year’s tax return. Unfortunately, doing so can put your chances of need-based assistance in serious jeopardy. The new rules let you fill out the financial aid documents using the previous year’s data (for details, see You Can Now File the FAFSA Starting Oct. 1). You can do this automatically by using the IRS Data Retrieval Tool on the official FAFSA website, which is available roughly three weeks after you file the form.
2. Minimize Your Taxable Income
The FAFSA is the main tool universities rely on to determine the applicant’s “expected family contribution” (EFC) – that is, the estimated amount the student and his or her parents can kick in toward tuition and other expenses. All else being equal, a lower EFC will result in greater need-based aid.
How can a family accomplish this feat without hurting itself in the short term? One way is to postpone the sale of stocks and bonds, if they will generate a profit, as the earnings will count as income. That also means holding off on early withdrawals from your 401(k) or IRA. In addition, ask your employer if you can defer any cash bonuses to when they won’t have a negative impact on your child’s financial aid.
3. Be Careful About Who ‘Owns’ Your Assets
If you’ve been putting money away for your children’s college education over the years, you’ll be in much better shape when they graduate from high school. But all that saving does have a small catch – some of that money will be included in your EFC.
One important aspect to realize about the FAFSA is that schools anticipate students will contribute more of their assets toward higher education than parents will. According to the Web site FinAid.com, 20% of the child’s assets are assessed in the needs analysis, as opposed to the maximum rate of 5.64% of the parent’s assets.
Consequently, in most cases, your application will fare much better if any college savings accounts are in a parent’s name. So if you set up a Uniform Gift to Minors Act (UGMA) account for your son or daughter to avoid gift taxes, you could be hurting your chances of need-based aid. Often, you’re better off emptying these accounts and putting the money into a 529 College Savings Plan or a Coverdell Education Savings Account. Under current rules, these are both treated as a parent’s asset, as long as the student is classified as a dependent for tax purposes.
4. Don’t Assume You Won’t Qualify
Having a substantial family income doesn’t always mean that financial aid is beyond your reach. It’s important to remember that the needs-analysis formula is complex. According to the U.S. Department of Education, factors such as the number of students attending college and the age of the parents can affect your award. It’s always a good idea to fill out the FAFSA just in case.
Keep in mind, too, that some universities won’t offer their own financial aid, including academic scholarships, if you don’t fill out the FAFSA first. The assumption that the form is only for low- and middle-income families often closes the door to any such opportunities.
5. The FAFSA Isn’t the Whole Picture
While the FAFSA is an immensely important tool in determining need-based aid, some families actually put too much emphasis on the document. The fact is, most financial-aid counselors have the authority to use resources as they see fit. The expected family contribution usually plays a big role, but it may not be the only factor they’ll consider.
The more an institution values the student’s skills and experiences, the more likely it is to woo him or her with an attractive aid package. The key is to look for colleges that represent a good fit, and to reach out to the financial aid office about your child’s prospects for grants or federally subsidized loans. This, in addition to its academic reputation, can help families select whether a school is worth pursuing.
The Bottom Line
A generous financial-aid award can take much of the sting out of college tuition costs. The best way to improve your child’s chances of getting one is by filing early and doing whatever you reasonably can to reduce your family’s estimated contribution.