Students often dismiss the idea of financial aid for college because they think their parents make too much money. But families earning as much as $180,000 per year can be eligible for some form of help, so unless your parents earn a lot more than that, it’s worth applying. Last year, the U.S Department of Education reported that all dependent undergraduates, no matter what their family income, could qualify for at least $27,000 in unsubsidized Stafford loans over four years.

In order to qualify for both loans and grants, you have to fill out the Free Application for Federal Student Aid (FAFSA); it's the official form you use to request financial assistance from colleges, states and the federal government. This quick guide will help you understand how the FAFSA works. (See 5 Ways to Get Maximum Student Financial Aid for more.)

What Is the FAFSA?

The primary purpose of the Free Application for Federal Student Aid is to figure out how much need-based financial aid you qualify for, and then how much non-need-based aid you can get. Even if you’re expecting to get most of the money you need from your parents, private scholarships and personal loans, it’s worth taking an hour to fill out the form: Some schools even require it as part of making all financial aid decisions, including private scholarship and grant money. Be aware that federal loans have extremely flexible repayment options (see Time to Consolidate Your Student Loans?) so it's worth investigating them before looking at private loan options.

How is Need Calculated?

To come up with your financial need, the FAFSA essentially does a calculation, taking the cost of attendance (COA) at the educational institutution and subtracting your expected family contribution (EFC)

Colleges and universities provide an estimate of your COA. The calculation includes tuition and fees, room and board, books, supplies, transportation, loan fees and other related school expenses. Child and dependent care costs are considered, too, as are costs related to a disability or eligible study-abroad programs.

Next, the FAFSA calculates the amount your family is expected to contribute (EFC). The system figures that 20% of a student’s assets and 5.64% of the parents’ assets should be available for spending in any one college year. So the key is to put most college savings in the parents’ name. However,  529 college savings plans, whether they are in the child’s or parents’ name, are evaluated at the parental rate of 5.64%.

You can also lower your assets by paying off credit cards or spending money on college needs prior to filing out the FAFSA – say, if you (or your parents) plan to buy a computer and a car to get back and forth to school. You can also consider prepaying bills, such as a mortgage or other debt, to reduce your assets before you complete the FAFSA. However, keep in mind that about $50,000 in family assets is protected by the FAFSA formula – the exact amount depends on the parents’ age.

Assets not considered in this calculation include the value of the family home or the value of retirement assets, insurance policies and annuities. (Another way parents can reduce assets is to increase their contribution to their retirement accounts while their child is in high school.) Personal items such as cars, clothing and furniture are also not assessed when figuring the EFC.

After subtracting the EFC from COA, the FAFSA shows you how much financial aid you qualify to get. This aid can be need-based or non-need-based grants and loans.

Need-Based Aid

These options include:

Federal Pell Grant: These grants do not need to be repaid. They are primarily awarded to undergrads, but some teacher certification programs are also eligible for Pell Grants. The maximum award in the 2015/2016 school year is $5,775. The financial aid office will determine how much you qualify to get. based on need.

Federal Supplemental Educational Opportunity Grant: This grant program also does not need to be repaid, but it is not available at all schools. The amounts that can be awarded are between $100 and $4,000 per year.

• Federal Direct Subsidized Loan: These loans are subsidized by the government, which means Uncle Sam will pay the interest on them while you are in school and for a grace period of six months after you graduate. Loan amounts that can be subsidized range from $3,500 to $5,500, depending upon your student status. However, no subsidized loans are available for graduate study. For more on student loans, see College Loans: Private vs. Federal.

• Federal Perkins Loan: These loans are available to students with exceptional financial need at the undergraduate and graduate level. Not all schools offer these loans, and each school that does has a limited pool of loans available each year.

• Federal Work Study: If you are not able to get enough in scholarships, grants and loans, part-time jobs are sometimes available as part of the Federal Work Study program. Both undergraduate and graduate students may be eligible.

Non-Need-Based Aid

These types of financial aid include:

• Direct Unsubsidized Loan: This is similar to the subsidized loan program with one big exception: The government doesn’t pay the interest while the student is in school or during the six-month grace period afterward. If a student, or his/her parents, doesn’t pay the interest during these times, it will be added to the principal of the loan.

Federal PLUS Loan: This is a loan is taken out by parents for their child’s college education, or by graduate students. It is not subsidized by the federal government, so interest that accrues during the college years will be added to the principal if it isn’t paid while the student is in school.

• Teacher Education Access for College and Higher Education (TEACH) Grant: Students training to become teachers can qualify for this grant, up to $4,000 per year, even if they don’t meet need-based criteria. It doesn’t have to be repaid. To qualify, you must take certain classes and, within eight years of graduation, you have to work for at least four years in an elementary or secondary school or an educational service agency that serves low-income families.

The Bottom Line

Whichever type of grants or loans you hope to get, it’s critical that you complete the FAFSA application online as soon after Oct. 1 each year as possible. Many schools and some states have a limited pool of grants and loans, which are awarded on a first-come, first-served basis. You now can use an earlier year's taxes on the application; you no longer have to wait for the current tax year or amend your application with current-year tax information after taxes are filed.

Also be sure to put something in every line of the application, even if it is just a zero. If you miss a line, the application could be returned to you. After you have fixed the errors and resubmitted the application, you go to the bottom of the pile.

If your family has circumstances not addressed on the FAFSA that have affected your available funds for school – exorbitant medical expenses, for example, or a job loss – be sure to submit a statement about that, too. 

You can fill out the application online here, and you can check what your student aid might be at the Department of Education FAFSA4caster.

For additional information, see Stafford Loans: Subsidized vs. Unsubsidized and Top Student Loan Providers.

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