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FAFSA PLUS Loan / FAFSA Stafford Loan Secrets About The FAFSA Loan Site FAFSA Loan Home |
*** [9] Financial Planning Tips Financial planning is the process of designing a plan to meet your financial goals. It involves identifying the goals (e.g., saving for your retirement, paying for your children's education, buying a house), your current position (net worth = assets - liabilities; net cash flow = income - expenses), and the steps you need to take in order to reach those goals. Just knowing how much you spend on monthly expenses can be an eye-opening experience. Given this information, you can then play "what if" games and make better decisions for your future. 1. It pays to save. Even though the federal methodology need analysis formula will take parent assets into account when calculating the family contribution, it is still worth saving money for college despite the "savings penalty". Your home equity and retirement savings aren't counted, and an age-dependent asset protection allowance shelters some of your assets from the need analysis. Moreover, parent assets are assessed at a very low percentage rate. Try saving at least $100 a month from the date of birth. This probably won't cover the full cost of the child's education, but it can make a difference between being able to pay for college and not. If you can afford it, $400 or more a month is a much better target. When there are many years before matriculation, you can be more aggressive in your investment strategy. As college approaches, however, you should shift from risky investments like stocks to more secure investments like CDs. Two years before college you should sell the securities in order to avoid realizing the capital gains during the tax year upon which need analysis is computed. Education is one of the best financial investments you can make. A bachelor's degree yields an increase in lifetime earning potential of nearly half a million dollars according to Census Bureau data. This is equivalent to a 20% annual return on investment. 2. Don't play asset shifting games. The financial need of most families are assessed primarily on income, not assets. Remember, the value of your home and retirement plans will usually not be included in calculating the parent contribution. [Although the federal calculation of financial need does not include home equity, some private colleges and universities still consider it when awarding institutional grants.] Moreover, the federal methodology also ignores the first $30,000 to $40,000 in savings and investments, depending on the number of parents, their age, and the family size. Consult an accountant before shifting parent assets to your children. Although there can be a significant tax benefit, remember that the federal methodology need analysis system assumes that children contribute 35% of their assets to their education each year. The federal methodology assumes that parents contribute a MUCH lower percentage of their assets, so it is usually better to leave the assets with the parents. Saving a few dollars in taxes now may cost a lot more in aid eligibility later. Some people may advise shifting assets to grandparents, non-custodial parents (if parents are divorced) or other relatives. Even if such asset-shifting games are financially sound, they are at best unethical, if not fraudulent. You haven't lost control over the assets -- your relatives cannot spend the money as they wish. When you fail to report these assets on the FAFSA and PROFILE, you are providing false information. Such actions are as bad morally as stealing from your neighbors or cheating on your taxes. For most people parent assets are not really a factor in parent contributions. The asset protection allowance prevents a threshold amount of assets from being included in the calculation of the parent contribution. Student assets, on the other hand, do play a significant role in the calculation of the student contribution. 3. Ask about the impact of a second income on aid eligibility. If the second income is low and introduces additional expenses (e.g., child care), sometimes it does not pay for the second parent to work. Examine the tradeoffs very carefully. 4. Don't try to finagle the financial aid regulations and policies. Many financial aid consultants suggest various ways of taking advantage of loopholes in the financial aid system. Some of these strategies are sound, but others have backfired on the families who follow them. For example, a few years ago some "consultants" advised parents to amend their previous year's tax returns to remove their child as a claimed exemption. The idea was to qualify the child as an independent student when applying for financial aid. Not only can this trigger an audit, but financial independence is not the only requirement for determining independent status. Parents who followed this advice lost a fair amount of money in lost tax savings, not to mention fees paid to high-priced consultants. If the advice you receive involves questionable ethics, think twice before following it. There is good advice and there is bad advice. Good tips include spending student assets before parent assets, keeping investments in the parent's name, and reducing family income below the $50,000 threshold that causes assets to be ignored. Any financial aid administrator will admit that these strategies take advantage of genuine loopholes in the need analysis formula. But there are also strategies that try to circumvent the system, instead of trying to work within the rules. Unethical tips include hiding assets, trying to qualify a truly dependent child as an independent, or providing false information on a financial aid form. 5. Try to bargain or appeal to the financial aid administrator only when the family financial situation has changed significantly or where a great disparity in aid offers suggests that an error has occurred. Some people may recommend trying to bargain with the school's financial aid officer to try to increase the aid offer. The only case in which this will definitely work is if there is a significant disparity in the net cost of attendance (e.g., more than $2,000) or if the family's financial picture has changed significantly (e.g., death or disability of a parent, fire, serious illness). Most financial aid administrators will review the award if there is a good reason for doing so, but all will refuse to get into a bidding war with other universities. This is especially true at the Ivy League schools and top research universities. If you really want to attend a school but are convinced that you cannot afford it, talk to a financial aid administrator at the school. They may be able to help, especially if it looks like they will lose an outstanding student because of a few thousand dollars difference in the aid package. They may, for example, be able to modify your financial aid package so that your outside scholarships reduce the loans and not the institutional grants, or suggest other sources of financial aid. 6. Don't lie or act in an unethical manner. If the financial aid administrator believes that false information was provided on the financial aid forms, they can require additional documentation or even disallow your claims. Many schools go through a process known as verification, in which a high percentage of their students are required to provide full documentation of every piece of information listed on the financial aid forms. Read the certification paragraph about providing false information that appears on the front of the FAFSA form. In particular, the FAFSA states that any person who intentionally makes false statements or misrepresentations on this form is subject to fine or imprisonment or both under provisions of the United States Criminal Code That includes the student and his or her parents. If you received funds as a result of providing false information, you will be required to repay those funds. 7. Start looking for aid early. Start planning for your children's education as soon as possible. Most parents wait until the beginning of their child's senior year to start worrying. This is often too late to make a difference. Encourage your children early on in academics and athletics, and start saving as early as possible. There are many sources of financial assistance, but you have to start searching for this aid early. It is never too early to start planning for your children's education. 8. Plan for the cost of education. College costs typically increase at about nearly twice the inflation rate. Plan accordingly. 9. Indicating the wrong tax return form on the FAFSA can negatively affect eligibility for some aid programs, such as the Pell Grant. Many parents choose to file the 1040 even though they are eligible to file the 1040A or 1040EZ. Likewise, companies like H&R Block often automatically file the 1040 form, regardless of the AGI or earnings. This can sometimes cause their children to not qualify for the Pell Grant. Parents should ask their tax preparers whether they would have been eligible to file a 1040A or 1040EZ. The question is NOT whether you would have gotten a bigger refund with the 1040, just whether you would have been eligible. 11. Loan repayment. When repaying your educational loans, try to make as large a payment as possible. The longer you take to repay the loan, the more interest you will pay. A shorter loan period will save you money in the long run. There is also never a prepayment penalty for paying off a loan early. If you are having trouble repaying your loan under the standard 10-year repayment plan for FFELP loans, consider consolidating the loan with a longer term. You may want to consolidate your loans anyway, to reduce the amount of paperwork associated with servicing several loans. Some graduates have found it necessary to consolidate their loans in order to qualify for a mortgage. There are other repayment options that may also help. If your loans are unsubsidized (i.e., the government does NOT pay the interest while you are in school), try to avoid capitalizing the interest. This can significantly increase the size of the loan, especially if you are in school for an extended period (e.g., for a graduate degree). Talk to your bank about setting up an automatic payment plan, where a fixed amount of money is withdrawn from your checking account each month to pay for your loan. This may help you manage the repayment, if you find it difficult to avoid spending money while it is in your checking account. Remember, your student loans will show up on your credit report. Defaulting on your student loans can have serious consequences for your ability to get credit for purchasing a home. Contact the lender *before* you stop making payments, not after, since you may be eligible for a deferment or a forbearance. 11. Divorce and prenuptual agreements do not shelter funds. Many universities require both natural parents to provide for their children's education. Only when the custodial parent (the parent with whom the child lived the most during the past 12 months) remarries does this obligation shift from the non-custodial parent to the step-parent. Thus, if your parents are divorced and the custodial parent has not remarried, the income and assets of both (natural) parents must be included on the university financial aid form. This rule holds even if the non-custodial parent refuses to supply the required information. (The financial aid administrator may make an exception in cases of documented spousal abuse or abandonment. In general, however, getting divorced is not an effective means of increasing eligibility for institutional funds.) If the custodial parent has remarried, the step-parent's income and assets must be included on any financial aid form, including the FAFSA. By step-parent, we mean the new spouse of the custodial parent, not the spouse of the non-custodial parent. There are no exceptions, even if the step-parent refuses to provide any money for the step-children's support or to supply the required financial information. It may seem cruel, but no information, no aid. If the parent and step-parent do not comply with the reporting requirements, the student is out of luck. It is the student's responsibility to get the parents to cooperate. Likewise, prenuptual agreements are ineffective at sheltering assets from the calculation of the parent contribution. If a step-parent is being counted in place of a natural parent, then all of that parent's assets should be considered subject to the determination of financial need. However, any child support and/or alimony received from the non-custodial parent must be included on the FAFSA. The federal need analysis system treats step-parents as though they were natural parents if + they are married to the custodial parent (the natural parent whose information is being reported on the FAFSA), or + they have legally adopted the student The step-parent's income must be reported for the entire base year, even if the marriage did not occur until the subsequent year. Likewise, the system does not recognize prenuptual agreements. *** [10] My School Didn't Award Me Enough Aid! Most family complaints about insufficient financial aid derive from the practice of "need gapping" described in section [3]. There is little that can be done about this, other than applying for scholarships and fellowships, working during the school year and summer, and applying for educational loans. Howerver, if there is a significant discrepancy between the amount of aid awarded and your financial need, perhaps you didn't bring some special circumstances to the attention of the financial aid administrator. Make an appointment to review your financial situation with a counselor in the financial aid office, especially if your family circumstances have changed since the financial forms were filed. If the circumstances warrant, they may be able to adjust the amount of financial aid for which you qualify. This process is known as Professional Judgment (PJ). For most families, however, the increase will be limited to the amount of educational loans, with the institutional grants remaining unchanged. There are several special circumstances that families sometimes forget to mention: 1. Affecting the cost of attendance: + Unusually high supply costs (e.g., art students) + Child care expenses + Expenses related to a disability (e.g., braille machine and readers for blind students, transportation expenses for handicapped students) + Health insurance for students who are no longer covered by their parents' health plan. 2. Affecting the parent contribution: + Death of a parent + Unemployment of a parent for 10 weeks or more + Change in income due to a change of jobs, a reduction in the number of hours worked, or retirement + Loss or reduction of alimony and child support received (or an increase in alimony and child support payments) + Divorce or separation of parents after submission of the FAFSA + Loss or reduction of disability and unemployment benefits + Losses due to natural disasters, such as floods, tornados, hurricanes, and mine subsidence + Unusual medical/dental and nursing home expenses + Child care expenses + Casualty and theft losses If you encounter these circumstances, you may need to provide estimated income information on your financial aid form instead of relying on the past year's financial information. If there aren't any special circumstances, but the financial aid administrators awarded you less aid than you think you need, you're probably wondering how you will be able to afford your education. Here are a few suggestions: 1. Consider a home equity loan. A home equity loan lets you borrow against the equity in your home, and you can deduct the interest on your taxes. You can use the home equity loan to pay off your other debt such as credit cards -- a good idea, since the interest rate will be lower -- and also use some of the proceeds to pay for your education. 2. Obtain a Federal PLUS and Unsubsidized Stafford Loans. You do not need to demonstrate financial need in order to be eligible for these loans. Of course, if you are eligible for a Subsidized Stafford Loan, you should use it before you rely on unsubsidized of educational loans. 3. Part-time work. You can get part-time work during the academic year, and a summer job during summer vacation. 4. Save money by completing your education more quickly. If you can graduate in three years instead of four, you'll have saved 25% of the cost of your education. Advanced Placement (AP) tests, institutional advanced standing examinations, and taking an extra course every semester can shave a semester or a year off of your academic career. 5. Cut costs: + Sell your car and buy a bicycle, or ride the bus and carpool. If you must keep your car, increase the deductible on your auto insurance policy to $1,000. + Share an apartment to cut housing costs, or live at home. + Make long-distance telephone calls only at night, or cut them out entirely. + Learn to cook and stop eating out. There are a lot of nutritious but inexpensive meals you can make. + Sell your TV and VCR. + Shopping tips: - Only buy what you absolutely need, and only when it is on sale. Consider buying in bulk. - Buy generic drugs and store brands. - Eat a full meal before going grocery shopping. Never go shopping on an empty stomach. - Buy used textbooks, or sell your books when you're done with them. - Buy your clothing and furniture at Goodwill, Dollar a Pound, discount stores, and garage sales. + Marry a wealthy spouse. If you're majoring in a lucrative field, such as business or computers, don't worry too much about the size of your loans. When you graduate and get a job, you'll probably be earning enough money to pay off your educational loans in a reasonable number of years. For other fields, you should consider how you will be able to repay your loans before getting too heavily into debt. Likewise, students who intend to go on to graduate or professional school should carefully consider how their finances will affect their future options. *** [11] Common Questions and Answers This section contains a list of common questions with concise answers. General Questions: 1. I probably don't qualify for aid. Should I apply for aid anyway? Yes. Many families mistakenly think they don't qualify for aid, and prevent themselves from receiving financial aid by failing to apply for it. In addition, there are a few sources of aid such as unsubsidized Stafford and PLUS loans that are available regardless of need. The FAFSA form is free. There is no good excuse for not applying. 2. Do I need to be admitted before I can apply for financial aid at a particular university? No. You can apply for financial aid any time after January 1. To actually receive funds, however, you must be admitted and enrolled at the university. 3. Do I have to reapply for financial aid every year? Yes. Most financial aid offices require that you apply for financial aid every year. If your financial circumstances change, you may get more or less aid. After your first year you will receive a "Renewal Application" which contains preprinted information from the previous year's FAFSA. Note that your eligibility for financial aid may change significantly, especially if you have a different number of family members in college. Renewal of your financial aid package also depends on your making satisfactory academic progress toward a degree, such as earning a minimum number of credits and achieving a minimum GPA. 4. How do I apply for a Pell Grant and other types of need-based aid? Submit a FAFSA. For student employment, student loans, and parent loans, you should check the appropriate boxes. 5. Are my parents responsible for my educational loans? No. Parents are, however, responsible for the Federal PLUS loans. Parents will only be responsible for your educational loans if you are under 18 and they endorse your loan. In general you and you alone are responsible for repaying your educational loans. On the other hand, if your parents (or grandparents) want to help pay off your loan, you can have your billing statements sent to their address. Likewise, if your lender or loan servicer provides an electronic payment service, where the monthly payments are automatically deducted from a bank account, your parents can agree to have the payments deducted from their account. But your parents are under no obligation to repay your loans. If they forget to pay the bill on time or decide to cancel the electronic payment agreement, you will be held responsible for the payments, not them. 6. Why is the family contribution listed on the SAR different from the family contribution expected by the university? The federal formula for computing the expected family contribution is different from those used by many universities. In particular, the federal formula does not consider home equity as part of the assets. 7. If I take a leave of absense, do I have to start repaying my loans? Not immediately. The subsidized Stafford loan has a grace period of 6 months and the Perkins loan a grace period of 9 months before the student must begin repaying the loan. When you take a leave of absense you will not have to repay your loan until the grace period is used up. If you use up the grace period, however, when you graduate you will have to begin repaying your loan immediately. It is possible to request an extension to the grace period, but this must be done *before* the grace period is used up. If your grace period has run out in the middle of your leave, you will have to make a payment on your student loans. 8. I got an outside scholarship. Should I report it to the financial aid office? If you are receiving any kind of financial aid from university or government sources, you must report the scholarship to the financial aid office. Unfortunately, the university will adjust your financial aid package to compensate. Nevertheless, the outside scholarship will have some beneficial effects. At some universities outside scholarships are used to reduce the self-help level. For example, at MIT 40% of the scholarship amount is applied toward the self-help level, and the rest replaces institutional funds. At other universities outside scholarships are used to replace loans instead of grants. 9. Where can I get information about Federal student financial aid? Call 1-800-4-FED-AID (1-800-433-3243) or 1-800-730-8913 (if hearing impaired) and ask for a free copy of "The Student Guide: Financial Aid from the US Department of Education". You can also write to Federal Student Aid Information Center PO Box 84 Washington, DC 20044 or read the publication on the Department's web site (www.ed.gov). FAFSA Questions: 1. I sent in my FAFSA over four weeks ago, but haven't heard anything. What should I do? If you haven't received a Student Aid Report (SAR), call the Federal Student Aid Information Center at 1-800-4-FED-AID or 1-319-337-5665. You must provide them with your Social Security number and date of birth as verification. You can also write to Federal Student Aid Programs PO Box 4038 Washington, DC 52243-4038 to find out whether your FAFSA has been processed or to request a duplicate copy of your SAR. 2. My parents are separated or divorced. Which parent is responsible for filling out the FAFSA? If your parents are separated or divorced, the custodial parent is responsible for filling out the FAFSA. The custodial parent is the parent with whom you lived the most during the past 12 months. Note that this is not necessarily the same as the parent who has legal custody. If you did not live with one parent more than the other, the parent who provided you with the most financial support should fill out the FAFSA. This is probably the parent who claimed you as a dependent on their tax return. If you have not received any support from either parent during the past 12 months, use the most recent calendar year for which you received some support from a parent or lived with either parent. Note, however, that any child support and/or alimony received from the non-custodial parent must be included on the FAFSA. Financial aid applications can be somewhat confusing because there are several different criteria applied for different kinds of parenthood: 1. The parent with whom the child lived the most during the past 12 months. 2. The parent who provided the most financial support to the child during the past 12 months. 3. The parent who provided more than half the child's support (and will continue to do so). 4. The parent who has legal custody. 5. The parent who claimed the child as a dependent on their tax return. As noted above, criteria 1 and 2 are used for determining the custodial parent, with the first criteria being primary. For determining household size (the number of family members), criteria 3 is the most important. However, the student's custodial parent gets to list him or her even if the custodial parent does not provide more than half of the student's support. This leads to the anomalous situation where a student can be counted as belonging to two different households. For example, suppose the non-custodial parent remarries and has college-aged children of his own. If the non-custodial parent provides more than half of the student's support, he gets to list the student as a member of his household even though the custodial parent has also listed the student as a member of her household. (The IRS tax return instructions prevent this kind of double dipping on tax returns, but the FAFSA instructions apparently don't.) Criteria 3 is also used to determine whether the student has one or more dependents, in the rules for specifying whether the student is an independent student with dependents. Criteria 4 and 5 are not used in the financial aid formulas, but are sometimes used to give an indication of the right choice when the other criteria are insufficient. Criteria 5 is also sometimes used to substantiate claims made under criteria 3. For example, a financial aid administrator may ask a parent for a copy of their tax return, to see whether they claimed the child as a dependent. Criteria 5 usually implies criteria 3, because the IRS definition of a dependent includes a 50% support test. There IRS definition includes a few exceptions where the parent isn't required to provide more than half the child's support in order to claim the child as a dependent, but in almost every case, if the parent could not claim the child as a dependent (criteria 5), they did not provide more than half the child's support (criteria 3). 3. My parents are divorced, and the parent I'm living with has remarried. Does my step-parent have to report his or her income and assets on the FAFSA? Yes, provided that the parent you're living with is the one filling out the FAFSA (your custodial parent). If your step-parent is married to them at the time you fill out the FAFSA, they must report their income and assets even if they weren't married to them in the previous year. Myths About Financial Aid: 1. Won't the government take away our home if we apply for aid for our children's education? No. Absolutely not. This myth seems to be pervasive, and causes many families to avoid applying for financial aid. The government does NOT take away your home when you apply for financial aid. 2. All financial aid packages include term-time work, and working while trying to study is bad. First of all, numerous studies have shown that a small amount of term-time employement (10 hours per week) improves academic performance. Secondly, you can always refuse the work-study aid and pay for the expenses covered by that aid through other means, such as loans and summer employment. *** [12] Answering Your Questions The FinAid site includes much more information than could be presented in this brief FAQ. It includes, among other things, a glossary of financial aid terminology, information about the taxability of financial aid, information about bankruptcy and financial aid, and anything else you might want to know. If the answer cannot be found on the site, you can use the FinAid Ask the Aid Advisor service to ask a question of one of more than 100 financial aid professionals who have volunteered to answer student questions. For questions about federal student aid, call 1-800-4-FED-AID (1-800-433-3243). The TDD number for hearing impaired individuals is 1-800-730-8913. If you never received your Student Aid Report (SAR) after submitting the FAFSA, or want a duplicate SAR, call 1-800-4-FED-AID or 1-319-337-5665. If you want to report fraud, waste, and abuse of federal student aid funds, call 1-800-MIS-USED (1-800-647-8733) to reach the office of the Inspector General at the US Department of Education. Selective Service can be reached at 1-847-688-6888. Immigration and Naturalization Services (INS) can be reached at 1-415-705-4205. The Internal Revenue Service (IRS) can be reached at 1-800-829-1040. The Social Security Administration can be reached at 1-800-772-1213. The National and Community Service Program (AmeriCorps) can be reached at 1-800-94-ACORPS (1-800-942-2677). |
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