FAFSA Loan - The Truth About FAFSA Loans: FAFSA Stafford Loans,
FAFSA PLUS Loans and FAFSA Consolidation Loans

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FAFSA Loan Questions and Answers (continued)

Financial Need (continued)

Unfortunately, your school may not be able to provide you with financial aid to meet your entire demonstrated financial need. Many colleges and universities must create a "Unmet Need" or "Need Gap" between the cost of attendance and the amount you can afford to pay because of limited funds. Schools have limited funds available for financial aid, and they must determine how to best allocate the funds to their neediest students. Very few schools can afford to meet the demonstrated need of all their students, so most assume that all students and/or parents must pay a certain minimum amount, regardless of their need. Others give financial aid only to the neediest students. You're expected to obtain the funds for the unmet need or gap through summer or term-time employment earnings and educational loans, including the Federal Parent Loan for Undergraduate Students (PLUS).

Moreover, your financial aid package may be reduced by any "outside resources" you receive. A resource is something that is available because the student is in school, and is normally counted after need is determined. For example, if your parents have contributed money to a prepaid tuition plan, the money received from that plan toward the student's education will be subtracted from the determination of financial need. Other resources include VA educational benefits and outside scholarships. Thus the determination of the school's financial aid package is actually based on

Remaining Financial Need = Financial Need - Resources

So even though resources do not affect the size of the Pell Grant the student will receive, they do affect the amount of Stafford or campus-based aid available. They are often counted 100% toward meeting need, and the university will reduce the size of the financial aid package to compensate. Resources represent a direct reduction of cost (e.g., a prepaid tuition plan cuts the amount of tuition the student will pay) and therefore less need.

[A few schools will "reward" students for bringing in outside scholarships by using a portion of the outside funds to reduce the self help level, or by using them to reduce the loan portion of the financial aid package and not the institutional grants.]

The school's "budget" or COA will include tuition, fees, room and board, books and supplies, travel, and personal and incidental expenses. In many cases there is a standard fixed budget amount for some of these categories. For example, the budget amount for travel may vary depending on the student's home state. Likewise room and board expenses may be reduced and travel expenses increased for commuter students.

Budget allowances are used only for determining the estimated expenses that a student will experience during the enrollment period. Actual costs will vary depending on the your particular lifestyle. If special circumstances should warrant a higher budget amount, consult your financial aid administrator, who is permitted to increase your budget, if appropriate, with documentation. For example, students with child care expenses or expenses related to a disability may be able to get their budget increased to compensate. If your books and supplies cost more than the amount in your budget, save your receipts and show them to a financial aid administrator.

The federal formula approved by Congress to calculate the EFC is called the Federal Methodology (FM). The federal methodology is used to determine eligibility for federal funds. If a college or university relies on a different formula for awarding its own funds, that formula is called the Institutional Methodology (IM). Different colleges and universities may use different institutional methodologies.

The EFC is the sum of the student contribution and the parent contribution:

EFC = Student Contribution + Parent Contribution

An independent student is not expected to have a parent contribution. To be classified as independent for Federal aid purposes, a student must either be 24 years of age or meet one of the following exceptions 1. be married 2. have a dependent 3. be a graduate or professional student 4. be a ward of the court or an orphan 5. be a veteran

Some schools (mostly private) expect both natural parents to contribute to their children's educational expenses, regardless of a divorce or any court orders to the contrary. In cases of divorce where the custodial parent remarries, the financial information for both the custodial parent and the step-parent must be included on the FAFSA as well as any child support and/or alimony received from the non-custodial parent.

If a student is classified as independent because of marriage, the spouse's financial information must be included on the form.

The student contribution assesses 35% of the student's assets and 50% of the student's earnings after subtracting a small threshold from the student's earnings.

The parent contribution depends on the number of parents with earned income, their income and assets, the age of the older parent, the family size, and the number of family members enrolled in postsecondary education. Income is not just the adjusted gross income from the tax return, but also includes nontaxable income such as social security benefits and child support. The Higher Education Amendments of 1992 eliminated home equity from the EFC, but many private colleges and universities still use a parent's home equity as a way of rationing their school's own grant and scholarship funds. Money set aside for retirement in a pension plan such as a 401K, IRA, Keogh, or 403b is usually not counted as an asset. However, the funds contributed to a tax-deferred retirement program during the previous year must be included on the FAFSA as "other untaxed income". In addition, an asset protection allowance shelters a portion of the assets from the calculation of the parent contribution. The asset protection allowance increases with the age of the parents to allow for emergencies and retirement needs. The asset protection allowance for most parents of college age children will be approximately $40,000. The parent contribution assesses a maximum of 5.64% of parent assets and 20% to 50% of parent income, after subtracting various allowances.

The full need analysis formula is rather complex. If you want an estimate of your EFC, use the free financial aid estimation calculator on the FinAid site. It will let you play "what-if" games.

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