The FAFSA – What you need to know

by Lighthouse College Financial Planner Shireen Daniels CFP®, CDFA
If you are a parent of a high schostudent-849825_640ol student, you have most likely heard of the FAFSA form (The Free Application for Federal Student Aid). We have found that many families, no matter what socio-economic background, have misconceptions about how it works and how it directly relates to their family. This post is meant to clear some of that up.
What is it for?
The FAFSA form is a government form that takes a look at parent income, parent assets, student income and student assets to determine what is your EFC (Expected Family Contribution). The EFC is what the government says you can afford to pay out-of-pocket per year. This does not mean you will get charged your EFC number; some families will pay more and some will pay less. The FAFSA used to be used solely to determine who received Federal Financial Aid such as Pell Grants. While it is still used for that, colleges also use it to determine who is awarded both need and merit aid. Need based money is not a guarantee if you are low-income and merit money is not guaranteed for top students. The level of potential aid derived from the FAFSA can literally make a mission-critical difference for many families, especially when their student is bound for a high-cost private university. No matter what your family situation is, we strongly recommend filing the FAFSA.
When is it filed?
The FAFSA can be filed as early as January 1st of your student’s senior year. (For high school seniors of the 2016-2017 class, it changes and can be filed Oct. 1st of senior year based on 2015 taxes). The FAFSA filed January 1, 2016 will be based on 2015 taxes. Even though your taxes will not be completed, still file the FAFSA. Much of the money is given on a first come first served basis so your initial filing is important. You will then complete your taxes early and finalize your FAFSA afterwards. This extra step will be eliminated in the future by having the FAFSA filing in October based on the previous year.
What if I have multiple college students?
A FAFSA form needs to be filed for each child as it is technically the student’s form. Your EFC number is a per family number. So if the government says your family can afford $40,000, it will then be $20,000 per student.
Is there anything I can do to make our family look better?
Here are some things we addressed in our October blog:
While a full discussion of this laptop-868818_640complicated process is beyond the scope of this column, it’s important to understand that income levels typically have the largest impact on the FAFSA aid formula. With this in mind, if it is possible to reduce income in 2015 by deferring a bonus until next year, or making some capital investments if parents own a business, or by deferring distributions from retirement plans if parents are retired, now is the time to think about this type of planning.
On the asset side of the equation, it’s important to understand what assets are considered countable resources for college expenses, and what assets are not. While once again this is a big discussion, one easy to understand concept is student assets are always weighted heavily in the equation, so repositioning items such as UTMA (Uniform Transfers to Minors Act) accounts or other accounts in a child’s name could be a smart move.
Biggest tips?
Get educated. Get started. Get help if needed.