Free Application for Federal Student Aid (FAFSA)

I received my first Reader's Question from Aunty J who is in the process of completing the Free Application for Federal Student Aid (FAFSA) and wanted some help understanding what she can do to maximize the amount of loan she can get.

It's been a while since I've had to fill out the FAFSA, so let's start with the basics.

What is the FAFSA?
The FAFSA is one of the most important forms you will need to fill out for receiving federal aid for higher education. By filling out the application, the government is able to assess the student's and parents' ability to afford college. The amount of aid that they will award is based on the family's financial need. It is different from scholarships (also a great way to get money for college) in that it is based strictly on financial need, not on scholastic merit. It can be a time-consuming process, but is definitely worth the time and effort.

How do you apply?
The FAFSA can be applied for on paper or online. I recommend filling out the paperwork on the web and applying for a Federal Student Aid Personal Identification Number (PIN) so that you can electronically sign your document and submit electronically. I recommend this because the web version will help to double-check that you did not miss anything, your information will be saved to aid in completing the FAFSA the following year (you need to fill out the FAFSA each year you want to apply for aid), and your application will generally be processed faster.

The hardest part about applying will be collecting all of the necessary financial documents needed to complete your application. Here is a checklist of items you will need:
- Student's Social Security Number
- Student's driver's license
- Student's W-2 forms and other records of money earned
- Student's (and spouse's, if married) Federal Income Tax Return (i.e. IRS FOrm 1040)
- Parents' Federal Income Tax Return (if student is a dependent)
- Student's untaxed income records (i.e. Social Security, Welfare, etc.)
- Student's current bank statements
- Student's current investments information
- Student's alien registration number or permanent residence card if not a US citizen

The official FAFSA website is located at http://www.fafsa.ed.gov/

Now, for the "important stuff"...how can you get the most money?!
I'm not an expert on this, but I did some research on the Internet and found this website quite informational: http://www.fafsaonline.com/. This site provides "FAFSA Secrets," which I've summarized below.

1. Reduce Your Adjusted Gross Income (AGI)
The amount of aid you receive is inversely proportional to your AGI -- the more money you make, the less aid you will receive. Your AGI is the amount of money you make per year after standard adjustments. So what do you do if you make too much money (hahaha)? Well, in order to reduce your AGI, you don't necessarily want to lower your income, rather you want to increase your adjustments. AGI = income - adjustments. You can do this by redistributing your assets to your advantage. Examples of this include increasing contributions to retirement accounts (i.e. 401(k)s, IRAs, etc.) and utilizing flexible savings accounts if offered by your employer. A flexible spending account will allow you to put money aside pre-tax to go towards healthcare or childcare expenses. It is important to estimate these costs as accurately as possible, because in most cases, you need to use all the money set aside in the given tax year. Check with your specific policy for more details.

2. Get Rid of All Your Cash
Well, not all of it...but you can stragegically get rid of liquid assets by putting money towards things you know you will need prior to submitting your FAFSA application. Examples of this could be buying things such as computers and books that you know the student will need for college. You can also do things such as paying bills such as car insurance in a lump-sum rather than monthly to get a large amount of cash out of your name. Some insurance companies will offer you a discount for doing this. You can also put a large amount of money towards your mortgage to get rid of liquid assets while retaining the money as equity in your home. Another option is transfer assets to another person. It is cautioned, however, that your friend/relative may not be as trustworthy as you think. Grandparents' money is invisible on the FAFSA until they make a payment towards the student's education, at which time it will be counted against the parents' contribution. A better strategy if you are lucky enough to have grandparents who want to help pay for education is to have them hold the money and help pay off the student loans once the student graduates.

3. Ensure you are Insured
Line 44 of the 2007 FAFSA asks you to detail the worth of your investments, but will exclude the following: mortgage on your principal residence, retirement plans, IRAs, prepaid tuition plans, and the value of life insurance. While whole life insurance can provide a greater storage for assets, benefiting your FAFSA, it is expensive and often advised against by many financial advisors.

4. Sell Bad Investments
Best advice: sell off bad investments, take the loss, and reap the tax benefit of the loss as well as having the investment (and whatever net worth it had) off the books.
Important reminder: you must unload any bad investments prior to the end of the previous tax year! If you wanted to take the loss and deduction in 2008, you would need to complete the sale prior to December 31, 2007.

5. Assets Should NOT be in Student's Name
Assets, savings, and cash carried in the student's name carries more weight than if the assets are held in the parents' name. Students assets are assessed at 20%, while parents' assets are assessed at 6%. This means that any savings for college should not be saved in the student's name.

6. Leave No Entry Blank
Remember that if you don't know the answer to something on the FAFSA, do not leave it blank. Put a zero there insteaed. If you take nothing else away from this FAFSA secrets tutorial, remember that a blank space is your worst enemy and a zero is your best friend. Why? The FAFSA EFC is computed using a formula, and blank spaces may yield a different result than zeroes. Additionally, if too many blanks are left on the FAFSA, the computer system may reject your FAFSA as erroneous.
Best advice: Check your work early and often. When you're done with the FAFSA on paper, have someone else with fresh eyes look at it for mistakes - do this even if you file it online.

7. Apply As Close to January 1st As Possible
It is always advised to apply for as many scholarships as possible, but because any scholarships you receive before applying for the FAFSA will decrease the amount of federal aid you will receive, it is advantageous to apply for the FAFSA as early as possible to get it in before applying for scholarships. The FAFSA application controls access to student loans and grants, and the earlier your FAFSA gets in, gets processed, and gets done, the more eligible you are for grants and scholarships which have a limited pool of money that's first come, first served.
Best advice: File your FAFSA on January 1 and file applications for scholarships beginning January 2. However, if you have to choose between scholarships and the FAFSA, make scholarships a priority. Why? Scholarships == money you don't have to repay for college.

8. Do the Practice FAFSA Form
http://www.fafsaonline.com/fafsa-form/draft-fafsa-form.pdf

9. Other Financial Aid Options
Not really a FAFSA tip, but often times we can get so wound up over the FAFSA that we forget about the other options. You should also be on the look out for available scholarships and be applying for as many as possible. If you do not qualify for aid, you can also apply for a private loan which is non-need-based.


On a related note:
Once the student graduates, consolidate student loans to lock in a low interest rate. This can be done through the US Department of Education or through various private companies.


I hope this information was helpful. It was definitely a great learning experience for me. Keep your questions coming!