All families should submit a FAFSA regardless of income level, but they also need to monitor household finances and understand student aid formulas, says Edvisors publisher Mark Kantrowitz.
Adam Zoll: From Morningstar I am Adam Zoll. College acceptance letters are already in the mail, but for those who still haven't filled out their Federal Financial Aid Forms. There is still time. Here to talk about the Federal Financial Aid Form, or FAFSA, as it's known, as well as common mistakes that people make while filling it out is Mark Kantrowitz. He is publisher of Edvisors.com, a college-planning website.
Mark thanks for joining us today.
Mark Kantrowitz: Thanks for having me.
Zoll: Mark you've written that one of the most common mistakes people make when it comes to the FAFSA is failing to fill it out at all. Why is that one of the most common mistakes?
Kantrowitz: It's leaving money on the table, and everybody who files a FAFSA is eligible for the unsubsidized Federal Stafford Loan and the Parent PLUS Loan. They don't depend on financial need. But even among students who might be eligible for a Pell Grant, about 2.3 million undergraduate students didn't file the FAFSA who would have been eligible for a Pell Grant, and of them about 1.1 million would have been eligible for a full Pell Grant.
The FAFSA is also your gateway not just to federal student aid, but also to financial aid from the state governments as well as financial aid from all but about 250 mostly private colleges.
Zoll: Would you recommend that even students from higher-income families, who maybe don't expect to receive any aid, still fill out the FAFSA?
Kantrowitz: Absolutely. The financial aid is based on financial need, which is the difference between the cost of attendance and the expected family contribution. Now you can have greater financial need if you have the lower EFC. But you can also have greater financial need if you're enrolled at a higher-cost college. So middle- and upper-income students are more likely to enroll at much more expensive colleges and they may qualify for some need-based aid at those more expensive schools.
Zoll: Let's talk about timing. Here we are in March; the tax deadline is coming up next month. Is it too late to file for financial aid if you have already been accepted to a school or if you are planning to attend in the fall.
Kantrowitz: Ideally, you should file as soon as possible after Jan. 1. The federal government has an 18-month application cycle. You can apply for Federal Student Aid as late as the last day of the semester of the academic year or June 30 of 2015, whichever comes first.
However the state aid and the institutional aid tend to have much earlier deadlines. So you may have missed the deadlines for your state. There are two states that have deadlines in February. There are 10 states that have deadlines in March. There are seven states that award their aid on a first come, first serve basis. But it's better to apply than to not apply. There still is some money available, and you should get a head start on next year's FAFSA by making sure to put in your calendar that you start as soon as possible after Jan. 1.
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Zoll: Let's talk about some other common mistakes. For example, family income, can be kind of a tricky issue. Can you explain some common mistakes related to that.
Kantrowitz: The family income is based off of the adjusted gross income because it is a verifiable figure; it's from your prior tax year. They then add in certain types of untaxed income. Say you had money deducted from your paycheck before taxes to contribute to a 401(k) or other retirement plan.
Since that's a discretionary choice, they add that back into adjusted gross income to yield total income, and they base your aid eligibility on that figure. So you need to be careful with regard to the prior tax year's income to make sure you don't artificially inflate that income. The formula is very heavily weighted toward income. If you have unusual capital gains that aren't offset by losses you or [offset by a loss in salary], any of these things can cause you to have higher income than you otherwise would, and that will affect your aid eligibility.
You may want to take a hardship distribution from your retirement plan to help pay for college costs. Or you may want to sell stocks; they'll pay for college costs. But if this occurs in the year before the child enrolls in college, it can reduce their eligibility for need-based aid. So you have to be very careful about the income in the year before you enroll in college and each subsequent year while you're in college.
Zoll: And can you give us say two or three other common mistakes that people make when filling out the FAFSA?
Kantrowitz: One is with regard to these retirement-plan accounts. Qualified retirement plans are not treated as an asset on the Free Application for Federal Student Aid. But families sometimes include it in the investments figure. So you need to be careful because then if you count it it's going to hurt your aid eligibility.
Another issue is saving for college in the child's name as opposed to the parent's name. If the money is in a 529 college-savings plan account, a prepaid tuition account, or a Coverdell Education Savings Account, it's going to be treated as though it were a parent asset. But if it's in a UGMA or UTMA custodial bank or brokerage account, it's going to be treated as a child asset, and those assets are assessed much more heavily than money in the parent's name.
With the child assets, it's a flat 20% of that asset value reduces aid eligibility, whereas with parent assets, part of the assets are sheltered. Typically $30,000-$50,000 of parent assets depending on the age of the parent are going to be sheltered from the need-analysis formula. And then there's a bracketed system for any reportable assets beyond that point, which maxes out at 5.64%. So $10,000 in the parent's name is going to reduce aid eligibility by at most $564, whereas $10,000 in the child's name will reduce aid eligibility by $2,000.
Zoll: Mark, once I fill out the FAFSA, am I pretty much done in terms of applying for financial aid, or are there other steps I need to take?
Kantrowitz: You need to review the student aid report when you get it back. You are going to get financial aid award letters shortly after the admissions letters from the schools, and you need to take a careful look at these award letters. It can be very hard to interpret what the college is really going to cost you. You need to figure out what's the grant and make sure that they are listing all of the actual costs, not just the direct costs like tuition fees, but also room and board, books and supplies, transportation, miscellaneous personal expenses, and cost of a computer.
And you subtract the grants--the gift aid, the money that doesn't need to be repaid from the cost of attendance. That gets you the net price, and you can compare the net price among the different colleges to see which is going to be more affordable, and whether it is worthwhile to go to a more expensive school that is a better fit in other ways.
It allows you to make a more informed choice about the trade-offs between affordability and the quality of the institution. You have to, however, be very careful within that price because about half of all colleges practice frontloading of grants, where grants during your first year are going to be more generous than your grants in subsequent years. That yields a lower net price your first year than as an upperclassman. It’s kind of like a bait and switch almost.
Then if you've won a lot of private scholarships, you have to know what that's college’s outside scholarship policy is. When you receive need-based aid and then get a merit-based, non-need-based scholarship, it reduces your financial need, so the college has to reduce the need-based financial aid package.
They have flexibility, however, in how they reduce that aid package. They could reduce your grants, in which case you have no net financial gain and your net price remains unchanged. Or they could reduce the loans in which case your net price goes down because you are substituting a grant for a loan.
Zoll: Mark, I know a lot of families are counting on financial aid as part of the college-planning picture, and as you said at the top filling out the FAFSA and really understanding what you are getting in terms of a financial aid offer is so key to making that work for families. So, thank you for joining us today and sharing your thoughts.
Kantrowitz: Thank you for having me.
Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.
