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The FAFSA is your ticket to financial aid, including grants, scholarships and student loans. Use these tips to maximize your benefits!
Assets registered in a student’s name are weighted more heavily in the FAFSA formula. If possible, consider moving assets from UGMA or UTMA accounts to a custodial 529 plan to increase eligibility for need-based financial aid.
1. File Your FAFSA as Early as Possible
The FAFSA is the gateway to financial aid from the federal government, state governments, and most colleges or universities. It uses a formula called the Student Aid Index to determine what your family can afford to pay for your child’s tuition, room and board, books, and other fees. This formula is based on income and assets, with income weighted more heavily than assets.Financial Aid Benefits is also one of them.
That’s why it’s important to minimize the impact of your family’s assets on your Student Aid Index. One way to do this is to move your assets into nonreportable accounts, such as a Roth IRA or 529 college savings plan. You can also delay major purchases or make them during years in which the FAFSA is being calculated. For example, you can ask your employer to defer a bonus or stock options during the years in which you file the FAFSA.
Another big tip is to submit the FAFSA as early as possible. The first three months the FAFSA is open — from October through December — tend to give students twice as much grant money as those who file later, according to Saving for College. It’s not hard to see why: Senior year is busy, with college applications, special senior activities and finals on the calendar.
Lastly, you should keep in mind that the FAFSA takes into account your income from tax returns filed two years prior to filing. This means that if your child is a high school senior and intends to attend college in 2024, the FAFSA will use tax returns from 2022. So if you can, try to avoid big income spikes like large withdrawals from retirement accounts or exercising stock options during those two years.
2. Fill Out the Free Application for Federal Student Aid (FAFSA) Correctly
Filling out the Free Application for Federal Student Aid (FAFSA) is one of the most important steps students can take to help pay for college. The form asks families to report their income and assets, which is used to determine financial need. Fortunately, there are ways that families can optimize the results of their FAFSA to maximize the amount of aid they receive.
First, make sure to use the correct tax information. Families should submit their FAFSA using verified tax returns from what’s known as the prior-prior year – for 2023-2024, that means using the returns filed in 2020. This will give them the most accurate estimate of their income and assets.
Next, keep in mind that only certain types of income count when calculating financial need. For example, retirement withdrawals, capital gains and some taxable scholarships are considered income. To minimize the impact of these items, it’s best to invest as much as possible in qualified retirement accounts like IRAs, 401(k)s and TSPs, which aren’t included in financial aid calculations.
Finally, remember that a student’s total household income includes both student and parent earnings. If a student is an independent student, then they won’t need to provide their parents’ income information on the FAFSA. However, if the student is a dependent student and their parent’s income must be reported, there are specific guidelines to follow on how to report those earnings correctly.
Lastly, it’s worth mentioning that the FAFSA is also used to determine state and institutional grants, work-study awards, federal student loans and merit scholarships. So, neglecting to fill out the FAFSA could be a big mistake. Luckily, the FAFSA is available starting October 1 every year for the applicable academic year.
3. Make Sure You’re Filing Your Taxes on Time
Students need to file taxes so they can receive the benefits of financial aid, including federal grants and work-study programs. Students can also use the funds to help pay for on-campus housing and dining.
It is very important that students know the rules and strategies for filing their taxes correctly. The penalties for failing to file a tax return can be severe. Filing late also impacts the ability to get student loans or mortgages and other financial services.
Getting the most out of your Pell Grant is vital to making college more affordable. Depending on your situation, you may be eligible for up to $4,960 per year in need-based aid from the government. This can include Pell Grants, Federal Work-Study Programs, and Federal Supplemental Educational Opportunity Grants. These grants do not need to be repaid, but they can be limited by your total income and the number of years you have been in school.
While many families are able to afford the cost of college, many struggle with the necessary costs associated with it. That is why it’s important for parents to take the time to review their financial position and find strategies to make the most of their resources.
Parents who are considering paying for their child’s college education with money earned through a business, rental property, or investments should speak with a professional about the ramifications of those decisions. In addition, a good financial plan that takes into account unique circumstances, like job loss or a significant unreimbursed medical expense, can help families maximize their aid eligibility. If you have questions about how a specific financial decision may impact your eligibility for college funding, reach out to your school’s financial aid office for more information.
4. Pay Down Debt
With college costs at an all-time high, it’s no surprise that parents are looking for ways to maximize financial aid. There is a lot of advice out there, much of it questionable but some of it based in kernels of truth. One common piece of advice is to pay down debt in order to increase your financial aid eligibility. While this can save money, it’s important to weigh the trade-offs carefully.
Financial aid formulas take into account a family’s income as well as any assets they own. There is a special allowance set aside for asset protection that allows families to protect the first approximately $10,000 in savings toward a child’s education. This is typically enough to cover the cost of tuition at most colleges. Beyond this amount, however, a family’s assets are used to calculate the Expected Family Contribution (EFC) and potentially reduce the amount of need-based financial aid offered.
Many families can dramatically reduce their EFC by utilizing some smart financial strategies. For example, using cash in savings to pay off credit card debt is a great way to reduce unsecured debt and thereby lower the family’s reportable assets. This can lead to a higher financial aid award or even result in the student receiving a Pell Grant, which is free money that doesn’t have to be paid back.
Another strategy is to accelerate necessary expenses before filing the FAFSA, which will reduce a family’s taxable income in the base year and potentially increase their financial aid eligibility. Finally, many families can limit their reportable assets by shifting some of their investments into protected assets like a Roth or other retirement accounts. A financial planner can help you weigh these and other possible money moves and ensure they fit within your overall goals and finances.
5. Keep Your Assets in the Right Place
The FAFSA considers a lot of factors when it comes to awarding financial aid, including how much money you have in assets. The goal is to keep these assets as low as possible, which will increase your chances of receiving need-based scholarships and grants. One of the best things you can do is invest in a 529 account for college savings, which has tax advantages and doesn’t have to be titled in your child’s name.
It’s also important to pay down any debt you have, especially high-interest loans. This will help reduce your expected family contribution (EFC) and free up some of your earnings for other expenses like tuition or mortgage payments. However, it’s important to work with a financial planner to weigh the pros and cons of paying down your home equity versus saving for college in other ways.
Finally, if you have an investment or retirement account in your name, consider moving some of those assets into a 529. While these accounts have their own set of rules, they can reduce your EFC and provide additional funding for college.
Of course, the most obvious way to fund college is through winning a full-ride academic or athletic scholarship. These scholarships come in all shapes and sizes, from academic to affinity groups, and can make the difference between going to your top choice and settling for something less. Finally, don’t be afraid to appeal your financial aid package if you think you can get a better deal. Just be sure to have all the right documentation and a clear understanding of what changes were made.
