This is the month when most high school seniors who are headed for college are celebrating their acceptance letters while their parents weigh their various options, such as what they can afford and how they’ll pay your deposits.
The dreaded FAFSA
Most parents who have had to fill out a FAFSA (Free Application for Federal Student Aid) come to dread having to fill out another one because it requires so much time and so many different documents. In fact, to completely fill out an FAFSA means you will need to have the following documents or information available.
• Your Social Security number (it’s important that you enter it correctly on the FAFSA!)
• Your parents’ Social Security numbers if you are a dependent student
• Your driver’s license number if you have one
• Your Alien Registration Number if you are not a U.S. citizen
• Federal tax information or tax returns including IRS W-2 information, for you (and your spouse, if you are married), and for your parents if you are a dependent student:
o IRS 1040, 1040A, 1040EZ
o Foreign tax return and/or
o Tax return for Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, the Marshall Islands, the Federal States of Micronesia, or Palau
• Records of your untaxed income, such as child support received, interest income, and veterans non-education benefits, for you, and for your parents if you are a dependent student
• Information on cash; savings and checking account balances; investments, including stocks and bonds and real estate but not including the home in which you live; and business and farm assets for you, and for your parents if you are a dependent student
Whew, that’s a lot!
Why the FAFSA is critical
It’s critical that you fill out and submit a FAFSA if you or your child will need any sort of financial aid. This not only includes federal loans but many other types of financial aid including federal and state grants, tuition waivers, scholarships, work-study, etc. You can choose to have your FAFSA submitted to as many as 10 schools but keep in mind that student financial aid is on a first-come, first-served basis. So the earlier that you get your FAFSA completed and submitted the better.
If you need help
The FAFSA contains a number of terms that you may not be familiar with. For example you might not know about an Adjusted Gross Income. You can download free tips titled Filling The FAFSA by Mark Kantrowitz who is an expert on financial aid. This is a free step-by-step guide that helps demystify the FAFSA. There is a terrific book entitled Paying for College Without Going Broke by Kalman Chany. And there is also the official FAFSA help site.
Read the fine print
Was your child accepted to a school that uses a new form called the Financial Aid Shopping Sheet? If so, this form will give you a good sense of the school’s net price. This is its cost of attendance – tuition, fees, room, board, books etc. – less grants, work-study, loans and scholarships. The best way to think of the Financial Aid Shopping Sheet is that it’s a discounted sticker price. Unfortunately, about two thirds of all colleges still don’t make your net price clear. And this is where it can get tricky. For example, we know of one person who got excited when he received a letter from a small liberal arts school announcing his “financial aid award.” It was only when he and his parents read the fine print of this $5500 “award” did they discover that it was for a Federal Stafford loan that they would have to pay back.
Watch out for one-year financial aid awards
One of the terms that you want to watch out for is the word “renewable.” This means that the financial aid may be a one-time enticement for freshman but that other aid would then have to be renewed every year – which could be subject to your child’s GPA. So when you read that letter, he sure to read it super carefully and understand all its conditions. Finally, you should confirm everything by calling the school’s financial aid office to ask how the scholarship would be renewed. If it’s based on your kid’s GPA and even if he or she earns those grades, make sure it’s certain that the money will be there every year.
The best interest rates on student loans currently are Stafford loans that are direct loans from the federal government at 3.86%. However, they are capped at $5500 for incoming freshmen, $6500 for sophomores and $7500 for juniors and seniors. There are two types of these loans – subsidized and unsubsidized. If you or your child qualifies based on need, they will be subsidized by the federal government meaning that you will not be required to pay any interest while still in school. And if you or your child has an exceptional need, you might qualify for an additional $5500 in Perkins loans where the interest charge is 5%. Beyond this, your child’s school may offer you a Direct PLUS loans at a fixed rate of 6.41%. These loans are more expensive than loans your child could get and are not eligible for a loan forgiveness or consolidation. However, they would still be a better deal than private loans where the interest charge could be 13% or even more.
Leave your retirement savings alone
While you might be tempted to raid your retirement savings to help pay for your child’s education, don’t do it. First, if you pull money out of your retirement fund, you will have more taxable income that will ultimately serve to reduce your child’s financial aid eligibility when you fill out next year’s FAFSA. And yes, you do have to fill this out every year. Second, while you can borrow to help pay for your child’s education, you can’t borrow to pay for your retirement.
Have a heart-to-heart talk with your child
We know that you want to give your child everything possible so that it’s hard to say no. But this is the time when you need to calculate everything in terms of the school, how much you can contribute and how much in loans your child is willing to take on. You will need to get your financial aid offers in front of you and then consider your circumstances. Do you have another child who will soon be in college or other upcoming large expenses? Also, be sure to talk about your child’s goals. As an example of this, if your kid has not yet decided on a major, maybe he or she could do well in a cheaper in-state public school while saving up for a graduate program at a more prestigious college. And if your kid is eyeing a low-paying profession such as teaching or working for a nonprofit, don’t freak out. He or she may be eligible for federal student loan repayment programs that would help ease the burden.
Choose a school that will accept your child’s college credits
If your child has taken AP or honors classes, check to see if the schools you are considering will give college credit. We know of one kid who was a high achiever and graduated in three years because when he began school he had almost two semesters’ worth of credits from his AP classes. In addition, he had a waiver for his school’s foreign language requirement. This means that even if your kid’s number one choice has a high net price you could be looking at a lower overall attendance cost (for three years) compared to a school that costs less but that doesn’t accept his or her AP credits and would then require four years.
Visit the school
If you can afford it, be sure to tour your kid’s top-choice schools. You might check out the dining hall and the dorms and be sure to have a chat with one of the school’s financial aid counselors. There are cases where the lesser name school that offers a bigger financial package looks better when you see it up close and personal.
Don’t be afraid to try to negotiate
Finally, if your child has gotten financial aid offers from schools that were not his top choices, don’t be afraid to call the school he or she really wants to attend and discuss your other options. You have nothing to lose and the school could decide to woo you by increasing the size of its financial aid package. And you should definitely call the school if your situation has changed such as a divorce or you’ve lost your job, etc. When you call, have all your financial information ready. Be very clear, polite and not pushy. Remember that you’re talking to a person who might make $40,000 a year so don’t cry poverty if you earn more than $100,000.
I am an associate at National Debt Relief, which is a Debt Consolidation Company that has helped thousands of Americans facing credit card debt problems. We help with debt settlement, debt management, and other debt related financial crisis' facing consum