The financial aid process is a mystery to most. If you are beginning the process of learning about financial aid, you should first consider the promises and risks in paying for financial aid advice, because you will no doubt be tempted (and solicited) by offers to “cut through the red tape” and “better guarantee your child’s chances for financial aid.” Before proceeding the route of a paid financial aid processor or locator, please review the article entitled, “Promises, Promises” publishes by the Wall Street Journal, which can be found by clicking here.
So, in order to evaluate your options, you will need to have an understanding of the process. The process begins with the Free Application for Federal Student Aid, administered by an office at the U.S. Department of Education.
You must file this form to apply for federal student aid, such as grants and loans, as well as most state and college aid. Everyone, from colleges to the government, recommends that parents get a jump on this task as soon as possible. Schools typically award aid on a rolling basis -- first come, first served.
Even if you don't think your family will qualify for need-based aid, it's worth your time to fill out the form. It may enable you to get federal loans at better rates than you could find in the private market. Besides, your student may qualify for certain grants or scholarships.
That means you probably should get started as you've filed your most recent tax return. To get started, search for the following documents for you and your college-bound teenager: driver's licenses; W-2 forms; federal income tax returns; records of untaxed income; recent bank statements; business or farm records; and stock, bond, or other investment records. You'll need all this information because, by the time you're finished, the Department of Education will know more about you than your own mother.
You will need to complete your prior year’s tax forms before tackling the application, because many of the questions ask for information reported on your tax return. Some directly reference lines on IRS forms, such as adjusted gross income and exemptions. You can fill out the student aid form without having done your taxes first, but FAFSA will require you to go back and correct any tax or income information that changes.
When filling out the aid application, you'll be asked questions about your income -- for example, about your contributions to certain retirement accounts, and about your receipt of Social Security benefits, child support, and veterans' benefits.
In addition, both parents and students will be asked to report their assets in cash, savings, and checking accounts. You'll also be asked about the value of your investments, business, and real estate, excluding your home.
The Education Department estimates that first-time users will spend less than an hour filling out the official paperwork, either online or on paper. The Department apparently does not consider the hours you'll spend looking for the proper documentation.
Once completed, the information will be run through an analysis that weighs a number of factors, including your income, assets, age, dependents, and any unusual financial circumstances. In about three weeks, you'll receive a Student Aid Report. It details how much money the government expects parents and students each to contribute toward college expenses, otherwise known as the Expected Family Contribution, or EFC. That calculation determines your eligibility for federal student aid.
The financial aid office at the college your student attends will use your EFC and other information to put together your package of financial aid, including grants, loans, and work-study program eligibility. That package depends, of course, on how much your selected university costs. The school and your state may have additional aid programs. If you have an unusual financial situation, like a job loss or unexpected medical bills, you'll need to contact the school's financial aid office.
The Formula
When planning for college and considering the possibility of financial aid, it helps to know how your assets will be counted by the formulas that determine how much money you'll be expected to pay.
Home equity, for example, does not count toward the federal formula that computes financial aid. Some private schools, however, may request this information and factor it into their financial aid packages. You'll have to check with your school to see whether they'll be looking at your home equity in their equations.
Retirement accounts, however, generally do not count as assets considered available for education costs. This is great news for anyone who wants to retire, because few things have the potential to deplete a cushy retirement nest egg faster than four years of tuition at a private college.
For this reason, retirement should rank at the top of savings goals. Because these assets aren't counted toward your family's expected financial contribution, you'll be missing an opportunity to maximize both your retirement and your financial aid eligibility.
When applying for financial aid, money you have saved outside retirement accounts -- and especially any money in your child's name -- will be counted as an asset that could be spent on education.
Unless you have a lot of other compelling reasons to invest money in your children's names, and you know you will not qualify for any financial aid, keep your college savings in your name. Students are expected to contribute about 35% of their assets toward school costs, while the expected parental contribution hovers closer to 6%. This includes investments held in any regular taxable account, like a brokerage account.
Keep this in mind when considering how to save for your child's education. Money held as a Coverdell Educational Savings Account (or ESA) in most cases will be counted as the child's assets, and the federal formulas will assume a large portion of the account can be spent on college.
Section 529 College Savings Plans, however, typically name a parent or other family member as the account owner, even if the student is named the beneficiary. Less of the money in these accounts will be counted toward your expected contribution toward college costs. If you should be lucky enough to have more than one child in college at the same time, that will be factored into the equation as well.
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