The Free Federal Student Aid, or FAFSA, Application is your gateway to college money for federal and state governments and most colleges and universities. How you file the FAFSA can affect the amount of money you get and the types of financial aid.
Top Ten FAFSA Tips to Maximize Your Eligibility
1. File the FAFSA early.
The sooner the better. You may have heard the standard song and dance about filing the FAFSA ASAP on or after October 1 to avoid missing state and college aid deadlines. More than a dozen states award grants on a first-come, first-served basis and ten have deadlines in December, January, February or early March. Colleges can also have short deadlines, and even some federal student aid can run out if you apply late. But did you know that students who file the FAFSA earlier can get extra help? Students who file the FAFSA in October tend to receive more than twice as many scholarships, on average, as students who file the FAFSA later. So, file the FAFSA in October to maximize your eligibility for aid.
2. Minimize base year income.
The FAFSA calculates the financial strength of the family using income and tax information from a previous calendar year called the base year. The base year is the previous year. For example, the base year for the 2023-2024 FAFSA that students began filling out on October 1, 2022 is 2021.
Since the financial aid formula is heavily income-based, it makes sense to minimize income in the base year. For example, avoid realizing capital gains in the base year. If you must sell stocks, bonds, mutual funds, and other investments, try to offset capital gains with losses. You can reduce your adjusted gross income (AGI) by making capital losses exceed capital gains up to $3,000. You should also avoid taking retirement plan distributions in the base year, as the withdrawals will count as income on the FAFSA, even if it is a tax-free refund of contributions to a Roth. IRA.
Each $10,000 reduction in parental income will increase assistance eligibility by approximately $3,000.
Each $10,000 reduction in student income will increase aid eligibility by approximately $5,000.
3. Reduce reportable assets.
Although assets do not count as much as income on the FAFSA, they can still affect eligibility for financial aid based on need. You can make money disappear in the bank by using it to pay off unsecured consumer debt, such as credit cards and car loans. Not only is paying off high-interest debt with low-interest savings good financial planning, but it will also help you qualify for more financial aid. Paying off the mortgage on the family home works on the FAFSA but may not work as well on other financial aid forms because the FAFSA ignores the net worth of the family’s primary place of residence, unlike other financial aid forms. ‘financial aid.
4. Save strategically.
Money in the student’s name is assessed at 20%, while money in the parent’s name is assessed at a lower rate, no more than 5.64%. So it is better to save money in the name of the parents and not in the name of the student. Fortunately, money in a college 529 savings plan is treated as if it were a parental asset, whether it belongs to the student (a custodial 529 plan) or the parent. Now, while a 529 plan owned by grandparents (as well as 529 plans owned by someone other than the student or the student’s custodial parent) is not reported as an asset on the FAFSA, distributions count as untaxed income for the student on the following year’s FAFSA. This may reduce eligibility for assistance by up to half the amount of the distribution.
Every $10,000 of student assets reduces aid eligibility by $2,000. Each $10,000 of parent assets reduces assistance eligibility by up to $564. Every $10,000 in a 529 plan owned by the student’s grandparent, aunt, uncle, or anyone other than the student and the student’s custodial parent will reduce the eligibility for assistance up to $5,000.
5. Spend strategically.
If you happen to have registered on behalf of the child, for example in a UGMA or UTMA, correct the situation by transferring it to a 529 plan owned by the student or parent or by changing the owner of the account. You can also spend the student money to zero first, before you hit the parent money, so it doesn’t stick around and affect second-year aid eligibility. .
6. Coordinate 529 college savings plans with the US Opportunity Tax Credit (AOTC).
If the family is eligible for the AOTC, they must pay up to $4,000 in tuition and textbooks to be paid in cash or loans to maximize the AOTC. IRS rules prevent double-dipping, so you cannot use the same qualified higher education expenses to justify both a tax-free distribution from a 529 plan and the tax credit. The AOTC is worth more, per dollar of qualified college expenses, than a tax-free distribution from a 529 plan.
7. Maximize the number of kids in college at one time.
The federal financial aid formula divides the parent contribution portion of the Expected Family Contribution (EFC) by the number of children in college. Increasing the number of children in college from one to two is almost like halving the parents’ income. So something as simple as having more kids in college at the same time can have a huge impact on the amount of financial aid available for each child. It may be too late to bring children together, but the impact on eligibility for assistance can be considered when deciding whether or not to allow a child to skip a class. This is another reason why it’s important to file the FAFSA every year, even if you didn’t get any grants last year, because small changes can have a big impact.
8. Even rich students can get help.
Financial aid is based on financial need, which is the difference between the Cost of Attending College (COA) and the Expected Family Contribution (EFC). So there are two ways to increase financial need and therefore increase financial aid. The first is to file the FAFSA in a way that minimizes the EFC. The other, however, is to increase the COA. Wealthier students may qualify for aid at higher-cost colleges or when multiple children are enrolled in college at the same time. Unless a student’s parents earn more than $350,000 a year, have more than $1 million in net assets to declare, have only one child in college, and that child is enrolled in a public college in the state, they must still file the FAFSA.
9. The FAFSA is a prerequisite for low-cost federal student loans.
To qualify for the Federal Unsubsidized Stafford Loan and the Federal PLUS Loan, the student must first file the FAFSA, although these loans are available regardless of financial need. Even wealthy students can benefit from these loans.
10. Look for generous and inexpensive colleges.
There are about six dozen generous colleges, including the Ivy League, that have adopted “no loan” financial aid policies. These colleges replace student loans with grants in the financial aid program depending on the needs of the student. Also, public colleges in the state may be your cheapest option, even after subtracting gift aids such as grants and scholarships.
Now that you know how to file the FAFSA to get more money in college, be sure to avoid these ten common mistakes when completing the FAFSA.
For more information on the FAFSA, see “What is the FAFSA and why is it important?“