If you’re the parent of a student who is in college or is headed off to college soon, then you’ve no doubt heard of the “Free Application for Federal Student Aid”, or the “FAFSA”. If you’ve never heard of it though, the FAFSA is the Federal Government’s application for financial aid for college. It determines how much you are expected to pay for your student’s college education, one year at a time. Oh, and in case you think that “free” means “easy”, a few years back our Secretary of Education Arne Duncan told Congress, “You basically need a Ph.D. to figure that thing out!”…and he’s a Harvard guy.
The FAFSA is arguably the single most important application in determining how much and what type of financial aid a family will receive. However, it has failed to keep up with the changing composition of our families and our lives. Confusion is widespread and can lead to an inaccurate portrayal of a family's finances.
A more recent example: One of our advisors just attended College Goal Sunday, an event dedicated to helping families complete the FAFSA for their students in one afternoon. After attending, this advisor couldn’t believe the amount of difficulty that people were having. I had to remind him that even the most “basic” questions to college guys like us could be complicated and complex for the everyday person. If you don’t deal with college financial aid everyday, how can you be expected to automatically understand one of the most daunting financial aid applications out there?
When our company hosts local college workshops, we try to take a few minutes to answer individual concerns. Many of the questions tend to be the same for middle and upper middle class families so I thought I'd summarize five of the more common issues here. Q
uick disclaimer: these responses are general and should be considered a guideline, not a recommendation -- remember, no two families have exactly the same circumstances. Finally, the guidelines for the FAFSA are available through the Department of Education. Keep in mind that it may be similar to deciphering Greek or the entire IRS Code, but these guidelines are out there.
1. The student is the applicant
. Any reference to 'You' or 'Your' on the FAFSA and on the CSS/Profile refers to the student! Don’t make the mistake of accidentally listing parent income or assets under the student’s name. This can cause a huge problem and may result in the colleges thinking you can afford more than you’re supposed to.
2. On the matter of children with separated or divorced parents: Dept. of Education guidelines require that the applicant report the household income and assets of the legal parent who provides more support. This is typically the household where the student lives the majority of the time. Just keep in mind that the non-custodial parent's household is largely ignored on the FAFSA, but
will likely be counted in the CSS/Profile formula.
3. For most business owners, the proper value of their business is “$0”. Why? Well according to the FAFSA, a “business” is only a “business” if it has 100 or more employees. Those with fewer than 100 employees should be exempt, but I’ve seen CPAs make the mistake of reporting a value greater than $0 when trying to fill out a FAFSA and lose thousands in potential financial aid.
4. I get so many questions from parents who want to 'emancipate' their children so that they can be considered “independent” on the FAFSA. Unfortunately, “independent” for the FAFSA and “independent” for your tax return are two completely different things. The Dept. of Education has certain criteria to determine whether a student is “independent” and trust me, you don't want to answer 'Yes' to these questions, at least not yet (like, for example, whether your child is married or has dependents of their own).
5. Work-Study is a great program. You probably realize that most colleges do not give out 100% free money. Most schools award a combination of free money and loans/work-study. You should check 'yes', indicating that you wish to be considered. You can always appeal later or decline the work-study offered, but it's harder to ask for it later. Besides, if your kid works 10-20 hours a week and makes a few extra bucks, that's a good thing.
6. Cash, checking, savings, and investments: Aside from questions about your income, the FAFSA will also ask about assets. A key point is this: You don't have to disclosing the value of your retirement accounts or the value of your primary residence! The FAFSA specifically tells you not to include those assets, so don't! You do however, need to enter the total amounts of cash holdings you have as of the day you file. So, if you have to, make any large payments (like mortgage, etc) BEFORE you file. As for other non-retirement assets, there is an asset protection allowance, and certain annuities and insurance products could also be exempt. A good rule of thumb: consult a professional college advisor if you have more than $50,000 worth of non-retirement assets.
We do cover a lot more information than just this in our workshops, so if you are local to the greater Boston area, we encourage you to come out over the next couple of weeks. We conduct our workshops at venues like high schools and libraries, and they are of course open to the public. If you have college-bound children and want to attend, simply
click here to register. If you don't, please send this on to someone who does -- I'm certain they'll thank you for it.
