Journal of Financial Planning: February 2019
One of the most exciting—but stress-inducing—rites of passage for many high school seniors is the college application process. That means parents everywhere will also sit down to complete the FAFSA, or the Free Application for Federal Student Aid.
Over the years, at our fee-only RIA, we’ve learned that many people don’t fully understand the FAFSA or its purpose. And those misunderstandings can cost them.
Here are the top three misconceptions about the FAFSA:
1. Only people who expect need-based aid must fill out the form.
Many people incorrectly believe that the FAFSA is only used for determining qualification for federal grants and loans. As a result, one-third of college students fail to submit a FAFSA, which means they could be leaving money on the table.
Yes, the FAFSA is used to determine eligibility for the federal Pell Grant and Stafford Loan programs, but it’s used for other awards, too.
State governments use information from the FAFSA for their own financial aid programs. Additionally, some colleges use the FAFSA to calculate their own estimate of a student’s need—and even to determine eligibility for certain scholarships.
In short, the FAFSA is free to fill out, and it could help your clients uncover some funding sources.
Tip: Clients can use the FAFSA’s forecasting tool (studentaid.ed.gov/sa/fafsa/estimate) before their child’s senior year. This can help them know what to expect before application season even starts.
2. It’s a pain to fill out, so put it off until you have more free time.
Clients with high school seniors should not delay. Some schools award aid on a first-come, first-served basis. And even though the federal government deadline to submit the FAFSA is June 30, most schools have earlier deadlines. So, clients are better off completing it as soon as possible.
Although the FAFSA takes about 45 minutes to fill out, it’s often not as onerous as people fear. You can help clients gather the necessary documents before they begin—like tax returns, bank statements, and 529 account paperwork.
In addition, there are other resources to help. Clients can check out the IRS import tool, which automatically populates their FAFSA with data from their tax returns (StudentAid.gov/irsdrt). There’s also a new mobile app for the FAFSA, called myStudentAid, making the process more accessible than ever. But, either encourage clients to double-check the information, or run a double-check yourself, before the client submits it.
3. Once the FAFSA is submitted, the financial aid process is over.
Not so fast. Clients need to fill out the FAFSA for each year that their child attends college (and potentially graduate school, too). The form should auto-populate after the first submission, making subsequent updates much easier.
Around three weeks after the FAFSA is submitted, your client will receive a Student Aid Report (SAR), which provides information about their child’s eligibility for federal aid, including their Expected Family Contribution (EFC). The EFC represents the amount your client’s family is expected to pay per year for college. The child’s need is calculated by taking the Cost of Attendance (COA) for each school and then subtracting the EFC. The result is the child’s need to attend that particular school.
Many private schools also require the CSS Profile for financial aid. The CSS asks more detailed questions and looks at more sources of wealth than the FAFSA. It typically computes a higher EFC (and, therefore, a lower level of need) than the FAFSA. Unlike the FAFSA, the CSS costs money to complete and to send to schools.
Finally, clients will receive a financial award letter from each college their child is accepted to, detailing what kinds of aid they were awarded. Among other issues that you can help clients to consider, make sure they understand which awards are renewing (meaning their child will receive the money every year) and which are non-renewing (meaning it’s a one-time award).
Keep in mind that financial aid decisions can be appealed, especially if the family’s situation changes. For example, if a serious health issue arises or employment changes, encourage clients to update each school on their new situation.
As most parents are painfully aware, college costs are outpacing income growth. You can help clients use the FAFSA and other tools to maximize their child’s chances for financial aid.
Kate Brownstein, CFP®, is a financial planning specialist at Truepoint Wealth Counsel in Cincinnati, where she assists with wealth management plans, stock-option monitoring, and insurance reviews and audits.