An early step in every family’s college admissions campaign is performed by the parents. They forecast the amount of money that can be diverted from the family’s income, savings, and investments to pay for college. Next, they subtract from this amount the expected total cost of enabling their student to achieve his or her educational goals.
The result of this exercise often shows that the family’s resources are not adequate. To fill the gap, families seek funding from external sources. Determining which sources of funding to seek can be a vexing issue. This post describes one of the best sources of funds — Federal student loans. It also includes an introduction to the form and process through which you’ll apply for many types of financial aid — the Free Application for Federal Student Aid (FAFSA).
The FAFSA is a form to be completed by college applicants and their parents as well as continuing students and their parents to determine their eligibility for Federal, state, and many types of private financial aid.
The relevant FAFSA dates for students now in high school are noted below:
- Students in the high school class of 2022 (rising seniors) can register for the FAFSA on studentaid.gov beginning on October 1, 2021. Their deadline for submission is of the FAFSA is June 30, 2022.
- Students in the high school class of 2023 (rising juniors) can register for the FAFSA on studentaid.gov beginning on October 1, 2022. Their deadline for submission is of the FAFSA is June 30, 2023.
- Students in the high school class of 2024 (rising sophomores) can register for the FAFSA on studentaid.govbeginning on October 1, 2023. Their deadline for submission is of the FAFSA is June 30, 2024.
States and colleges set their own FAFSA submission deadlines. See studentaid.gov for the deadlines for each state. Refer to the websites of the colleges to which you plan to apply for their FAFSA deadlines.
You should submit a FAFSA even if you don’t plan to apply for a loan because you can’t change your mind later if you missed the deadline. Also, certain merit scholarships are available only to those students who have a FAFSA on file.
In past years, completion of the FAFSA has been far more arduous that it is today and perhaps that reputation persists. It takes time to gather the tax and other documentation needed. Filing the FAFSA should be done by all college applicants, but those in any of the categories below should consider it a requirement:
- Students seeking governmental or private need-based financial aid,
- Students who may wish to seek financial aid in the future,
- Families that anticipate having two or more children in college at the same time, and
- Students seeking to apply for merit-based financial aid from institutions and organizations that require the FAFSA.
The principal FAFSA eligibility requirements are that you have a financial need, are a U.S. citizen or eligible noncitizen, and are seeking to enroll in a degree or certificate program in an eligible college or career school. There are also additional eligibility requirements that you must meet. You can learn about them at studentaid.gov, a website maintained by the U.S. Department of Education.
The FAFSA bases family income on tax information. They require the Federal income tax information from the “prior-prior year”. The “prior” year is the tax year preceding the academic year during which you apply for admission. The prior-prior year is the year before that. For example, the 2021-2022 FAFSA is based on tax year 2019 income and tax information, not on tax year 2020 information, as you might assume. Your family’s financial assets must be reported, over a certain amount, and your own financial assets are also counted over a certain amount.
Since financial aid is awarded to eligible students on a first-come, first-served basis, you should have the necessary tax return available through the IRS Data Retrieval Tool so that you can complete the FAFSA in advance of the deadline for submission.
When completing the FAFSA, it’s best to answer questions as succinctly as possible. Don’t include extraneous information. Be scrupulously honest.
After submitting the FAFSA via the studentaid.gov website, you’ll be presented with a Student Aid Report (SAR). The SAR provides you with the following:
- Your eligibility for different types of financial aid,
- Your Expected Family Contribution (EFC), and
- A recap of your FAFSA data.
An electronic version of the SAR (ISIR) is made available to the colleges that you designated on the FAFSA. The ISIR is also sent to state agencies that award need-based aid.
Often, the EFC is more than the amount by which your forecasted college costs exceed what your parents can contribute. This means that, even if you take advantage of the Federal financial aid available to you, there’s more work to be done in securing external funding. You may also wish to consider modifying your educational goals at this point.
The FAFSA Simplification Act of 2020
The FAFSA Simplification Act of 2020 became law on December 27, 2020. The purpose of the Act is to modify the FAFSA and its rules to make it easier and faster to correlate IRS tax return information, and fairer to all students who apply for financial aid. The Act becomes effective on July 1, 2023. All modifications mandated by the FAFSA Simplification Act of 2020 will be described in detail in an upcoming post.
Federal Student Loans
Submission of the FAFSA is the first step in obtaining Federal Direct Loans under Title IV of the Higher Education Act. If you are an undergraduate student, the maximum amount you can borrow each year in Direct Loans varies from $5,500 to $12,500, depending on your year in college and your dependency status.
There are three Federal loan programs, as follows:
- Federal Direct Subsidized Loans have an interest rate of 3.73% in August 2021. The interest rate is the same as the rate on 10-year Treasury notes and is reset annually on July 1. The government pays the interest while the student is enrolled in college. Repayment begins six months after graduation.
- Federal Direct Unsubsidized Loans have the same interest rate as subsidized loans — 3.73% in August 2021. The interest on these loans accumulates while the student is in college. It must be repaid along with the principal beginning six months after graduation.
- Parent Loan for Undergraduate Students (PLUS) allow parents to borrow money to fund needs not met by other financial aid programs. They enable parents to pay college costs with no money out-of-pocket initially. However, the first payment will be due within one year of the loan’s disbursement. PLUS loans are subject to higher interest rates (6.284% in August 2021) than other Federal loans. They are subject to loan origination fees of up to 4%. They require good credit history, and their repayment options are less flexible than other Federal loans.
In a future post, we’ll review in more detail the process of registering for the FAFSA when it first becomes available to you through studentaid.gov. It will also cover the annual renewal process for students who are already enrolled in college. The opportunities that may arise through effective use of the FAFSA are extensive. It’s worth the effort to focus on the FAFSA as much as you do on any other aspect of your college admissions campaign.