On your marks, get set… FAFSA!
If you are the parent of a senior in high school, you are about to embark on an amazing journey and take the first step to pay for college. FAFSA stands for Free Application for Federal Student Aid. All families should apply, regardless of income. Many colleges use the application to offer additional financial aid or scholarships, regardless of need. So now it’s time to get started.
The application process begins right after Labor Day when students and parents each create their own FAFSA account. While you cannot submit the forms until October 1st, you can set up your account now at StudentAid.gov under the Aid for Aid tab. Because parents need to upload their most personal financial information, these separate accounts with passwords allow for your children’s privacy.
After opening your account, you will be given a FAFSA ID. This number, along with your password, will allow you to securely upload the required information once the forms are available on October 1st. Your most recent tax returns are automatically captured with a secure link to the IRS.
But this form wants to know more than just your income. You must list the value of all your assets and investments – excluding your family residence, retirement accounts, and small family businesses.
Even the value of your college savings in a parent-owned 529 plan is included in the wealth profile, as 5.64% of the value is available for college in a year as part of the formula.
As you can see, the FAFSA is the most intrusive form Americans have to submit, reporting not only income but also assets — so the government can decide how much federal student loans their kids can get for the coming year. You must submit an update each year you reapply for the grant.
The “formula” for calculating expected family contribution is as closely guarded as the secret recipe for Kentucky Fried Chicken. But the bottom line is letting families know how much federal financial aid their student can get — and how much parents should be willing to provide.
Lest you mistakenly believe that state aid will cover all of the college’s expenses, consider these numbers. For 2022-23, the maximum Pell Grant amount is $6,895. These grants are granted based on need.
For federally subsidized and unsubsidized loans, freshmen are only allowed to borrow $5,500 per year; Sophomores are only allowed to borrow $6,500; and juniors, seniors, and those studying beyond their fourth year are capped at $7,500 per year. Don’t be surprised if there’s a huge gap between government grants and the full cost of college—every year, for four years!
As a parent, you’re on the hook for the difference between the state aid awarded and the cost of attending college (including room and board, books, and transportation). Some schools offer additional help in the form of work study programs, scholarships, or “merit grants.”
At Scholarships.com you can start looking for more free money right away. But don’t count on that to fill the gap.
You can make up the difference yourself by taking advantage of Parents Plus loans, which do not require financial need. However, plus loans are the most expensive type of borrowing based on interest rates and fees. An alternative is to refinance your home (although interest on loans used to pay for college isn’t deductible).
Many families turn to private lenders for high-interest student loans with no income-related protection. The only way out of personal loans is bankruptcy.
When this eye-opening revelation hits you, it’s time to “have the conversation.” That’s when you tell your high school senior that you just can’t afford to send him or her to that dream school. Yes. Parents can say no. And best of all, before hopes are raised.
Now it’s time to ask your student which schools he or she would like to attend. Every college website lists the total cost of attendance on their website, but you can also look up this number on CollegeCalc.org. You can also find and compare cheaper alternatives there. That’s the conversation: a discussion of the financial reality and alternatives like attending a local community college for a year or two and moving to the dream school.
It’s time to deal with college costs. And that’s the wild truth.
Terry Savage is a Registered Investment Advisor and the author of four best-selling books, including The Savage Truth on Money. Terry answers questions on her blog at TerrySavage.com.
©2022 Terry Savage. Distributed by ribune Content Agency, LLC.