What Students Need to Do to Qualify for Federal Financial Aid

Here are some thoughts on what students need to do to qualify for federal financial aid courtesy of ARA Content:

The FAFSA (The Free Application for Federal Student Aid) is one of the most critical financial aid forms a student will have to complete. Much like filling out a bank loan application, the FAFSA qualifies how much federal aid a student is eligible to receive (in the form of grants or loans) based on U.S. Department of Education guidelines -- including information such as your family’s assets and previous year’s income.

“Although it is easier to file the financial aid application once parents have completed their taxes, the FAFSA can be filed using the best estimate of your prior year’s income. Applicants will have the chance to update the information they initially provided at a later date,” says Stephanie Behrends, spokesperson for 2nd Story Software, Inc., developers of TaxACT tax preparation software and online services.

Behrends continues, “Certainly, the state in which a student resides, choice of school and academic standing are components which contribute to the total amount of aid a student will receive in the form of scholarships, grants and loans. However, it is crucial for students to understand the chances of receiving federal aid are directly related to filing the FAFSA on time and the financial strength of their family, which is calculated by using the information supplied on the application.”

The FAFSA measures your family’s expected contribution toward the cost of your education. For that reason, cash assets and having high adjusted gross income (AGI) will greatly diminish the amount of assistance a student can receive. Nevertheless, a bit of planning prior to preparing the FAFSA can help you save thousands of dollars toward the cost of a college or technical education.

If you are a student (or the parent of a student) seeking to maximize your chances of receiving federal aid, be vigilant by using the resources available to you, which can help you to strategize and meet deadlines.

Behrends suggests, “Early tax preparation offers FAFSA filers a distinct opportunity to coordinate the lion’s share of financial information required by applicants. Tax software, like TaxACT Deluxe which contains a College Student Financial Aid Worksheet, is a valuable resource that can help students and parents of students to take full advantage of various tax credits, deductions and strategies which can reduce income you report to the IRS.”

While any decision should be made with your financial advisor or accountant, some worthy strategies FAFSA filers should investigate to reduce cash assets and lower reported income include:

• Prepaying state taxes December 31. Paying a due amount by December 31 will reduce your cash assets and entitle you to an additional deduction on your 2006 tax return.
• Maximizing retirement saving contributions.
• Making charitable donations.
• Contributing to a Health and Dependant Savings Account (flex spending). Flex contributions are deducted from your gross income -- greatly reducing the amount of income you report to the IRS.
• Making purchases before the end of the year. Make a qualified energy efficiency improvement to your primary residence by December 31. You’ll reduce the amount of cash you have on hand and, under the Energy Policy Act of 2005, you may get a tidy tax credit worth up to $500.
• Paying off /down loans. Making an extra payment toward the principal amount of your home loan. You’ll pay less interest and build a nest egg in the form of home equity.
• Paying off bills. Paying for services upfront reduces cash assets and may entitle you to a discount. For example, many customers receive rebates from their automotive insurance provider by paying for the year in full.
• Sell bad investments by December 31. You can deduct up to a $3,000 capital loss ($1,500 if you are married and file a separate return) to offset capital gains.

Funding is on a first come, first served basis. File your FAFSA the second you are eligible -- the first minute of New Year’s Day -- January 1. Not only will you increase your odds of getting federal aid, you may actually receive more financial assistance because the money pool has not been diminished. However, be forewarned, if you attempt to submit before January 1, the application will not be processed.

Comments

[Matt]

Also, don't get divorced. Because whether or not a child's noncustodial parent participates in the child's life or contributes financially to the household, both parents' financial information must be supplied in order for any federal aid (or most college-based aid) to be granted.

Don't have the student work and save the money. For every dollar the student earns and subsequently saves, his expected contribution to the cost of college will rise by $1.25. (Money earned and spent also counts agianst him, but at a lower rate.)

Don't put college savings in the student's name. All savings are penalized, but savings that belong legally to parents are penalized far less than savings that belong to students.

Remember, the government and most colleges expect students to graduate not merely broke, but with a substantially negative net-worth due to accumulated debts...if this doesn't happen, they perceive it as their failure to squeeze hard enough. But while they expect that parents will contribute, they don't expect them to bankrupt themselves. Any assets or earning capacity that the student can't hide from the FAFSA will be ruthlessly exploited. Parents get off far easier. So to whatever extent it's possible to do so, structure earnings and savings so that as much as possible belongs (legally, at least) to the parents, rather than the student.