The Crazy World of the FAFSA

I have been reading the best book I've ever read on preparing financially for college. The book is Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parents and I'll be sharing a bit of it over the next several days. Today I want talk about the FAFSA -- what it is and why it's more of a hindrance than a help when it comes to paying for college. Let's start with how the author defines it:

FAFSA stands for Free Application for Federal Student Aid. It's a form provided by the federal government that asks for all kinds of information about your finances and those of your child; how much you, your spouse, and your child earn, and what kind of assets you have. Then it puts all that information into a formula and spits out your expected family contribution (EFC) or the amount of money the government believes you should -- or can afford to -- contribute to your kid's college education.

If you want to calculate your EFC, you can go here to do so.

The author then spends the next several pages detailing why the FAFSA is not by any stretch of the imagination an accurate estimate of what anyone can pay to help their child go to college. Here are some highlights:

1. The FAFSA form determines your EFC based on a formula that has nothing to do with how much families will actually contribute. One example: if your income was higher last year than this year, too bad. Your contribution is based on the higher number.

2. The FAFSA does not take into account retirement savings when determining the expected family contribution. To understand how nuts this is, take a look at this example: The parents in family A have a combined income of $90,000 per year, with $12,000 in retirement assets. The parents in family B have a combined income of $90,000 per year, but also $4.2 million in retirement savings. All the parents are fifty-eight years old. Under the FAFSA formula, both families are expected to contribute the same amount toward college expenses.

3. You must be careful about methods of paying for college that will artificially inflate your income for the purpose of the FAFSA form (like selling stock with large capital gains.)

4. If your child works hard and saves a lot of money, he will be penalized on the FAFSA form (35% of a student's savings is deducted from the financial aid eligibility on top of half of his after-tax income over $3,000 per year.)

5. The FAFSA formula does not take credit card debt into account when calculating the EFC. What this means is that two families with identical finances -- except that one has $100,000 in credit card debt and the other has no credit card debt -- will have the same expected family contributions, even though their capacity for paying tuition bills is extremely different.

My take on these:

1. Does it surprise you that a government form is not 100% based in reality? Or that you can "game" it a bit to help yourself out?

2. Personally, I'm glad that retirement savings aren't counted -- I have a huge amount of my net worth socked away in IRAs and a 401k.

3. Another land mine. Ugh.

4. Interesting how the kid working and saving -- two things it seems like you'd want to encourage -- actually hurts his chances for aid.

5. Another reason why credit card debt is so bad. It seems like this is the sort of debt that just keeps on killing your finances.

I'm a few years out from having to complete an FAFSA, but I need to start planning for it now. Great -- another financial hurdle to jump.

How about some comments from real-life experiences? Do any of you have interactions with the FAFSA that you'd like to share? I sure would be interested in hearing them.

Comments

[Mark]

But a good reason to pay off your house and have no liquid assets - the family home value is not counted as an asset.

If you have $500K in the bank, a $600K house and a $500K mortgage, the money in the bank is used to calculate the EFC.

If you have nothing in the bank, a $600K house and NO mortgage, then you are poor and your EFC is lower.

Strategy: Buy a VERY expensive home, tying up ALL your liquid assets?

[JC]

Quit your job the year before you file - the lower your income, the more financial aid you get :-) No, don't really quit your job, but I did find out that our family business made very little the year before I went to college and so I was able to get some gov't grants that I didn't have to repay and gov't subsidized interest on my student loans. My wife (then girlfriend) was not able to get the same benefits and had to pay accruing interest on the non-subsidized loans though our family's assets were comparable.

The EFC calculation is pretty bogus, IMO. If my parents would have been able to contribute what the government said they could, I'd be amazed.

My 2 cents: fill it out early, fill it out right, make copies and submit it on time. Thankfully you only have to fill it out completely once. If I remember correctly, you just need to update it as years go by.

[jason]

I went to college using nothing but student loans from FAFSA along with working myself and paying the difference. It is much like filling out your taxes except 10X worse.

I was able to get the minimum which did not make me happy, but somehow I was always able to pay the difference, Im not sure if it was the pressure that made me or if the calculation actually worked on its part. I did not seem to ever struggle too badly for money while in school since I worked while going and living at home. The advantage of living at home was huge since rent was not a factor.

I came out owing about 18k in 2007 and have it down to 10k now at $100 a month with a fixed 2.5% interest (cakewalk!). IMO it is a great way to get a loan for school if you must, any other loan would have at least 6% or more from what I understand. Also, you can go subsidized or unsubsidized, and im not 100% sure all of the differences, but I did have both. The unsubsidized had a higher interest rate so I paid them off first. Another concept about the two would be fixed interest or not, might wanna look into that if interested.

Overall, they worked for me, I worked hard while in school, and would do it all again if I had to. My only other option was the military if I were to ever get a formal education.

[jim]

"If your child works hard and saves a lot of money, he will be penalized on the FAFSA form"

That kind of statement riles me a little bit. When I hear this kind of thing it sounds like people think that financial aid is some sort of right or entitlement that they deserve somehow and if they don't get it that they are being cheated or something.

Yes if you work and have money then you don't get a handout. Financial aid is not meant for people who have money and can afford college. You are not being "penalized" if you don't qualify for aid.

[jim]

Sorry I know the FAFSA is goffy and the system doesn't make sense. I just reacted to the way that one sentence was worded. But the common "I'm getting punished for working hard" kinda whining ignores the fruits of the hard work and lack of need it created.

[Lucas]

@Jim

Why should a student who doesn't work deserve more money then one that is working? This is one of the fundamental wrong's with the system.

I worked during college and because of that I was penalized. I had numerous friends who didn't work just so they received more aid. Guess what happened. I worked my butt off, didn't enjoy college and ended up with $24,000 in student loan debt. I never once lived above my means and most months just got by. My friends on the other hand, got the same degree, had a lot more free time (fun) and ended up with a considerable less amount of debt (some none) because they could get grants. According to the government, I "made too much" to qualify for grants. Does that sound like a fair system?

[Apex]

@jim,

I generally agree with that statement.

@FMF,

If you make the same money in a few years that you make now, I can predict about how much financial aid your children will qualify for. HINT: connect your index finger to your thumb. :)

One of my favorite movie lines comes from the movie Soul Man. For people not familiar the movie is about a rich white kid who takes some kind of skin medicine to change his color to get scholarships intended for African American students. He does this after applying for financial aid and being rejected. He explains to the FinAid office that his parents may be rich but they have cut him off and are not paying for any of his college and he has no money. The lady on the phone says, "Oh I am terribly sorry but we provide money for student's whose parents are poor, not for students whose parents are A-holes."

[Apex]

@Lucas,

I don't pretend to understand all the workings of FAFSA. I mean its the govt so I am sure it is about as screwed up as possible. But on the basic merits of the concept, if aid is going to be given at all it should be given to those who need not everyone who comes calling.

In that sense if there is a problem as you describe it, it's because they are giving too much to those not working, not that they aren't giving enough to those that are.

Additionally according to the formula above you are required to use 1/3 of your savings and 1/2 of your income (over 3K) towards your education. So if that formula is correct it is not possible for you to work and be worse off than those that didn't. Unless that formula reported above is wrong, something else must be in the equation for it to turn out as you describe such as the people who didn't work were also getting fed money from their parents or something.

[jim]

"Why should a student who doesn't work deserve more money then one that is working?"

Its aid that is supposed to be for people who need it. Need based aid is based on need.

To me your question is like asking : Why shouldn't a man get a free meal at a soup kitchen or a welfare check if he is gainfully employed? Why don't boy scouts help 21 year old men cross the street?

[Texas Wahoo]

"Its aid that is supposed to be for people who need it. Need based aid is based on need."

I think the point is that it doesn't do a good job of measuring "need." If someone does not work through college because they decide they'd rather party, do they need it more than someone who works through college?

[jim]

Let me clarify: I do think that any student getting any aid should be expected to work a certain amount and contribute a certain amount towards paying for their own education.

I just don't think that government handouts are something that successful and self sufficient people should envy.

When I got aid it started with loans and work study, then if you had more need then you got the grants. They don't just start out by throwing free money at you. Only the people with the most need got the grants. Generally if a student works or not I don't think that is the sole difference between grants as student incomes are generally relatively low compared to college costs. The parents income levels and asset levels generally make a bigger difference. When I first went to school I got grants, work study and loans. But later my parents had higher income and all I qualified for was loans. Of course exactly how aid is handed out probably differs from school to school or state to state. Unless you know the full financial details of a student and their parents you can't say with any certainty why they are getting the aid they get or how much their working or not matters.

[FMF]

Apex --

I know. I filled out the prelim web form. It basically laughed at me and said, "Sucker, you're paying for EVERYTHING!!" ;-)

[Russ Gellar]

Nice post, referenced you and the book at the EFC Expected Family Contribution blog.

One big issue that folks are missing is that the FAFSA and EFC Calculations are used heavily by the SCHOOLS to determine how much aid to offer a student.

I can see how some would feel that accessing government aid might be a "handout", but when you consider that these forms can make the difference between kid #1 who has no need to work but blows all the money his parents give him on video games, and kid #2 who worked through high school just to save $1,000, it can seem very harsh when you understand that the very same school will offer kid #2 $500 less per year to attend since their offers are often tied to the EFC that is determined by the FAFSA.

[MBTN]

I worked with a guy who grew up in the UK and went to British colleges up through getting his PhD. He said that he went to school pretty much for free, because the government subsidies college education for everyone. He said that he was shocked that people in the US actually had to pay for college.

[Josh Polk]

Financial Aid = Loans in most cases. I don't wouldn't call that "aid" necessarily. For a grad school I was looking at my financial "aid" advice was "well you can borrow up to 100,000k. I went to a different (also excellent) school and went for free as a graduate assistant.

[Lucas]

@Jim

Thank you for the further explanation.

A little ranting:
If I recall correctly (I have been out of school for awhile now) FAFSA requires you to take your parents income into account when filling out the forms. Your parents are, in the government eyes, supposed to contribute to your education expenses. So guess how much my parents paid for...drumroll please...$0.00. That's right, I got nothing from them (and I never expected to or wanted them to burden them with my education expenses), yet I was penalized because of them (we were a low middle class - up from very poor when I was a young child). I sure as hell didn't want to work, but I had to due to the EFC calculations. Without me working and the very minimal amount of loans I got, I would have never been able to attend school. I realize that every situation is different, but most of the friends that I had which were working had to because of the situation that I was in (some also had families to try and support).

I am not upset by any means of what happened. I have a very good job and have done well for myself, but at the time I sure could have use some more aid - stress of school was more then enough, but having to ensure you had enough money to eat added even more. All in all, I guess FASFA it is like most things the government touches, screwed up!

[Mike Hunt]

Financial aid distorts the costs of education. More aid means universities can and will increase tuition and fees.

Universities need to focus on bringing costs down.

How come in technology (computers, storage, memory, smart phones, etc) costs go down but performance goes up yet universities run in the opposite trend?

Tools for learning (internet sharing of knowledge) should facilitate costs going down.

Get the government out of the aid business and let the universities compete on pricing.

What is the point of going into big debt for a university education when the unemployment rate of new graduates is not good?

-Mike

[Bad_Brad]

"4. Interesting how the kid working and saving -- two things it seems like you'd want to encourage -- actually hurts his chances for aid."

Leave it to Uncle Sam to demotivate good behavior.

[SB]

I am currently a senior in college and will graduate in the spring. I, like a few others, have worked my way through college and have gotten nothing but loans for financial aid. While I do think it is extremely unfair that those who choose not to work (yes, they CHOOSE, at least in my town there are plenty of minimum wage jobs for anyone that wants them) are rewarded with grants, while those of us that have been working since we were in high school receive nothing.

I have personally financed the majority of my education through loans and work, but in the end I think it is actually a good thing that I had to work hard for the last 4+ years while others slacked off and took the easy route. Because of my hard work and experience, I am now lined up with a very well paying job when I graduate next summer, while others I know are beginning to worry if they will have a job or even qualify for one without work experience.

[KH]

SB gets it right in my opinion---"having" to work while in college is actually a big part of your education and contributes hugely to the future value of your degree.

Geting grants may seem like a free ride (like welfare payments) but if you look at the whole picture they aren't going to make or break your future.

That said, it's stupid to leave money on the table if it's available--so I'm happy to start learning about FAFSA requirements now so I can get as much $ for my kids' educations as possible in a few years.

Of course I don't expect much--it appears that FAFSA is primarily designed to provide some kind of educational opportunity even to kids whose parents who are financially naive or irresponsible. Which is OK in my book--if a kid can do it academically, they should have a chance at college even if their parents are screwed up.

It turns out that parents' attitudes towards education throughout their kids lives (not the parent's net worth) is the largest predictor of whether they're kids will be successful in life or not. So think of it this way--kids getting that financial aid probably really do need it, not only because they don't have money but also because they haven't had all the extra educational opportunities and emphasis while growing up that can make a difference.

[Matt]

My EFC is more than what it will cost to send my oldest to college and I have not filled out my FAFSA yet.

Yup seems fair to me. My parents 26 years ago contributed NOTHING.

So what has happend in 26 years? The government got involved?

[jon]

How about the rule requiring your parents income on the FAFSA until you are 24, even if you are no longer a dependant on their taxes? How does that make sense?

[Jen]

My parents' EFC was overly high due to my father having 1/5 ownership in his parents' farm. That was an "asset", although not liquid---how could he sell 1/5 of a farm? Plus he and his 4 siblings promised not to sell until both of their parents had passed away. By that time, both my brother and I were finished with our educations.

Although I was accepted to 3 small liberal arts colleges, I attended a large urban state university on scholarship (tuition, room and board), waited tables for spending money, then took out loans for a state medical school, with savings paying for room and board. I graduated with $86,000 in debt to SallieMae. I now have a 30 yr payment plan at 2.25% interest.

My parents did what they could-- a thousand here and there (maybe $6000 total?), but never did they offer to pay a tuition bill or rent.

I filled out a FAFSA every stinkin' year. I hated those things. Only my very last year of med school, at age 27, was I told I was eligible for a Perkins LOAN ($5000).

[RB]

Why is it a Free Application? Did students have to pay to apply for student aid before the application was free?

[Holly]

The FAFSA is a bunch of baloney!

Question: Are kids whose parents are divorced able to game the system by stating that they live w/the parent w/the lower income/net worth (even though the other parent is still 'secretly' contributing)?

[jason]

If you disagree with the FAFSA then consider this. Life is not fair, nothing is fool proof, and the government is not responsbile for your education. The FAFSA provides a leg up for people, that is all. A lot of us will get low interest loans, and some of us will get full paid grants. I used to get mad at the system, but I realized, as long as I work hard, I'll be ok. If you want to critizize the system, then dont use it, go to a bank and get a loan and tell me what kind of interest you end up with. If that's not up your ally, then join the military, serve four years, then go to school on the government's dime. I understand FAFSA has its quierks and not to downplay it as an issue, but from reading the follow-up comments, it seems people dont understand what its true purpose is.

[jim]

Thank you Jason.

[jim]

Mike H.

Actually spending at universities has not actually increased that much. In the past 25 years spending per student at public colleges has increased at a rate of 4%. The reason tuition has gone up so much is that spending by the states via tax dollars has not kept pace. So more of the cost is shifted to tuition. That means actually spending goes up 4% but tuition rates go up 8%.

That technology you talk about has been a cost to universities since they have to spend money on computers and new lab equipment.

[Holly]

Jason:

I doubt anyone commenting here would want to take the aid away from those who truly demonstrate a need for it, except there is a problem. There are too many students getting hand-outs simply for the fact that their parents refused to save, refused to make them work, and lied on their FAFSA. I know doctors who are eligible for aid...does that make any sense to you?

[Sarah]

@Holly - why should the students be punished for their parents not saving? FAFSA is for the students, not the parents. It seems as though the students with parents who refused to save are exactly the students that need it.

I never qualified for grants, although I did have workstudy and student loans that I qualified for. A lower interest on a student loan sure didn't feel like a hand-out to me at the time (even though I recognize that a subsidized interest rate is money that they are paying in as well). When I went to school my brother & mom were also both full-time students, so we qualified for a fair amount, in subsidized loans, but we didn't qualify for any grants.

With the students who qualify for actual grants, it looks like it is the lowest EFC possible from the parents.

I think the EFC is high as far as what families are supposed to be able to contribute - which makes you wonder what your family income would need to be to create the lowest possible EFC.

[Mark]

There are always trade-offs.

In countries where education is free, some people milk the system and remain students for many years. In countries with no subsidies, many smart people never get to go to college at all.

It seems to me that the US system has become too oriented towards entitlement. Should we offer opportunity to everyone who is poor, or to everyoe who has merit?

There is not much merit-based aid out there, compared with need-based. What are we telling our kids about the importance of working hard in high school, doing their best, contributing to society? Answer: If you don't work and don't save, then we will help you through college. If you and/or your parents work and save, then we will not help you.

[Holly]

Sorry, Sarah...I guess my train of thought wasn't clear.

I was thinking in terms of parents who may have had the means to help pay for college, but instead decided to buy a huge home, and then a second home, in other words -- spend it or tie it up -- rather than to help provide financial means for their child/ren. Therefore, the parent has less cash in the bank which could result into a low EFC (even though the student's family is not necessarily 'in need').

[Sarah]

@ Mark - do you really think there isn't much merit-based aid out there? The only reason I ask is that I was able to get a pretty good scholarship w/ mediocre high school grades, just by doing well my first semester in college. My gut would say that there is a lot more merit-based aid than need-based, just not through the government. But the amount that my university gave me is more than the amount that a government grant would have given me.

I would think that merit-based aid should be up to the universities because those are the tools that they have for convincing the better students to come to their school.

[The Saved Quarter]

I'm going to college for close to free because of the FAFSA and other grant and aid programs. I am (well) over 24 so my parents' income doesn't count, but they don't have much either so it makes little difference.

By giving money to me, currently living on an income below the poverty level and using public assistance to get by, so most definitely "needs based", the government is offering me the opportunity to gain the skills necessary to get a job that will pay enough that I'll pay a whole lot more into taxes later than I'm taking out of the system now. It's the proverbial "hand up rather than hand out."

I'm a business major at a respected business college, so I'm hopeful that I'll be able to get a good paying job out of school. I don't currently work, but I stay home with two small kids in addition to being a full time student; if I didn't have young children I would be working as well (daycare would eat up more than my entire hourly wage.)

I wouldn't recommend my life path - married and kids on a low income before going to college - but the benefit is that I'm definitely not squandering the opportunity and am very focused on finishing fast so I can improve my family's situation!