When thinking about sources of funding for your children’s college education, you may assume your family earns too much to qualify for federal grants, loans, and work-study assistance. In fact, even families with higher incomes are frequently eligible to receive some form of financial aid from the government.
The U.S. Department of Education uses a formula for calculating financial aid eligibility that takes into account a range of factors in addition to income and assets, including family size and other financial obligations. When assessing a family’s ability to pay for college, the federal government treats only a small percentage of parents’ assets as potential contributions, while certain types of assets, including home equity and savings in IRAs and 401(k) plans, do not figure at all in the qualification formula.
Even if you expect to cover your child’s college costs through sources other than federal aid, it is usually worthwhile to complete the Free Application for Federal Student Aid (FAFSA). In addition to determining your family’s eligibility for federal assistance, the FAFSA is the primary qualifying form used by many college, state, local, and private financial assistance programs.
The first step in applying for financial aid is filling out the FAFSA, which is distributed and processed by Federal Student Aid, an office of the Department of Education. Hard copies of the FAFSA are often available at high school guidance offices, libraries, or post offices, or by calling the Federal Student Aid office. The simplest way to complete the FAFSA is by going to the office’s website, http://www.fafsa.ed.gov. Filling out the form online will alert you to mistakes or omissions; it can also can speed up the processing time by one to two weeks.
Assuming you are a parent requesting aid for your dependent child’s education, the documents you will need to complete the FAFSA include your federal income tax return and W-2 forms from the previous year, current bank statements, records of untaxed income such as Social Security or veterans benefits, current business and investment mortgage information, and investment records. If you are divorced and are the child’s custodial parent, only information about your own household’s income and assets, including any child support and alimony, are required by the FAFSA. While some colleges take into account the financial resources of the non-custodial parent in determining the student’s need, the federal government does not.
The Student Aid Report
When filling out the FAFSA, you may request that your financial information be sent to up to six colleges. If your child intends to start college in the fall, it is usually advisable to file the FAFSA as soon as possible after January 1 of that year, as deadlines for submitting FAFSA information may be early in the year for some colleges and state awards programs.
Within a few days to a month after it is filed, you should receive by post or e-mail a form known as the Student Aid Report (SAR). On the SAR, you will find the Expected Family Contribution (EFC), an estimate of the amount your family should be able to contribute toward the student’s college expenses for the year. The colleges you listed on the FAFSA will use this figure as a basis for determining the size and composition of any financial aid awards.
If need is demonstrated, the schools that admit your child as a student will prepare a financial aid package covering all or part of the difference between your family’s EFC and the cost of attending the college. Depending upon your family’s income and the resources of the institution, some colleges will offer more or less aid than the gap between the EFC and the actual cost of attending.
The type of federal aid your child receives is largely based on family income. Lower-income students may be awarded grants that do not need to be repaid, such as the Pell Grant or the Federal Supplemental Educational Opportunity Grant (FSEOG), and assistance may be available in the form of a federal work-study job.
Beyond these awards, students may be eligible for subsidized federal loans, such as the Perkins Loan or the Stafford Loan. These loans must be repaid by the student, but the government pays the interest while the student is in school and during grace and deferment periods.
In addition, your family may be offered an unsubsidized Stafford Loan, which must be repaid by the student, or a PLUS Loan, which is in the name of the parents. Interest accrues on these unsubsidized loans from the time the funds are disbursed, though payments may be deferred until after graduation.
When loans offered by federal programs prove insufficient to cover the actual costs of your student’s education, you can apply for a private education loan. These loans tend to have higher interest rates than government loans, but they are often less expensive than other debt sources.
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