Leaves are changing hue
October 1st? Almost here
Time for the FAFSA!

For families with college-bound high school students, or kids already in college, October 1 is one of the most important days of the year. October 1st marks the first day that the Free Application for Federal Student Aid, aka the FAFSA, becomes available for the upcoming college enrollment year.

Financial Aid for college falls into two broad categories: gift aid and loans. Yes, loans are considered financial aid. On the surface, this would seem like nonsense. After all, the issues with student loans in America are well-documented.

But…

Consider that the Federal Direct Loan for Students, which is the only loan a graduating high school student can get without a cosigner, currently has an interest rate of 0% until the end of the year. Even in “normal” times, the loan’s interest is generally between 3-5%. The maximum students can borrow over four years is $27,000. They don’t borrow this amount all at once, but in four annual tranches. The freshman year loan is $5,500.

Also keep in mind that this is unsecured debt. This means there is no collateral backing the loan. The borrowers involved often have little to no credit. Categorizing a loan as financial aid seems dubious on the surface, but when you get into the nuts and bolts it looks much more reasonable.

The consumer protections wrapped into Federal student loans are robust. When you encounter reports of the Federal government freezing student loan payments, setting loan interest to zero, or forgiving a portion of loan balances, these measures only apply to Federal loans. Existing forgiveness programs like Public Service Loan Forgiveness or those within the rules of income-based repayment plans like Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE) are also unique to the Federal student loan marketplace. Families using private student loans from lenders like SoFi, Discover, or other financial institutions get no such special treatment.

In order to qualify for either gift aid or these favorable Federal Loans, a student must submit the FAFSA.

For families with low income and assets, they may be eligible for generous need-based aid programs. These are the families for whom the FAFSA is most crucial. No FAFSA = no need-based aid, and no Federal loans.

However, even affluent families can benefit from submitting a FAFSA.

Some colleges and universities – but not all – may require that a family submits a FAFSA in order to qualify for non-need merit scholarships. These scholarships are gift aid, like need-based aid, but are based on a given student’s academic, athletic, or artistic merits. State schools often have automatic scholarships that they award based purely a student’s unweighted GPA and ACT or SAT scores.

How do you know which schools will require the FAFSA for merit aid? Unfortunately, the only way to find this out is to ask the school directly. Each institution has their own aid policies. In general, you can’t go wrong with a “better safe than sorry” approach.

Many of the families for whom I’ve helped plan financially for college did not qualify for need-based financial aid, and the schools to which their students were applying did not need the FAFSA for merit-based scholarships. But those families still wanted to use the Federal Direct Loan for Students as part of their plan. So, they submitted a FAFSA in order to be eligible for that loan.

Submitting the FAFSA has gotten easier over the last few years. A family can complete it online here. The questions are fairly simple and straightforward. Income information can be pulled in directly from your tax return. Since the FAFSA is run by the Department of Education, they can link directly to the IRS to get your income information.

Naturally, this creeps some people out. You are not required to link your taxes to the FAFSA (the link is based on one parent’s Social Security Number). But, if you choose to enter your tax information manually, the odds increase that you will be “Selected for Verification.”

All this means is that the schools you list on the FAFSA form will ask for documented proof that the numbers you’ve provided on the FAFSA are legitimate.

One of the biggest “gotchas” on the FAFSA involves investment assets. The form asks for the value of assets held in investments. For many people, when they see this question, they think it applies to the holdings within a 401(k), an IRA, or a Roth IRA.

Nope!

“Investments” in this case refers only to the value of holdings within a taxable investment account. 401(k)s, IRAs, and Roth IRAs are all tax-advantaged retirement accounts. As such, the FAFSA ignores them. Even though someone under 59 ½ years old can take a loan out of a 401(k) to pay for college and withdraw the basis in a Roth IRA without taxes or penalty, the FAFSA does not assess these assets as sources to help pay for college. You’ll also want to exclude any assets held within annuities, or the cash value of whole life insurance.

What trips people up on the FAFSA, though, is not a specific question or technical step like linking your taxes. It’s not submitting it at all or doing so at the last minute.

The start of FAFSA Season for students enrolling in college next year is October 1, and you can submit the form all the way up to the end of June of the year of enrollment. But for people seeking need-based aid, it is important to know that such aid programs are first-come, first-served. The earlier you get your form submitted, the more money you may be awarded. Wait too long, and the funds the school had allotted to pay for need-based grants may be diminished.

Whether you are planning to help pay for college through need-based grants, merit scholarships, loans, or some combination of all of these, it all starts with the FAFSA. The first step involved is for the student and one parent to create a Federal Student Aid ID, or FSA ID. This will become your FAFSA login. You can create your ID by clicking this sentence.

SeaCure Advisors has compiled a page of resources for families looking to prepare college. These tools are all freely available online, but we’ve curated them all in one place to save you the trouble of searching them out yourself. You can access them here.

If you need help creating a plan to pay for college, we can work with you on a plan that doesn’t leave you or your student up to your eyeballs in debt. Reach out and we’d be happy to show you how we can help.