New FAFSA, New Timing

New FAFSA, New Timing

Imagine shopping for a new car and having no clue until the moment you pull out your credit card or sign the lease agreement what the vehicle will cost. College list prices, like those for cars, are readily available on websites, but what a family will actually pay is often a mystery until only a few weeks before a student must make a decision.  The lack of transparency in the cost of attendance has been a common gripe among families of college going students. This year the federal government decided on a simple though limited fix: move the availability date for filling out the Free Application for Federal Student Aid, or FAFSA, from January 1^st to October 1^st of the prior year.  Submission of the FAFSA is required in order to be eligible for all federal aid, and many colleges also use it as the primary determinant for allocation of their institutional need-based aid. The change goes into effect on October 1, 2016, just a few weeks from now. The actual impact on colleges and families is still not fully clear, but the change in timing should make filing the FAFSA easier and less of a scramble.

What eases the burden of completing the FAFSA is the move to prior prior year income reporting.  No longer will parents be pressed to estimate adjusted gross income in January for the calendar year just ended, often weeks before receiving W-2s and other necessary statements for filing taxes. Families of students applying for financial aid for fall 2017 will be asked to report their 2015, or prior prior year income instead. Most filers can take advantage of the IRS Data Retrieval Tool and, by merely clicking the Link to IRS button on the FAFSA, populate the required fields with their income data.  The timing of asset reporting will not change, meaning that parents and students will still report balances as of the date the FAFSA is submitted.  

The change in FAFSA timing accelerates some, but not all aspects of the college process. Applying for financial aid is now done concurrently with applications to colleges rather than two or three months later.  Families will benefit by no longer having to estimate income and update the FAFSA at a later date.  The earlier date also encourages students and their parents to address financial need and expectations earlier in the process.

Yet the question remains: will the advent of prior prior year income and the early FAFSA availability actually accelerate financial aid decisions to truly assist a family’s college planning? It’s too soon to tell.  Many colleges are moving up their deadlines for submitting financial aid forms to coincide with the FAFSA and CSS Profile’s October 1 availability date (the CSS Profile is an additional form required by roughly 400 primarily private colleges).  But are families really likely to know their financial aid packages sooner? Not unless admission decisions are accelerated as well.  Financial aid awards generally accompany or follow notification of acceptance. Clearly more will have to change than merely making it easier for families to complete and submit the FAFSA earlier. Under the current system, it’s unlikely that the timing of financial aid notification will change materially. 

Nevertheless, families would be wise to take advantage of the earlier filing date and get the forms submitted as soon as possible.  Checking financial aid requirements on each college’s website is necessary in order to confirm and meet the anticipated earlier deadlines.  It will probably take a few more tweaks to the process before families will be able to truly gauge the cost of college well in advance of making a final decision.

Who Should Apply for Financial Aid?

“If we aren't likely to qualify for need-based aid, should we file a FAFSA?”  “Is it true that everyone should complete financial aid forms, regardless of need?” “Do I need to complete the FAFSA to receive merit aid?” These are questions I often get from parents who are trying to determine whether there is any benefit to filling out this "black box" form.  The Free Application for Federal Student Aid, more commonly known as the FAFSA, is the federal form that all colleges require students to complete in order to qualify for certain types of financial assistance and any federal student aid.  (Nearly 400 colleges also require submission of the CSS/Profile form, found on the College Board website, for the allocation of their own institutional aid). You will need to fill out the FAFSA to receive need-based aid, but that is not the only reason to spend the time and effort.

Who should complete the FAFSA?  Anyone who believes he or she may qualify for need-based aid should invest the time; filling out the form is the only way to know for sure.  There is no maximum income or set amount which precludes one from qualifying.  Rather, many factors in addition to income influence eligibility including the age of parents, assets owned, family members living in the household and number of children in college.  Yet the FAFSA is not only required to calculate demonstrated need.  Any student or parent who wishes to borrow under the federal Stafford loan program, regardless of financial situation, must file a FAFSA.  This even applies if a parent chooses to take out a PLUS loan.  A handful of colleges require that students complete the FAFSA in order to receive merit aid awards.  The single best way to find out a college’s documentation requirements is to visit the financial aid pages on its website.  

  

Completing the FAFSA is relatively straight forward for those who have already filed a tax return and meet the eligibility requirements to take advantage of the IRS Data Retrieval Tool.  This enables filers to fill in much of the financial information on the FAFSA automatically by transferring data from their tax return.  But here’s the Catch-22:  You must wait approximately 2 weeks if you process your return electronically, or 6-8 weeks if you file by mail before you can access this feature.  By then the college financial aid deadline might well have passed (check individual college websites) so you may still be faced with the challenge of estimating your prior year tax information (a word of advice: better to under than over-estimate earnings).  For those who estimate, you will ultimately have to amend your FAFSA with the actual numbers, and can take advantage of the data retrieval tool at that point.  If you are certain you will not qualify for need-based aid yet will complete the FAFSA in order to borrow either a Stafford student loan or PLUS loan, you are not constrained by college financial aid deadlines so file your tax returns first to simplify the process. 

For a helpful guide on filling out the FAFSA form, you may want to view the 7 Easy Steps to the FAFSA tutorial before you get started.

Keep in mind that qualifying for financial aid is not a guarantee that you will receive lots of free money so go into the process with realistic expectations.   As I have emphasized in many of my blog postings, your personally estimated need, your FAFSA determined “demonstrated need,” and the amount of assistance you might actually receive can and will likely be three different numbers.  Financial aid formulas may yield a higher Expected Family Contribution (EFC) and lower demonstrated need than what you believe you can afford. The FAFSA is not frequently updated and consequently underestimates today's cost of living, especially for those who reside in expensive regions of the country. Furthermore, most colleges won’t fully plug the gap between the Cost of Attendance and what you are expected to pay. Like many of us managing our personal finances, colleges struggle to judiciously allocate a finite pool of resources.  So embark on this process with tempered hope and expectations. 

Need-Blind, Need-Aware and College Admissions

Does financial need factor into the college admission decision and if so, how does it affect applicants and to what extent?  Adding to the anxiety about college admissions is the question about how to handle and interpret application questions on financial aid.  Parents, especially those who are not sure whether they will qualify for assistance, often ask whether checking “yes” to the need-based aid question might negatively impact a student’s chance for acceptance. 

Like many questions related to college admission, the answer is rarely so straightforward. Students, of course, want to maximize the probability of admission without jeopardizing their opportunity to receive financial aid for college.  Some schools profess to be need-blind, meaning that they do not consider ability to pay in the admission decision.  That may sound like good news; however, it does not necessarily mean that the college will provide adequate financial aid to enable the student to attend once admitted.  New York University, a need-blind university, does not claim to meet demonstrated need and generally comes up short by more than 30% of the cost.  Admitted students are counseled by admissions, only after acceptance, that attending the university might not be a sound decision if it requires excessive borrowing.  

Certain need-sensitive colleges take a different approach to college admission, choosing to give more aid to fewer students rather than put affordability out of reach for many. Several of the more selective need-sensitive colleges, in fact, admit most though not all students without regard to their ability to pay.  When it comes down to the final 2-20% of the admission decisions (depending on the college), ability to pay becomes the deciding factor.   Is this more palatable than offering a spot in the class without providing the means to pay for it? Wesleyan University believes so, yet met with protests from students, parents and alumni when it switched from a need-blind to need-aware or need-sensitive policy this past May, stating that it would now consider ability to pay when filling the last 10% or so of the class.  The college chose to alter its admission approach so that it would still be able to meet the demonstrated need of every admitted student. A list of the small group of Colleges-that-claim-to-meet-full-financial-need was published by U.S. News & World Report earlier this year.

Whether a college is need-blind or need-aware, families should have an understanding about what they can afford to pay and what amount of borrowing is manageable, even before the applications are submitted. The unfortunate truth is that need is an unavoidable topic in most college admission offices. Colleges do not have unlimited financial aid budgets and most have to factor this into the equation. You can decide to try to game the system and avoid checking the will you apply for need-based financial aid? box, but if you honestly do not have the ability to pay, you are not doing yourself or your child a favor.  That being said, it is a good idea to understand the likelihood of your receiving aid as you work through the process.

Here are some guidelines on how to think about the application financial aid question to help you evaluate its potential impact on the admission decision for your child:

-          Is the school in question a reach, mid-range or likely for your child? If he or she is not at the high end or at least in the upper half of the admitted student range in terms of academic performance or some other compelling factor, having a financial need probably works against him/her in the admission process.  A student with money and the same academic qualifications has a better chance of being admitted. 

-          The most selective colleges reserve their financial aid for qualified students with demonstrated need rather than those with the best academic record.  At places where admission is less selective, merit tends to rule.  Many colleges use financial aid as the carrot to lure the most desirable students, whether they need financial assistance or not. In search of ever-improving rankings, colleges essentially pay to attract the high performers. 

-          More schools “gap” than do not; they expect that you will fill the balance of your need with student or parent loans.  So even if your Expected Family Contribution or EFC is less than the cost of attendance, don’t just assume that the college will make up the difference with a grant.  One major caveat: some colleges disingenuously qualify loans as financial aid; since loans must be paid back, be advised to distinguish them from grant money which is a gift.  If it is not clear whether a financial aid “award” includes borrowed money, ask.    

The best way to find out how need factors into the admission decision at a particular college, if in doubt, is to pick up the phone and call the school.  Keep in mind, however, that a need-blind policy will not necessarily work in your favor if tuition is high and the financial aid policy is to gap.  Net price calculators which can be found on every college’s website are another tool at your disposal to estimate your actual out-of-pocket cost per year.  You can also use College Navigator, a Department of Education site, to get a sense for what families in your income range typically pay at a given college.   With these tools, you will be better informed before checking the financial need box. 

Awarding Institutional Funds - The Black Box of Financial Aid

How colleges use their own institutional funds to provide assistance to students is often the black box of the financial aid process. Just consider the 500 or so private colleges and programs that make use of the CSS/Profile form to determine the allocation of institutional aid. If your son or daughter is applying to one of these schools or is currently attending one, then you may already be familiar with this comprehensive form that asks for multiple years of earnings and a full list of your family assets, including your home. But what you may not realize is that colleges pick and choose which pieces of this collection of data they wish to consider in the calculation of their applicants’ financial need. Colleges take advantage of a practice known as Professional Judgment. While the Expected Family Contribution (EFC) for federal aid purposes is standard regardless of the college, professional judgment allows schools some flexibility to set their own terms for distributing their institutional funds. This is one of the reasons that financial aid packages for the same student can vary significantly from college to college (that, and the fact that many colleges “gap” students, meaning that they do not fully cover demonstrated need).

Don’t waste your time trying to decipher the formula or determine which of your assets a college will consider. The process is far from transparent and few colleges actually disclose on their websites the factors that come into play in their decision making process. While admittedly I have not done an exhaustive search, Princeton is one of the few exceptions I have found. And for anyone interested, Princeton does not consider home equity in its calculation. As an aside, you might want to inquire with the financial aid offices on your child’s college list as to how they treat home equity in today’s economy, given that banks have made tapping that resource increasingly difficult.

So why is any of this worthy of mention? Understanding how colleges use financial aid formulas and why aid may vary from school to school can partially demystify an often perplexing process. It also underscores the fact that if you are applying for financial aid, you won't know what college will really cost until you have the award letters in hand. The bottom line is that it may be as important to apply to financial safeties as it is to include colleges where the probability of admission is high.

If cost is a factor for you, then hedge your bets by having your child apply to both public and private colleges, recognizing that the private option may turn out to be the better deal. How do you identify the financial safeties? You should approach it the same way you find right fit colleges. First, know that this is an art, not a science; there are no magic formulas so you won’t know for sure until your child is accepted and receives an aid package. So start by understanding your student’s chance of being accepted. The more desirable he or she is as a candidate, the more likely the school will be generous with money. The most obvious way to get a preliminary idea for one’s chances is to compare grades and test scores to those of the average student admitted.

Recognize that schools which state they fully meet demonstrated need are less likely to gap. However, keep in mind that for colleges using either the CSS/Profile or a proprietary form, the specifics of their calculations will not likely be disclosed to you. You can, however, make use of resources such as College Navigator to get a sense (not an assurance) for how generous your child’s college choices are likely to be with need-based aid. You can search colleges by name and look at the net price for different income ranges. The major shortcoming, however, is that there are virtually no details for families making above $110,000 annually, but the website can still provide some insights into what students pay.

While the lack of transparency makes it tough to project your true out-of-pocket expenses when it comes to paying for college, there are ways to get a better handle on the probable cost. Approaching the financial aid process strategically will hopefully lead to more affordable choices and less disappointment in the final analysis.

The ABC's of Financial Aid

It’s mid-December, two weeks away from the New Year. Many of us live by milestones that remind us how quickly time flies...birthdays, holidays, change of seasons. One of mine, I shamelessly admit, is the start once again of the financial aid cycle. With college applications hopefully finished or in the final stages, it is time to look ahead to the next set of deadlines, those for submitting financial aid forms. Bemoaning and complaining about the financial aid process is a yearly ritual. Yet it need not be so cumbersome and daunting. Familiarization with concepts, knowing deadlines and being organized is the key to successfully navigating aid forms and triumphing over the process. Here is my annual college financing primer which highlights some of the critical terms you will need to know.
The Cost of Attendance, or COA, refers to the total annual cost of college, not just tuition and fees. Don’t forget to factor in room and board, books, transportation, and other personal expenses when trying to estimate what a year of college will cost. College financial aid officers look at the total COA when they package aid awards. Come October 2011, colleges will be required to post the COA on their website.
The Free Application for Federal Student Aid, better known as the FAFSA, is used by colleges and universities to determine eligibility for financial aid. All students must file a FAFSA in order to receive any federal student aid. This includes the non-need based unsubsidized federally guaranteed Stafford student loans, so if you anticipate borrowing for college, you will have to complete the FAFSA. It becomes available online January 1, 2011 for the 2011-2012 school year at http://www.fafsa.gov/. Prior to filling out the form, both the student and one parent must each obtain a pin number which is in essence your electronic signature. You can register for a pin at http://www.pin.ed.gov/. Be sure to record your pin in a place where you can easily retrieve it for future use.
The Expected Family Contribution or EFC which is calculated from the information you provide on the FAFSA is the amount determined to be what the family can and should contribute to the cost of the student’s education. The EFC is based on the family’s current assets and prior year's income, including both the student’s and parents’ financial data.
After completing and submitting your FAFSA, you will receive a Student Aid Report, or SAR, which will show your EFC.
Nearly 600 schools also require that families complete the CSS/Profile form for the allocation of their institutional funds. The CSS/Profile is administered by the College Board and can only be filed online. Families can currently access the Profile for the 2011-2012 academic year by going to the College Board’s website: http://www.collegeboard.com/.
Now that you are familiar with these terms, there are some additional things that you should know about financial aid awards.
- Your “demonstrated need” (the COA minus your EFC) won’t necessarily be the amount shown on your SAR if the college also uses the CSS/Profile or another financial aid form. These methodologies are not the same, and therefore will produce different results. Institutions allocating their resources will naturally rely on the methodology that sets a lower threshold for your financial needs, so don’t be surprised if the aid package is less than you expected, even from schools that claim to meet demonstrated need.
- Colleges tailor the CSS/Profile formula to their specific institutional requirements. In other words, your demonstrated need may vary from school to school. For example, some colleges consider the equity in your home; others do not.
- The college offering the most financial aid may not necessarily be providing the best package. One has to look at the composition of each award. A financial aid package that meets need with grants which do not have to be repaid is far more attractive than one comprised entirely of loans.
- If your financial situation changes materially after you’ve filed the forms, such as loss of employment, you should notify the colleges immediately.
Lastly, be sure to visit the tuition and financial aid page of each school’s website (often buried in the Admission section) to check on requirements, deadlines and merit aid, if awarded. Meeting these deadlines is crucial. Since financial aid is a limited resource, getting things in early can make a difference. The sooner you complete the FAFSA, CSS/Profile and any other required forms, the better your chances of receiving financial assistance.