Qualifying for financial aid is a question that is often asked when applying for college. Here are 10 unique reasons to complete the FAFSA even if you do not think you will qualify for financial aid. I personally believe that every family should submit the FAFSA. Over the years when talking to different families, they have shared why they did not submit the FAFSA. These reasons have ranged from the fear of a difficult and lengthy process to believing they are too wealthy to qualify for aid. Applying for the FAFSA should be put on the list for every family.
As part of the college process, the financial aspect is becoming a bigger part of the college decision. The Free Application for Federal Student Aid or FAFSA is the method a family will use to communicate their financial position to each college. What many students and parents overlook are the other advantages that the FAFSA brings to the financial future of the family.
When a family completes the FAFSA, the EFC or Expected Family Contribution is generated. This is an important number in the financial aid process. The colleges determine your financial need by subtracting the Cost of Attendance (COA) by your EFC. The completed FAFSA also turns on a few other switches that may make the financial outcome better.
Listed below are several reasons why I feel every family should complete the Free Application for Federal Student Aid or FAFSA.
- Become Eligible for Direct Loans (Stafford)
By completing the FAFSA no matter what a family’s financial strength, the student will qualify for the Direct Student Loan or sometimes called the Stafford Loan. Any school or program that that receives federal funds will require the FAFSA submission for the student to qualify for federal funds. The FAFSA process requires students who are filing as dependent students to include their parent’s taxes and other financial information.
Even if a high-income family does not qualify for need based aid, by submitting a FAFSA, a switch is turned on for eligibility to the Direct Loans. Other advantages are listed below as why this switch is important as part of a family’s college funding strategy.
- Completing the Application Submission
This year will be the first year of Prior Prior, which will make the FAFSA submission a little easier. By completing the FAFSA and submitting your applications, you are telling the colleges that you are waiting for a response. If you do not submit the FAFSA, the college will need to wait until after the FAFSA deadline to pass before they will feel comfortable providing an award letter.
This is a big change from previous years. In prior years, there was a more defined structure of when the award letters would be issued. These timeframes were based on application type such as early decision or regular decision. With the change of Prior Prior, college will have the opportunity to offer admission and award letters much earlier than ever before.
It is unclear how much of an impact this will be in 2017, as colleges will be reacting differently to the Prior Prior change. We will be tracking how this will change over the upcoming years.
- Personal Financial Changes
Financial changes can occur at any time in a person’s life. It could be loss of job, divorce, or even death. If a family has a significant change in their financial position, the first request of the financial aid office involves whether a family has submitted a FAFSA. Since much of the loan and grant money is sourced from the federal programs, the FAFSA form is the gateway to that process. The colleges need the FAFSA form completed to stay in compliance with the rules.
Once they have the information, the college’s financial aid office can make changes. These changes are called professional judgments. With Prior Prior, you initial submission may not show that you qualify for financial aid but this step needs to be completed for the college’s verification and documentation process.
- Ability to Pay
As stated above, when a family completes the FAFSA, the resulting calculation is the Expected Family Contribution or EFC. With the EFC number, colleges are better able to see if a family should have the ability to pay for their college. This may help some students in the admission process.
Most people do not realize that college is a business and they need various types of students to complete the targeted freshman class. One of the factors in the admission and financial aid packaging decision is the income potential of each student and that family’s ability to pay. In my opinion, there are no colleges that are need-blind. The admission offices put forward the best candidates for admission and make that statement. To stay in business, the college’s enrollment management office puts together the financial awards of the admitted students. For higher income families, this may help your child’s admission chances.
- Helps Cash Flow
In business, cash flow is critical and college funding is not different. Understanding how the cost of attendance (COA) and your Expected Family Contribution (EFC) work together over the college timeframe is an important aspect of any family’s funding strategy. A family needs to estimate the student’s financial package from the start of college to graduation. By creating a four-year net cost of college, a family can better estimate the shortfalls that may occur. This important step can help the students and parents structure the needed debt better. It limits or reduces the debt that is related to the parents from a legal standpoint.
The Direct Loan has both a lifetime and annual limit. It is also based on the academic progress of the student. A family will be unable to reclaim a prior year unused limits which is why it is so important to understand the cash flow planning.
- Federal Loans for the student do not require co-signer
Both the Direct Subsidized and the Direct Unsubsidized federal loans are the legal responsibility of the student and not the parent. This is an important fact that gives the student a responsibility in the process but also limits the legal debt issues of the parents. A private loan on the other hand requires a co-signer. When a parent co-signs for a loan, they are directly responsible for the loan if their child should default or is unable to repay the loan.
Parents often do not understand how college debt affects future borrowing. Co-signing for these loans will appear on a person’s credit report. This affects an important ratio called your debt to income ratio. If a parent needs to finance something in the future, the private student loans could be added to the parent’s debt, making their debt to income ratio unfavorable. This may result in either denial of the loan or a higher interest rate for future financing.
- Interest Rate
The current Direct Loan has a fixed interest rate that changes every July 1. The interest rate is a fixed rate for the life of each loan based on the year it is issued. If the loan is consolidated, then the new consolidated loan interest rate will be a weighted average of the loan balance and the associated interest rate summed together.
The benefit of the undergraduate direct loan is the lower interest rate and fees compared to the Federal Grad Plus loans. Taking the Direct undergraduate loans may allow a family to reserve resources for postgraduate studies. It is a great way to create an interest rate hedge on the high interest rates and fees of financing post-graduate studies.
- Repayment and Forgiveness Options
Creating the proper debt structure is important since the loan type will determine the student loan repayment and forgiveness options
The federal loans offer the most flexible options. By having more flexibility, students can better manage their cash flow and loan repayment. By completing the FAFSA, this allows the student to qualify for the federal loans from the beginning.
- Incentive Program
It is often difficult for students to understand the financial consequence of their decisions and how important it is to maintain a high GPA. For some parents who have the financial capabilities to pay for college in full, the Direct Loans are a great way to keep the student engaged in the process. To do this, a family will need to complete the FAFSA to qualify for the Direct Loans.
Here is how it works. The parent sets a graduation GPA based on their child’s academic ability. If the student GPA is higher than the agreed GPA then the parent pays the loan. If the targeted GPA is not achieved then the student needs to repay the loans. By using the direct loans, these loans are the legal responsibility of the student.
- Establishing Credit
We often hear that educational debt is good debt. College is an investment in a person’s future. The repayment of this debt allows the young adult to establish their credit and credit score. By making better financial decision and having manageable debt at graduation, a student can establish good credit. As they get older, this will help them to become more independent and allow them to qualify for larger purchases such as a home or auto.
I hope these unique reasons will help families better understand the importance of completing the FAFSA. For families who qualify for need- based aid, it is critical that this is completed. In addition, the FAFSA needs to be completed each year that the student is planning to attend some form of post high school education.
The good news is it should become a little easier to complete the FAFSA starting this year with Prior Prior.
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