Congratulations to all college bound freshmen! The majority of the high school seniors have made a college commitment but the work is not over yet! There are still financial aid steps required after your college commitment. Many of these steps require significant attention. The final financial aid details include financial verification and data retrieval, structuring your debt correctly, signing the student loan agreement (promissory note), utilizing tax strategies and maximizing your resources.
Data Retrieval and Verification
Families have submitted their FAFSA information. The tax information needs to be verified by the college through the FAFSA/IRS Data Retrieval Tool (DRT) to be compliant with the Federal Government guidelines. This process provides the college’s financial aid office that the FAFSA numbers match the tax information submitted. Verification normally happens in May after the student has committed to the college. Changes can occur within the award letter if the amounts do not match. Depending on when you filed and paid your tax bill impact when this information is available through the IRS system.
It is always important to check with your school’s financial aid department to make sure all your information is received according to the deadlines listed at that college. If a parent submitted, an estimated FAFSA based on their last pay stub of the year with their W-2 and 1099 statements then they would use this tool after they file their federal income tax return. DRT is not always able to be done right after you complete your taxes. If you file your taxes electronically is can be used 1 to 2 weeks after it is sent. Taxes that were mailed can take up to 8 weeks.
Structuring the Student Loans
How can families structure the impeding debt correctly? One great feature of the EFC PLUS system is that it calculates a four-year cash flow analysis. This feature helps families review potential future college debt by year. Families can get a better understanding of the cost needed to get their child financially to graduation. What is often miscalculated in this review is the amount of debt that parents will directly or indirectly be responsible for. Depending on the goals of the family, an evaluation of the cost of money is an important step to review. This discussion should include the amount of college debt you want your child to incur. As an example, a parent may need to decide whether a Parent Plus loan versus a home equity has the best value for paying for tuition or whether the student will be taking the direct federal loan. The cost of money in this situation could be substantially different.
Another advantage of the EFC PLUS four-year cash flow is the ability to see the timing of when the student’s debt will be incurred. Many families make the error of not accepting the federal direct (Stafford) loan in the early years. The federal direct loan has both an annual and lifetime limit. Knowing the timing of the debt and positioning it to your customized budget will allow families to understand when these loans need to be utilized.
Final Financial Aid Award Decisions
After the financial verification, the student will receive a final financial aid award letter. With this letter the student will have to accept or decline the individual items of the financial award so that a final bill can be generated. As an example, a student may have received a work study opportunity that a family may decide is not a good option. Understanding the details of each piece of your award is important. The details tell the student the bottom line. This is often provided in a semester and total format.
Signing the Loans
Once the award letter is finalized, the school will give the student and parent access to the appropriate loan options. At that point the appropriate person will need to sign the promissory note. The promissory note is a binding contract for the federal student loans. This year students and parents will need to use their new FSA ID to sign these legal documents. It is all done electronically. The new FSA ID is replacing the Federal PIN. This change is scheduled for May 10, 2015.
Beyond Financial Aid
Often overlooked in the financial aid process are the various strategies that can lower the out of pocket cost of college. Various tax strategies can help families depending on the filing status and income of both the parents and the student. This could be a tax saving worth up to $2,500.00 per college student per year. The two most common are the American Opportunity Credit and the Lifetime Learning Credit. There are other tax strategies for self-employed, 529 plans and gifting that can be utilized to lower the college cost.
Many families focus only on their EFC and financial aid process. They do not look at the financial commitment at a broader level. In the paragraph above we have identified a few items that need to be considered and addressed before the first day of college. Each year families should review certain key financial details. The key areas would involve evaluating financial aid position, possible education-tax strategies, college saving plans and current student debt structure. By reviewing these details each year, families can maximize resources and this may lower their cost of college.
The EFC PLUS system helps families evaluate the various financial options that families may need to understand. It identifies by year what debt will need to be incurred and when additional resources will be needed. By understanding the four-year net cost of college the student and family can envision the financial outcome at graduation.