FAFSA Freak Out


While dorm move-in day is months away, now is the time for college applicants hoping to receive financial aid to complete the much-maligned Free Application for Federal Student Aid (FAFSA). While each school sets its own financial aid due date, some of the money is available on a first-come, first-serve basis, so it’s time to get busy! Before you start moaning, you should know that you have lots of company: the National Center for Education Statistics (NCES) found that over 70 percent of all undergraduate students received some type of financial aid in recent years, of which one-third was provided by the federal government. Over 20 million people completed FAFSA forms last year.

Many parents tell me that they won’t qualify for financial aid, “so why bother going through the drudgery of doing it?” According to the U.S. Department of Education, “the FAFSA takes most people 23 minutes to complete…and contrary to popular belief, there is no income cut-off when it comes to federal student aid.”

Maybe the procrastinators are already coming up with an excuse: “I’ll wait until after April 15th, so I’ll have my tax returns in hand." Contrary to conventional wisdom, you don’t have to wait until you file to start the FAFSA. Use your 2013 return as a guide to estimate your 2014 numbers so that the government can process the application immediately - you can submit your actual 2014 return later.

In fact, there is now a partnership between the FAFSA site and the IRS, allowing students and parents to automatically transfer the necessary tax info into the FAFSA using the IRS Data Retrieval Tool. In most cases, your information will be available from the IRS two weeks after you file. You can also change your mind about which schools you’re applying to, by logging in to the FAFSA site and updating school information – the same goes for when family income drops.

Those who don’t complete the FAFSA could be leaving a lot of money on the table and frankly, it is a pretty good trade: your time for a potential reduction in college costs. According to the College Board, the average cost of tuition and fees for the 2013–2014 academic year totaled $8,893 for state residents at public colleges; $22,203 for out-of-state residents attending public universities; and $30,094 at private colleges.

It should be noted that the same report also found that the actual amount that most students pay is lower, because of increased discounts, grants and tax benefits. Still, families need to tap whatever resources are available to finance higher education, which is why outstanding student loan balances stand at $1.13 trillion, as of September 30, 2014. There could be some relief from that mountain of debt: analysis from the New York Times shows that legislative changes to the Income-Based Repayment program (IBR) "may make it much easier for students to get out from under their debts."

Before you go into shock with all of these numbers, it might be helpful to utilize the FAFSA4caster, a free financial aid calculator that gives you an early estimate of your eligibility for federal student aid and helps families plan ahead for college.

And while not every student should attend a four-year private college, some higher education gives the average worker an advantage in the current labor market. Through the end of 2014, the national unemployment rate stood at 5.6 percent, but those who held an associate’s degree or had some college under their belts, were in much better shape, with just a 4.9 percent unemployment rate. Graduates with a bachelor’s degree or higher had a rate of just 2.9 percent. On the other end of the spectrum, those who did not finish high school have a still-high 8.6 percent rate.

And college degrees really do pay great dividends: a 2014 New York Federal Reserve study found that the return on a college education remains at about 14-15 percent, "easily surpassing the threshold for a sound investment." Separately, a San Francisco Federal Reserve study showed that the average college graduate could expect to earn at least $800,000 more than the average high school graduate over a lifetime.

Meanwhile, if you have younger kids or grandchildren and you are considering the various ways to save for college, the 529 plan is still my favorite vehicle. Under current law, 529 plans allow for tax-advantaged investing for college. Contributions within the account grow tax-free and are not taxed upon withdrawal, provided they are used for qualified higher education costs.

There was some concern after 529 plan changes ended up in President Obama's tax reform plan. Under the proposal, you would no longer be able to withdraw 529 funds on a tax-free basis. (The changes in would apply only to new contributions.) After harsh criticism, the Administration dropped the plan so 529 plans remain safe!