As the college application and financial season approaches, more families are concerned about how they will pay for their child’s education. Most parents do not realize that if they fill out the Free Application for Federal Student Aid or FAFSA it could help their child’s admission chances.
Most colleges have a process called enrollment management. This business approach allows the colleges to fill the seats they want or prefer in the upcoming class both from an academic and financial enrollment standpoint. Yes, I did say business. A family’s ability to pay the bill is an important factor in the enrollment management decision and it is often not explained to families.
Some families may question whether they should take the time to fill out the FAFSA. Over the years when talking to different families, they have shared reasons 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. I feel that submitting the FAFSA should be put on the list for every family regardless of their financial state.
When a family completes the FAFSA, the EFC or Expected Family Contribution is generated. This is an important number in the financial aid process and packaging. 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.
Become Eligible for Direct Federal Loans
By completing the FAFSA, no matter what a family’s financial strength, the student will qualify for the Direct Federal Student Loan. Any school or program that receives federal funds will require the FAFSA submission. The completed FAFSA is required for the student or parent to qualify for any federal funds or loans.
Even if a high-income family does not qualify for the Direct Federal Subsidized Loans, by submitting a FAFSA you will become eligible for a Direct Unsubsidized Federal Loan. The proper debt structure is becoming more important since careers are requiring post-graduate education.
Shows the College Your 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 has 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 that colleges 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 amount of revenue each student can pay. The EFC is just an estimator of your family’s ability to pay. It does not mean that a family has the ability to pay or will pay that amount.
In my opinion, there are no colleges that are need-blind. The admission offices put forward the best candidates for admission. Based on the college’s admission goals for that year, the enrollment management group then takes those recommendations and develops the award letters to match their revenue goals. For higher-income families, this may help your child’s admission chances.
Completing the Application Submission
By completing the FAFSA, and submitting an application, the student is telling the colleges that he or she is 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.
Financial changes can occur 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 funding source. 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, a family’s initial submission may not show their current financial position. Having the FAFSA completed could accelerate and improve your chances of getting more financial aid. This will be especially true this year due to the financial impact of COVID.
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 through graduation. By creating a four-year net cost of college, a family can better estimate the shortfalls that may occur and better structure any debt. It also limits or reduces the debt that is related to the parents from a legal standpoint.
The Direct Federal 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’s unused limit which is another reason why it is so important to both understand and implement a cash flow plan as early as possible.
Federal Loans for the student does not require co-signer
Both the Direct Subsidized and Unsubsidized federal loans are the legal responsibility of the student and not the parent. This is an important fact since it limits the parent’s loan liability. It gives the student the financial responsibility for this loan.
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, 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. Federal Parent PLUS loans are legally the parent’s loan and not the student’s.
The current Direct Federal 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 that is summed together.
The benefit of the undergraduate direct federal loan is the lower interest rate and fees compared to the Federal Grad Plus loans. Taking 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. Federal loans offer the most flexible repayment options. By having more flexibility, students can better manage their cash flow and loan repayment. As stated above, completing the FAFSA allows the student to qualify for federal loans from the beginning.
Personal Financial Incentive Program
It is often difficult for parents to engage their children in the financial consequences of their college decisions. It can be hard to explain why it is important to maintain a high GPA. For some parents who have the financial capabilities to pay for college in full, 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 Direct Loans.
Here is a possible suggestion. The parent sets a graduation GPA based on their child’s academic ability. If the student’s 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. Direct federal loans are the legal responsibility of the student.
We often hear that educational debt is good debt. College is an investment in a person’s future. The repayment of this student loan debt allows young adults to establish their credit and credit score. By making better financial decisions and having manageable debt at graduation, a student can establish good credit.