What You Need to Know About the FAFSA Application

The Squeeze

• Billions in student aid money never gets used each year because students don’t apply for it.
• Before deciding what colleges your child applies to, use the school’s Net Price Calculator — which accounts for available financial aid and other budget items — to estimate what the true cost of attending will be.
• Upcoming changes to the FAFSA student aid application promise to make the (somewhat confusing) process easier.

Each year millions of students leave billions in aid money in federal and state governments coffers for one simple reason: They simply don’t apply for financial aid. Given that cost is the No. 1 reason students don’t attend college, you would think all of that cash would get used — and you’d be wrong.

There is a big acronym that holds the key to all this aid: FAFSA (short for Free Application for Federal Student Aid). FAFSA is the form parents and students must fill out to qualify for any and all federal financial aid grants and subsidized loans. And that money doesn’t have to be used just for tuition — it can also go toward rent, books, meals and supplies. 

Importantly, universities and colleges use FAFSA information to calculate the amount of financial aid offered to each student, otherwise known as institutional aid. Institutional aid packages can reduce the amount of annual tuition a whopping $40,000 or more. 

Financial aid expert Mark Kantrowitz says that of the 2 million low-income students who don’t file for FAFSA, a full 1.2 million would qualify for the maximum payout on a federal Pell grant, which alone can lift a large amount of the financial burden.

Shocked? Surprised? Don’t be. Many people don’t know how to apply for FAFSA money — or understand how important it is. (Whew. Now you’re out of that camp, at least.) It doesn’t help, too, that the forms can be burdensome and the compensation formulas obtuse. But don’t let that stop you and your child from pushing through and getting paid. 

Here is what you need to know to optimize your chances for getting the most in federal financial aid.

Apply for college financial aid early — really early

FAFSA applications open on October 1 each year for the following academic year — and it doesn’t pay to wait. On average, the sooner you apply, the more money you’ll get, says Kantrowitz, the author of How to Appeal for More College Financial Aid. People who apply in the first three months have double the odds of getting a grant versus people who apply later. “If you file in the first month, you’re more likely to get funding than if you file in the second month … and so on,” he explains. 

Even though the FAFSA forms are developed by the feds, most states and schools also use them to allocate their student aid. For many families, it can be a catchall application that applies everywhere. Be sure to check what’s required by each state and school financial aid office to be sure.

Don’t wait until you apply to colleges to apply for federal aid

Part of the reason payouts decrease after October is because 14 states have limited funds and “first come, first serve” setups. You don’t need to wait until your college application is approved to apply for funds. In fact, you shouldn’t. Some states’ application deadlines occur between December and March.

“There’s a total of 24 states where if you wait until you get your offer of admission to apply for financial aid, you may not get any state aid,” says Kantrowitz. Students who make last-minute decisions to attend college are often awarded less than if they’d planned to attend earlier.

How much will you get? How much do you need?

Ann Garcia started planning for her twins’ college tuition when they were still in middle school. Even though Garcia is the creator of the blog “The College Financial Lady” and a certified financial planner, she still wasn’t at all sure what her children would get in federal aid for their college education. (Feel better about yourself now? You’re welcome.)

Garcia’s daughter is a “super high-achiever.” Her son: “a fairly normal kid.” (She’s quick to say “I don’t love either any less.”) Before her kids applied to a school, Garcia and her husband decided how much they were willing to spend for each child. Her daughter was interested in elite schools, the kind of schools with tuitions that would be out of reach for the family without financial aid. Garcia’s son, on the other hand, hadn’t exactly applied himself in high school, so she and her husband decided their financial support would extend to in-state schools, or a similar amount elsewhere. This gave them a well-defined sense of the financial landscape they were looking at.

Meet the net price calculator, your new best friend

In the same way the timing can affect the outcome of your FAFSA application, some schools apportion aid based on financial need and others on academic or extracurricular merit. A school may fully fund a student based on proven financial need or just a set percentage. Confused? You’re not the only one. 

Often the best way to figure out what you might pay to attend a specific college or university is to plug numbers into the Net Price Calculator (NPC) that can be found on every school’s site. Each tabulator is slightly different — reflecting how the school makes its decisions for awarding aid — but most of them ask questions related to the parents’ adjusted gross income, personal assets and the student’s dependency status. 

For Garcia’s daughter, these NPCs were critical in her search for higher education. “For her, we were really concerned about what the FAFSA was going to produce for us.” By checking the school NPCs, she was able to eliminate schools the family couldn’t afford. For her son, who was focusing on state schools, the FAFSA mattered less, because there is very little need-based aid available at public schools, says Garcia. Most people’s families are going to have an expected family contribution in excess of the cost of attendance at a public school. She estimates that if a family earns more than $25,000 annually, the hunt for need-based financial aid at a public school will be a challenge. 

After much searching, calculating and applying, Garcia’s daughter was accepted at the University of Chicago — one of the most expensive schools in the United States, which has a quoted tuition just above $60,000. It’s also one of the few elite colleges that fully funds student need. In her daughter’s freshman year, the FAFSA contribution wound up being $35,000. That amount has varied in other years, depending on the family’s annual income, but the school’s Net Price Calculator has been able to estimate what the grants, usually within a $2,000 margin of error.

Garcia’s son chose the University of Arizona and scored a merit-based scholarship — it helped that he aced his ACTs — and his parents were able to spend about the same as an in-state school would have cost. FAFSA didn’t factor in the calculation.

Ways to increase your federal financial aid from FAFSA

The most impactful number on the FAFSA form is usually your family’s adjusted gross income. That number is figured by connecting with the IRS Data Retrieval Tool, which pulls in data from your tax returns two years prior.

“If you're filling out the FAFSA in the fall of your senior year of high school, which is when you do the first one, it's going to be using the income year that starts January 1 of your high school sophomore year,” explains Garcia. While most families won’t be planning that far ahead, there are small things you can do on your tax return to impact that number, such as not maxing out your tax deductions. That approach may seem counterintuitive — as it increases your net reported income overall — but Garcia says that having a higher tax bill will often increase the aid you receive.

“Families who are maxing out their tax deductions are not going to be well served on the FAFSA for having done so, because you actually get to subtract your tax liability from your income,” she says. For example, if your family contributes $15,000 a year toward retirement in IRAs or 401Ks, you may want to put $20,000 in the year before the FAFSA and only $10,000 in the year of the FAFSA reporting (your child’s sophomore year), explains Garcia.

Other assets that can ding the amount given by federal grants include student savings. The way the FAFSA is set up, parents get a higher level of asset protection than kids. Case in point: If a parent has $1,000 in his or her bank account or 529 college savings IRA, the most it will add to the expected family contribution is $56, depending on the parents’ overall assets. That same thousand dollars in a child’s bank account will be assessed at 20 percent, or $200, toward the expected family contribution. 

As a result, Garcia had her children spend the money in their bank accounts or contribute it to their 529. Before making adjustments to your IRA contributions or savings accounts, work with an accountant or financial planner to be sure the choices are wise ones.

Ways to simplify filling out the FAFSA

Part of the reason many students don’t apply for federal aid is the FAFSA process, which can include filling out 100 questions just to check if you qualify. The current system is set up to ensure people who don’t deserve the money don’t get it, rather than make it easy for people who need the funds to receive them, says Kantrowitz. Taking that into mind, the 2020 federal omnibus spending bill passed in Congress addressed ways to simplify this process. Those changes will go into effect in the fall of 2022 for the 2023-24 school year. 

The streamlining will mean fewer questions on the form. It also increases the amount of Income Protection Allowance for both students and parents. And eligibility for Pell Grants is now tied to income rather than earned family contribution, making it easier for potential recipients to know if they’re eligible. Plus the family income amount for the Simplified Needs Test, which doesn’t require reporting assets, has been increased to $60,000. Garcia goes into more details on these changes and what they might mean to you in the post “Changes to the FAFSA” on her site. 

Additional important resources for you

Before you start the FAFSA process, one of the most important considerations is deciding what you or your family can afford to pay for college. Students shouldn’t go into more debt than their expected annual income upon graduation, advises Kantrowitz. Using that guideline, you should theoretically be able to repay your debt within 10 years. 

To research more about available scholarships, including ones covered by FAFSA and merit-based aid, check out sites such as Fastweb (where Kantrowitz used to be the publisher). The good news is this: a lot of money available for students isn’t being spent. You just need to make sure your child applies for it.