The Fundamentals of Financial Aid

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What actually is Financial Aid?
Every year on April 15, the people of the United States pay federal taxes, and a part of these taxes go directly to the federal student aid programs. This part of the tax is used to fund the college education of those people, who cannot pay for themselves.

So, in the time of extreme need, when the taxpayer themselves cannot afford their child’s college education, they can apply for these aid programs.

The federal government sets aside a huge amount of money annually, to be used for various federal aid programs. Almost all eligible applicants are eligible for a part of this financial aid.

Understanding financial aid- important terms

Students often lose hope and give up the idea of applying for the financial aid, thinking that they might not be eligible for it. Irrespective of the circumstances, we suggest you to apply for the financial aid by filing the Free Application for Federal Student aid (FAFSA).
Interestingly, you will be surprised to know that, even the rich parents manage to get financial aid for their children, by filing the FAFSA.
Before you understand the various ways of getting the financial aid, you must be acquainted with the important terms related to financial aid-

Below are the important phases you must know-

Free Application for Federal Student Aid(FAFSA):

The FAFSA is a form which is annually filled by current and prospective students, to determine their eligibility for the financial aid. After the form is processed, a Student Aid Report (SAR) is formed by the federal government. The SAR will decide whether the student should get financial aid or not.

IMPORTANT NOTE

  • January 1 is the initial date for filing the FAFSA.
  • Apart from the FAFSA, many colleges need you to fill up the CSS/Financial Aid Profile for additional information on your returns.

PROFILE:

Just like the FAFSA, the PROFILE is also a form, which is filled by the current and prospective students, to find out their eligibility for the financial aid. The private colleges and some other government colleges require you to fill the PROFILE to extract some extra financial information, and decide the aid accordingly.

Expected Family Contribution(EFC):

EFC is the estimate of the contribution, which the family and/or the applicant can make for the applicant’s post-secondary education. Each year the federal government allots a particular amount of money, which can be used as an aid by the students.

The EFC is required in order to determine the need-based financial aid, which the applicant is eligible for. The students have to apply for the Free Application for Federal Student Aid (FAFSA) each year. After the FAFSA is processed, the Student Aid Record is made which contains the information about EFC, and taking the EFC into consideration, the aid is decided.

This aid is not directly given to the students, rather it is sent to the college. The college, then uses the federal aid and combines it with the State Financial Aid (if the candidate is eligible for it), and the college’s own aid (if the candidate is eligible for it), and forms an aid package for the student. The lowest EFC number is zero, and the highest is $99,999. If the family’s income is below a specific number (which keeps on changing), then the EFC is automatically considered to be Zero.

IRS Form 1040:

The U.S taxpayers can use this form to file their annual income tax return. The form is divided into various sections in which the taxpayers are required to file their total income from any legal source (salary, tips, interest, dividends, alimony, business income, capital gains, IRA and pension distributions, farm income, social security benefits, unemployment income, and taxable state and local tax returns, or any other source until it is tax-exempted), and make any possible deduction and exemption to it, to improve their Adjusted Gross Income (AGI). After the total income has been filed, the taxpayers must figure out the amount of tax they have to pay, or any refund they should get.

IRS Form 1040A and 1040EZ: -These two forms are also used to file the income tax returns, but unlike the IRS 1040 form, not everyone can file the 1040A and 1040EZ forms. These two forms are called the long forms.

To be able to file the 1040EZ form, the taxpayer must fulfil the following conditions:

  • Taxable income must be less than $100,000.
  • The taxpayer should be single, and if married, then both must file jointly.
  • The taxpayer should have no dependent.
  • The income source should be from any of these: wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends.
  • The taxpayer should not be more than 65 years of age, as on January 1 of the year in which he files the taxes, or blind at the end of the tax year, for which he is filing.
  • The taxable interest must be $1,500 or less.
  • The tips earned by the taxpayer should be included in boxes 5 and 7 of their W-2 form.
  • The tax payer should not hold any household employment taxes on wages that they have paid to the household employee.
  • One should not be a debtor in bankruptcy case filed after Oct. 16, 2005

To be able to file the 1040A form, the taxpayer must fulfil the following conditions:

  • Taxable income must be less than $100,000
  • The income source should be from any of these and not more: wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends.
  • One should not itemize deductions (this prohibits you from deducting the charitable donations or mortgage interest paid.)
  • Copy of Copy of The income source should be from any of these and not more: wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends.
  • The tax payer’s only adjustments in their AGI should be an IRA, student loan interest, educator expenses, and tuition and fees deductions.
  • The tax payer’s taxes should only be from the tax table, the alternative minimum tax, recapture of an education credit, Form 8615 or the Qualified Dividends and Capital Gain Tax Worksheet.

The only credits that the taxpayers can claim are the credit for child and dependent care expenses, EIC, credit for elderly or the disabled, education credits, child tax credit, additional child tax credit, or the retirement savings contribution credit.

COA (cost of attendance):
Every college and university calculates its own cost of attendance, which includes tuition fee, housing, food, books, personal supplies, and transportation also called a “budget”.
While calculating your financial aid package the college will subtract your EFC from the COA to calculate your “need.”

Net Price Calculator:
It is mandatory for all colleges to display a calculator on their websites that gives a detailed information about the cost of attendance, EFC, scholarship, grant, tuition and accommodation. The calculator is termed as the Net Price Calculator.

FAFSA4caster: 
FAFSA4caster is a tool that can be used to input data, and roughly calculate your EFC. Though it is not accurate, it can help you estimate your EFC and prepare beforehand. It is really beneficial for those who have a consistent household income. To gain access to the dummy FAFSA called as FAFSA4caster, you can visit fafsa4caster.ed.gov.

Dependents: 

A student who depends on his/her parent/s for more than half of his/her support for the last 1 year is called as a dependent student. The dependency status often leads to a lot of confusion while filing the FAFSA. So, it is important to note that: as long as a student seeks for more than half of the support from his/her parents, he/she will be considered as a dependent, even if he/she files his/her own taxes.
Let us consider a situation- A student earns $8,000/annum, but his/her annual expenses exceed $20,000, and he/she has to depend on his/her parents for the support. Here, the student earns a good amount of money and though the income is taxable, and he/she pays taxes, the student is still considered dependent as he/she depends on his/her parents for more than half of the support.

Dependency Status

As stated before, a mere declaration by a student won’t change his/her status from dependent to independent. A worksheet is a mandate for determining the status of a student.

The student has to provide answers to a lot of questions on various topics like-marital status, military service, age etc. After providing suitable answers to these questions, the dependency status of a student will be determined.

Students who are willing to file the FAFSA can take the dependency status related test online at visit fafsa.ed.gov.

The personal identification number (PIN)

If you want to file the FAFSA online, then personal identification number is a mandatory requirement for signing the FAFSA. You can visit pin.ed.gov to apply for PIN.

Note- The custodial parent should also apply for his/her own PIN.

SCHOOL CODES
While filing the FAFSA, a student is required to select a list of schools to which he/she wants to send the FAFSA information. The online version of the FAFSA allows you to shortlist up to 10 schools, but while selecting the schools, a student is required to enter the respective school codes.

How to search for the codes?
You can take help from the FAFSA website to get the desired school codes.

DRN (Data Release Number)

Where to find the DRN number?
You can find a four-digit number in the upper right-hand corner of the Student Aid Report. While filing the FAFSA, you can also check the DRN number on the confirmation page.
About DRN?
The DRN number must be kept confidential, and an applicant should never share his/her DRN number with anyone.
But why?
The DRN number can be used to get the applicant related information filed on the FAFSA. The number comes in handy, if an applicant wants to make changes or updates to the FAFSA, including the email id, contact number, permanent mailing address, school codes etc.

Signature Page

As discussed before, the personal identification number (PIN) is a mandate for signing the FAFSA electronically.

What if, I don’t have the “Personal Identification Number” (PIN)

If the parents of the dependent student, or the dependent student him/herself, does not have the PIN for signing the FAFSA. He/ she can sign it manually by, taking a print and signing it.

NOTE-
Signing the FAFSA, irrespective of the misleading or false information may attract severe charges. The applicant may be fined $20,000 or sent to the prison.

Confirmation Number
We have discussed about a lot of numbers, including the PIN, DRN, SSN etc.
You might think, we are done with the numbers- However, you still need to learn about another number, called the confirmation number.
When you are done with filing the FAFSA, the last page called the confirmation page, will contain the confirmation number.

The page will suggest you to note down the number for your reference, as it might be required in the future.

Institutional OR Supplemental Application
You must have heard about the FAFSA, but what about the supplemental or the institutional application?

While the FAFSA contains the information required by the federal government, that can be sent to the selected colleges, the colleges have a separate form through which they can get access to the financial information of the applicants.

Just like the FAFSA, the Institutional or the Supplemental form is free of cost.
However, only a selected number of schools required this application.

FAFSA Transaction

Each time a FAFSA is filed or the correction is made to the existing FAFSA, a transaction takes place. As a result of the transaction, a new SAR is created along with the transaction number.

The entire process is called as the FAFSA transaction, and It makes it easier to determine and convey the changes, like- you can ask the concerned financial aid authority to refer to the “change made to transaction 4” or “transaction 4” without having to specify the exact change.

The Pell Grant

The Federal Pell Grant is another type of financial aid, that can be availed by the students on the basis of their need. Unlike other loans, the Pell Grant does not have to be repaid. The Pell Grant can be availed only by undergraduates.
In some cases, the post baccalaureate students, who have enrolled in the post baccalaureate teacher certification program can also avail the Pell Grant.

The Stafford Loan

The students who want to pursue their higher education from an accredited American institution, can avail this loan. This program was renamed from the Federal Guaranteed Student Loan program to the Robert T. Stafford Student Loan program, in the honor of U.S Senator Robert Stafford.

The Stafford loan is beneficial for the students, as it attracts a lesser rate of interest, in comparison to other loans.

Interestingly, the repayment of this loan has to be started only after six months, after the student has left or passed out of the college. The interest rates for the Stafford Loans do not depend on the major subject, or the future employment prospect of the student. The interest rate is dependent on the date, on which the loan was applied for, and may vary depending on the education level of the student.

The Federal Perkins Loan

The Federal Perkins Loan is a financial aid program, that provides loans, only to the students with exceptional need. The interest rate for this loan program is very low, and it stands at 5%/annum. However, not all schools participate in this loan program, so one must check with the school’s financial aid office, to know about the availability of this loan. The fund received from this program depends upon the financial need of a student, and availability of funds at the school.

The Federal Work-Study program

This program helps the needy students by employing them in a part time work, to fund their post-secondary education. The wages earned from this program will never be less than the federal minimum wage. The employment can come from: the institution itself, or the federal, state. It can also come from a local public agency; a private non-profit organization; or a private for-profit organization.

Financial Aid Officer (FAO): The FAO is a representative of the college, who looks into the total matter relating to financial aid. He/she is authorized to decide, whether or not the student should be given any kind of aid; if yes, then how much the aid should be.

Individual Retirement Accounts (IRAs): The IRAs are kind of retirement programs or accounts, where one can contribute money for post-retirement purpose. These accounts are provided to the people by the financial institutions. The advantage of having such accounts is that, any contribution made to the IRAs become tax free (except in some cases).

Adjusted Gross Income (AGI): The AGI is the estimate of the total gross income of a person. The AGI is calculated by deducting some personal exemptions and itemized deductions from the total income.

Margin Debt: The debt that can be availed on margin by opening an account is called margin debt. The amount of debt that can be availed, depends on the account capital, and an interest rate is charged on the debt.

Base-Income Year: The year which is taken into account while deciding the financial aid, is considered as the base-income year. The year previous to the one, in which you have paid your child’s tuition is called as the base- income year.

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