The Free Application for Federal Student Aid (FAFSA) is one of the most critical financial aid forms a student will have to complete. The FAFSA determines how much federal aid a student is eligible to receive (in the form of grants or loans) based on U.S. Department of Education guidelines. Filling out the form is much like filling out a bank loan application since you must include information on family assets income.
It is easier to file the financial aid application once parents have completed their taxes, however, the FAFSA can be filed using the best estimate of your prior year's income. The state in which a student resides and their choice of school and academic standing are components which contribute to the total amount of aid a student will receive in the form of scholarships, grants and loans. It is important for students to understand that the chances of receiving federal aid are directly related to filing the FAFSA on time and the financial strength of their family.
The FAFSA measures your family's expected contribution toward the cost of your education and, as such, a bit of planning prior to preparing the FAFSA can help you save thousands of dollars toward the cost of a college or technical education. Following are strategies FAFSA filers should investigate to reduce cash assets and lower reported income:
Prepay state taxes by December 31. Paying a due amount by December 31 will reduce your cash assets and entitle you to an additional deduction on your tax return.
Maximize retirement saving contributions.
Make charitable donations.
Contribute to a Health and Dependant Savings Account (flex spending). Flex contributions are deducted from your gross income which greatly reduces the amount of income you report to the IRS.
Make purchases before the end of the year such as a qualified energy efficiency improvement to your primary residence by December 31. This will reduce the amount of cash you have on hand and, under the Energy Policy Act, you may get a tidy tax credit.
Pay off loans. Make an extra payment toward the principal amount of your home loan. You will pay less interest and build a nest egg in the form of home equity.
Pay off bills. Paying for services upfront reduces cash assets and may entitle you to a discount, such as receiving rebates from an automotive insurance provider by paying for the year in full.
Sell bad investments by December 31 to offset capital gains.
Since funding is on a first come, first serve basis, be sure to file your FAFSA the second you are eligible on January 1. Doing so will increase your odds of getting federal aid and you may actually receive more financial assistance because the money pool has not been diminished. Don't attempt to file the FAFSA prior to January 1 because the application will not be processed.
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