FAFSA formulas dictate how much you can borrow for college

All federal aid is awarded based solely on financial need. When families file the Free Application for Federal Student Aid, or FAFSA, their income tax returns are downloaded from the IRS, and their ability to pay is computed.

 

In other words, parents have the primary responsibility to pay for their children’s education, and the federal government helps primarily as a lender. It’s like the hiker who is making the climb but is short a length of rope. Federal aid is the length of rope needed to supplement the family’s resources.

 

For undergraduate students, the Pell Grant is awarded to the neediest of students. The FAFSA Simplification Act has raised this limit so that families with adjusted gross incomes up to 225% of the poverty line can still receive a small amount of a Pell Grant.

 

The basic formula for determining need is the cost of attendance (COA) minus your Student Aid Index.

 

For example, if the COA is $58,000, and the family’s calculated contribution is $40,000, the demonstrated need is the difference, or $18,000. 

 

Assuming the student is going to college for the first time, the federal loan for a dependent student is $5,500. Parents can borrow up to the full cost, minus any other aid, through the federal PLUS loan for parents. This means that if parents haven’t saved enough, the college financial aid administrator can certify one parent for the federal loan amount. Colleges also keep agreements with private lenders, and parents need to weigh their borrowing options carefully.

 

The FAFSA Simplification Act changed some terms.

 

Parents are now called contributors, and a family’s expected financial contribution is now called the Student Aid Index. Families with multiple children in college at the same time don’t receive a discount on their contribution. Businesses are more carefully evaluated. Luckily, FAFSA doesn’t count the family’s principal residence. On the other hand, the College Scholarship Service Profile form, used by elite colleges, does count the equity in one’s home. Given the increased valuation of homes, this typically increases the family’s expected contribution.

 

Parents often ask me whether it’s worth it to file FAFSA. The answer is “it depends.” But most often, it is worth it.

 

If there’s demonstrated need, a student may qualify for the unsubsidized portion of the loan. In the first year, dependent students can borrow up to $5,500; in the second year up to $6,500; and in the third and fourth years, $7,500 each year, hence graduating with $27,500 in loans plus interest.

 

Dependent students cannot borrow more than these limits. If they’re willing to borrow, parents can pay the balance with the federal PLUS loan, which, like the unsubsidized loan for students, is awarded regardless of demonstrated need. But most people borrow those federal loans because they don’t have the means to pay in full prior to the start of classes.

 

As poorly as this new FAFSA launch turned out, the formulas behind the form are public, and families can become informed consumers.

 

C. Claire Law is a M.S. IECA Certified Educational Planner and has been a Daniel Island resident since 2004. Her latest book is “How to Control Your College Costs.” For more information on calculating college aid, visit studentaid.gov.