This guest post is brought to you by Ryan Ayres from The Financial Student, a personal finance site for teens, college students, and lifelong learners interested in the basics of personal finance.
While the Free Application for Federal Student Aid was due months ago, the effects of it will be felt by college students for years. Some students will receive grants that never have to be paid back while others will receive subsidized loans from Uncle Sam. No matter what one’s individual situation is, the FAFSA is a key factor in college finances.
But Is The FAFSA Fair?
The number of grants and type of loans a student receives is almost entirely based on how much their parents earn. The logic goes that if your parents are loaded, then you don’t need as much, if any, government assistance. There are, however, some problems with this system:
1. The FAFSA assumes that parents are going to pay for college. If your parents believe you should pay your own way, then their income and assets are irrelevant. While my own parents will most likely help out with some expenses — like books and maybe making a few interest payments on my student loans — I’m responsible for the majority of the cost. Why does it matter how much they earn?
Image from Time.com
2. The FAFSA punishes you for being a good money manager. The government looks at a family’s assets to figure out how much assistance their child will receive. That means emergency funds actually work against students. Same with those online brokerage accounts or owning a business. Now, this doesn’t mean that high school students and their families shouldn’t save money over the years, but it’s interesting how good behavior is actually discouraged! Many people (myself included) therefore recommend making large purchases (home renovations, automobiles, furniture) to lower assets on the FAFSA.
3. The FAFSA doesn’t do a whole lot to help out the middle class. The worst off will receive the best grants that never have to be repaid. The richest Americans will be able to cover the cost without many, if any, problems. That leaves the middle class to fend almost entirely for themselves. For example, I didn’t receive anything other than subsidized loans. No “free” money. And my parents are most definitely middle class: a schoolteacher and paramedic! The interest break is nice, but the average $24,000 that a student borrows is still a decent chunk of change to pay back.
Questioning FAFSA: Free Application For Federal Student Aid
Despite what’s wrong with the FAFSA, it certainly does a lot of good. Overall, more students are able to attend school because of this program. Since the federal government need not impress shareholders like big banks do, the result here is that they can provide low interest rates for loans. But it’s far from a perfect system. The best way to prepare for a student’s schooling is to handle it yourself — fund a 529 college savings plan or Educational Savings Account if you can, have your child apply for as many scholarships as possible, and consider a cheaper school.
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{ 6 comments… read them below or add one }
I believe (though I’m not sure) that your point #1 doesn’t apply if parents don’t claim the child as a dependent on their taxes, that the student is entirely self-supporting. I had a friend whose parents wouldn’t even try to pay for her college, and she went this route to get financial aid for herself.
@ CM – this varies a lot from state to state, or at least did when I went to college (graduated in ’97). In many states, it’s more complex than just not being claimed as a dependent on taxes.
My parents didn’t have the inclination (or the ability) to pay for any of my college expenses, but their income still went into my FAFSA. Lucky for me, it wasn’t a lot, but I still ended up with a ton of loans.
@CM Unfortunately, it is not that easy. The FAFSA uses a series of dependency stats questions to determine whether you are a Dependent (need your parent’s income) or Independent (use only your income). The general requirements are 24 years old or older, married, have a dependent that you support, or being prior military service. There is a process that each school may use to determine a student’s dependency status; it is called a “Professional Judgment”. The process varies among different schools, but I would consult your school if you had any specific questions.
Overall, I believe the FAFSA is fair. Unfortunately, it may seem like only very low income individuals or single parents are eligible for aid, and while that may be relatively true for the Federal Pell grant, many schools use the FAFSA application to administer school based aid which also allows a lot of students to go to school. So all in all, it is a great tool for financing school.
The problem with FASFA is that now many for-profit schools use it as a tool to access pools of government student loans. Many of these institutions operate as sales operations and try to get as many people into the system as they can with no sensible retention policies. They target their marketing to low income areas and many of these people will qualify for every penny of government loans. In fact, 40 to 50 percent of for profit student loan borrowers default.
The FASFA needs to be revamped and there needs to be a stop of lending to for profit schools until they can demonstrate stats on career placement. Just another market being pushed into a bubble by easy money.
I am an international student so I can’t apply for FAFSA. 🙁
I think there needs to be more of a recourse for students who are out on their own. Perhaps a version of the FAFSA that does not include parent’s finances, but requires more documentation to prove that you’re not receiving familial help and has more requirements to use. I would think if you’re living on your own, filing your own taxes and working at least part time while going to school, that’s at least a candidate for being independent.