Figuring out how to pay for college can be tougher than any college application. That’s why high-schoolers and their parents need to ace the Free Application for Federal Student Aid (FAFSA) form to make sure they get the financial aid they’re entitled to.
In the 2020 to 2021 academic year, only 68% of families filed the FAFSA, according to the 2022 How America Pays for College survey conducted by Sallie Mae, a private student loan lender. And one of the top reasons people didn’t file? “Complexity.”
These non-filers potentially missed out on some portion of $150 billion in various types of financial aid available, Sallie Mae reported. Furthermore, low-income students from the high school class of 2021 left an estimated $3.75 billion in Pell Grants “on the table by not completing the FAFSA,” according to the National College Attainment Network.
What Is the FAFSA?
Think of the FAFSA as a report card that college financial aid officers and the government use to determine how much you can pay for college and—most importantly—how much financial assistance you’re qualified to receive.
Prospective students need the FAFSA to open the door to many forms of financial aid, such as a federal Pell Grant (which eligible undergraduates don’t have to pay back), student loans and even work-study programs that provide part-time jobs for students to help offset school expenses.
Sounds great, right? But here’s the catch: Filling out the FAFSA correctly is no walk in the park. In fact, if there were a ranking of the most convoluted higher education forms, “FAFSA might be number one,” according to Andy Johnston of the Hechinger Report, a nonprofit newsroom that covers all things education. And, as we’ve seen, it’s one of the top reasons why families avoid it and lose out on potentially life-changing funds.
“The most important thing you can do to prepare for the cost of education is to fill out the FAFSA—and fill it out correctly,” says Thomas O’Rourke, director of DoMyFAFSA.com.
How to Fill Out the FAFSA Correctly
Here are six essential things to know about submitting the FAFSA. And remember, both the student and a parent must fill it out—no skipping mom or dad.
1. Fill the FAFSA form out no matter what. Even if you don’t think you’ll qualify for much, you should still fill it out—it’s worth it. In the 2020 to 2021 school year, the average aid awarded was $14,800 per undergrad, according to the College Board. And more than 85% of full-time undergrads received financial aid in the 2019 to 2020 school year, data from the National Center for Education Statistics shows.
Like the lottery, you’ve gotta be in it to win it. If you don’t file the FAFSA, you won’t be eligible for aid. “If a family doesn’t file, they give up the option of taking out a federal student loan,” says Stuart Siegel, CEO of Financial Aid Now. “And a lower-income family gives up the chance to get a Pell Grant.” What’s more, some colleges won’t give out scholarships without a FAFSA on file. So the importance of making a conscious effort to fill it out cannot be understated.
2. File early. Forget the worm: The early bird, in many cases, gets the money. Filing your FAFSA as soon as you can on or after the October 1 opening date could net you more aid. Why? Many states award grants on a first-come, first-served basis, according to College Ave Student Loans, a private student loan provider. Some aid programs also have limited funds, so you want to get in the front of the line.
“Students who file the FAFSA in October tend to get more than twice as much grant aid, on average, as students who file the FAFSA later,” says Mark Kantrowitz, student financial aid expert and publisher of College Ave Student Loans.
3. Organize important documents. Before you sit down to fill out and submit the FAFSA on the U.S. Department of Education’s site, gather the key financial information you’ll need. Round up your or your parents’ tax returns and W2s, financial statements (such as brokerage accounts and bank statements), social security numbers and driver’s licenses. To avoid errors in transferring numbers from your tax return, you can upload your tax return directly from the IRS website on the FAFSA application.
4. Minimize income in the key tax year. FAFSA calculates your ability to pay and your so-called “expected family contribution” by looking at your income and tax return from a previous year. It’s referred to as the “prior-prior” year, or base year. For example, for the 2022 to 2023 school year, the 2020 tax return would be used. For the 2023 to 2024 school year, FAFSA will look at your 2021 return.
Since anywhere from 22% to 47% of parents’ adjusted income is viewed by FAFSA as money that can be used to pay for college expenses, it makes sense to reduce income in the base year where possible. Some ways to do this include not exercising stock options, not selling winning stocks to avoid realizing capital gains, postponing retirement plan distributions or deferring bonuses.
Students’ income is treated in an even less favorable way than parents’ earnings. For the 2022 to 2023 school year, for example, 50% of any student earnings above $7,040 are treated by the FAFSA as money that can be put toward college. But a student who earned more than that protected amount can reduce their income for financial aid purposes by opening an IRA, Roth IRA or something similar, since retirement accounts don’t affect students’ expected contribution.
5. Pare down reportable assets. While parental assets don’t count as much as income on the FAFSA (only a maximum of 5.64% of assets are viewed as eligible for college expenses), it still makes sense in some cases to reduce the number of reportable assets in savings accounts and/or non-retirement investment accounts.
To do so, consider paying down consumer debt, like credit cards, or pay off your car loan early. If you were planning on buying a house or a car, using excess cash to fund a down payment now rather than later can lower the value of the assets that you report on the FAFSA.
6. Avoid costly mistakes. A big error many make is including retirement accounts, such as 401(k)s and IRAs, or the equity in a primary residence, as assets. FAFSA does not consider either of those major assets when determining how much a family can contribute to college expenses.
When in doubt, make sure you fully understand the questions the FAFSA is asking, says Siegel. “And if you don’t, ask questions yourself by consulting a professional.”
One more thing: If your financial situation has changed due to, say, a job loss since you filed the FAFSA, contact your school’s financial aid office to discuss it and push for more aid. Every bit helps.
Millie content is licensed from Dotdash Meredith, publisher of Millie, Real Simple, InStyle, Investopedia, The Balance and more.
Adam Shell is a freelance journalist. He’s worked as a financial markets reporter at USA Today and an associate editor at Kiplinger’s Personal Finance magazine.