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Ask Kantro: Questions about the Free Application for Federal Student Aid (FAFSA)

Having grown up with depression era parents, I’ve never been someone that liked to have debt. I’m told that avoiding debt will not work in my favor when applying for financial aid for my son’s education. What should I know and is there something I should do to improve my odds of getting what other typically debt-ridden families in our tax bracket will be offered? My son is 17 and so we are in the process of filling out applications for schools now and soon will be dealing with the financial aid forms. — Priscilla T.

You have been misinformed. Unsecured consumer debt is not considered by the federal need analysis formula. (Secured debt such as margin loans is considered as an offset to the value of the asset to the extent that the asset is reportable on the Free Application for Federal Student Aid (FAFSA).) There is no advantage to having more debt.

Consider two families with a net worth of $50,000. One family has $50,000 in the bank and no debt. The other family has $100,000 in the bank and $50,000 in debt. Assume that the age of the older parent is 48 in both families, so the asset protection allowance is $52,400 (2009-10). Then the first family will have no contribution from assets, while the second family will have $47,600 in unsheltered assets and a contribution from assets of as much as $2,685. Thus the family with no debt will get more financial aid than the other family, all else being equal.

Families are always better off saving for college. While there is a slight penalty for savings, savings provides more flexibility. For example, money in the parent’s name reduces aid eligibility by at most 5.64%, or $564 for every $10,000 in assets. This means that a family who has saved $10,000 will net at least $9,436 more money to pay for college than a family that has saved nothing.

It is also cheaper to save than to borrow. If you save $200 a month for 10 years at 6.8% interest, you will accumulate about $34,433. If you were to borrow the same amount at 6.8% interest, you would pay $396 a month for ten years. So you have a choice: save before college or pay twice as much after college.

My daughter is in her second year residing on campus. We complete the FAFSA annually and receive financial aid in the form of student loans and parent loans. Next year she is thinking of residing off campus in an apartment to be shared with others. Will financial aid continue to help us and consider the costs that she will have for living off campus? — Shelley M.

Financial aid is based on financial need, which is defined as the difference between cost of attendance and the expected family contribution. The cost of attendance includes an allowance for room and board. Most colleges will have two cost of attendance figures (often called “student budgets”), one for students who live on campus and one for students who live off campus. Some colleges base their off-campus budget on a survey of local apartment rents or on national figures published by the College Board. Others simply adjust last year’s figure for inflation (and may have been doing so for decades). This sometimes results in a figure that is lower than the student’s actual costs. If your daughter’s actual costs are higher, she can ask the college financial aid office to adjust the cost of attendance to reflect her actual costs. If her costs are reasonable there’s a good chance the college will grant the adjustment.

Keep in mind that every $100 she spends on rent using student loan money will cost her $200 by the time she has paid off the loan. So the primary motivation for living off campus should be to save money. Otherwise it is a luxury she cannot afford. She should live like a student while she is in college so she doesn’t have to live like a student after she graduates.

I have child support in the bank for the second semester of my daughter’s sophomore year. After I pay the cost, I will not have any college funds left. I will be submitting the FAFSA in January and have to show what I had last year, as the child support is considered taxable income. But I won’t have that amount this year. How do I handle this? — D.S.

Child support is often discontinued when a child reaches the age of majority. Ask your college for a professional judgment review, arguing that last year’s child support is not reflective of your ability to pay during the upcoming academic year due to its discontinuation. The college has the authority to adjust your prior tax year income to compensate for the loss of child support.

(Although this is too late to help you, there is pending legislation which would eliminate child support from the definition of untaxed income and benefits starting in 2011-12.)

Ask Kantro is written by Mark Kantrowitz, an expert on paying for college and publisher of FinAid.org and Fastweb.com, the leading free web sites for information about student financial aid, student loans and scholarships. Write to Ask Kantro at AskKantro@Fastweb.com.