It’s time for Step Three of the FAFSA. This is a short section and has one purpose: to determine the dependency status of the student. All questions are asked of the student.

• If all questions are answered no, the student will go to Step Four and be considered dependent.
• If any of the questions are answered yes, the student will skip Step Four, proceed to Step Five, and be considered independent.

Becoming an “independent student” is not easy. Do not assume that because your child has moved out, appears to have their own life, or files their own taxes that the Department of Education will consider them independent — it’s not that simple.

Let’s take a look at the questions. Remember these questions are asked of the student.

46. Were you born before 1/1/87?

Answer yes if you are separated but not yet divorced.

48. Will you be working on a master’s or doctorate program during 2010-11?

Refer to the FAFSA notes for exceptions, but you will usually answer no if you are a National Guard or Reserve enlistee who is on active duty for state training purposes.

Refer to the FAFSA notes for exceptions, but you will usually answer yes if you have engaged in active duty in the U.S. Armed Forces and were released under a condition other than dishonorable. Answer yes if you are not a vet but will be by 6/30/11.

Support means money, gifts, loans, housing, food, clothes, car payments or expenses, medical and dental care, and payments of school costs.

The same support listed in question

You may need to provide proof of these to a school financial aid department.

To answer yes, you must provide a copy of the court decision.

Again you will need to provide proof.

You may be required to provide proof. To gain this proof, you must have been in high school and have a liaison who made the determination. If not, contact your financial aid office for assistance.

Same as question 56.

Same as question 56.

So we have completed Step Three and determined our dependency status. If you are a dependent, your parents or guardians will complete Step Four.

Until next time!

It’s time for Step Two of the FAFSA form; I know it’s just what you all have been waiting for! Get your financial forms (taxes, W-2s, checking and savings statements, investment statements, etc.), and we will get started.

This section covers questions 33–58 which are about the student. If the student is single, separated, divorced or widowed, all questions will need to be answered about the student alone. If the student is married, he or she will need to include information about their spouse.

Please note, most students who are not considered independent, will most likely not have a large income or asset listings to report on the following questions. In most cases these questions primarily relate to those that are independent students.

Questions (the following questions are summarized; please review the FAFSA to see the full questions):

33. Have you completed your IRS income tax return?

The options are the IRS 1040, 1040A or 1040EZ, a foreign return, or a tax return with Puerto Rico, another U.S. territory or Freely Associated State.

This is a very important question and can affect whether your FAFSA is figured with a Zero Expected Family Contribution (EFC), which will afford you the most financial aid possible. If you are eligible to complete the 1040 or 1040EZs (you make less than $100K, do not itemize deductions, do not get income from a business or farm and do not get alimony) and you make less than $30K, you may be eligible for a Zero EFC.

Line 37 from your 1040 (if 1040A—line 21; if 1040EZ—line 4) includes a total for these items: wages, salaries, tips, taxable interest, ordinary dividends, taxable refunds, alimony, business income, capital gain (or loss), IRA distributions, pensions and annuities, rental real estate, farm income, unemployment compensation, and Social Security benefits. These items make up Total Income. Thirteen additional fields, which include things like health savings account deductions and student loan interest deductions, are then subtracted from the Total Income to make the Adjusted Gross Income.

This is line 55 from the 1040 (if 1040A—line 35; if 1040EZ—line 11). Be careful if you are estimating this amount and ensure you get it correct. Many people confuse this with the withholding amount they see on their W-2s and they are NOT the same.

This is line 6d from the 1040 (and 1040A; for 1040EZ, see notes) and is basically a summary of all those people who are covered on the taxes. Remember: This portion is about the student only.

There should be a dollar amount listed here even if the student worked but did not earn enough to file taxes. Check the W-2 for this info.

As above, check the W-2.

Please list an average total balance of these accounts. Be careful in overestimating.

Net worth means current value minus debt. Investments to include for this question include real estate, trust funds, UGMA and UTMA accounts, money market funds, CDs, stocks, stock options, bonds, other securities, installment and land contracts, commodities.

If the student is a beneficiary on a 529 account DO NOT list the asset here — the 529 is a parent asset.

The net worth of the business or investment farm includes value of land, buildings, machinery, equipment and inventory. Debt includes only those debts for which the business or farm was used as collateral. If the business your family owns and controls more than 50% and has 100 or fewer employees, it is not counted here. The farm is not counted if you live on it.

a. Education credits, from line 49, Form 1040 or line 31, Form 1040A

The Hope Credit is a tax credit for college students in their first two years of college. It provides a tax credit of up to $1,800 on the first $2,400 of college tuition and fees. You can claim the Hope Credit on your tax return if you are enrolled at least half-time at an eligible education institution, and you were responsible for paying college expenses.

The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible education institution and you were responsible for paying college expenses.

b. Child support paid by you

c. Taxable earnings from need-based employment programs such as Federal Work-Study and fellowships or assistantships

d. Student grant and scholarship aid (Enter any student grant and scholarship aid reported to the IRS of the parents Adjusted Gross Income. This includes AmeriCorps benefits as well as  grants and scholarship portions of fellowships and assistantships.) )

e. Combat pay (Only include taxable pay. Do not enter amounts reported on your W-2 in Box 12, Code Q.)

f. Earnings from work under a cooperative education program offered by a college (If you worked at the college in a program other than the Federal Work-Study program, check to see if you need to report earnings here.)

a. Payment to a tax-deferred pension and savings plan (will be listed on W-2 boxes 12a-12d, codes D, E, F, G, H, and S.)

b. IRA deductions and payments to self employed SEP, SIMPLE, Keogh (1040 line 28 plus line 32; or 1040A, line 17)

c. Child support received

d. Tax exempt interest income (1040 or 1040A line 8b. Interest income, such as interest from state and municipal bonds, that is exempt from federal income tax.)

e. Untaxed portions of IRA distributions (1040 15a distributions minus 15b taxable amount, or 1040A line 11a minus 11b)

f. Untaxed portions of pensions (1040 line 16a minus 16b or 1040A line 12a minus 12b.)

g. Housing, food and other living allowance paid to military, clergy (On base military housing or value of basic military housing allowance is NOT included.)

h. Veterans non-education benefits such as disability, death pension, etc.

i. Other untaxed income not reported (report worker comp and disability but NOT welfare payments)

Step Two is completed! I know it may not have been lots of fun, BUT this same information is collected for the Parent in Step Four so by the time we get there you will be an old pro at this.

See you next time.

It’s time to break down the Free Application for Federal Student Aid (FAFSA) and show you what the form and its 107 questions is asking for, and give you a bit of advice along the way.

The current version of the FAFSA covers July 1, 2010–June 30, 2011, so seniors in high school and those already in college will complete the form this year.

The following information covers Step One (questions 1–32). This section is the easiest to complete as it's primarily demographic information about the student. All questions that say “you” or “your” refer to the student. Students should leave blank any questions that do not apply to them (the online form gives you the option to say “not applicable”).

Questions

1. Last name

2. First name

3. Middle Initial

4.–7. Permanent mailing address

8. Social Security number

9. Date of birth

10. Permanent telephone number

11-12. Driver's license number and state if applicable.

13. Email address
If you provide an email address you will be notified when the form is processed. Note: The email address you provide will be shared with your state and the colleges you list on the FAFSA. Provide an email address that you check often so you can access your Student Aid Report (SAR) when it’s completed (3–5 days).

14. Are you a U.S. citizen?
If yes you can skip to question 16. If no and you are an eligible non-citizen, complete question 15, which asks for your alien registration number.

15. Alien registration number

16. What is your marital status?
Options include Single, Married, Remarried, Separated, Divorced, or Widowed. If you are separated but not yet divorced, you will be considered married on the dependency verification questions that appear later.

17. Month and year you were married, separated, divorced, or widowed

18. State of legal residence

19. Did you become a legal resident of this state before January 1, 2005?
States have varying criteria for determining if you are a resident for purposes of state financial aid (and in-state tuition). If you established a true, fixed, and permanent home in any state more than four years ago, you meet its residency criteria, according to the U.S. Department of Education.

20. If you answered NO to question 19, give the date you became a resident

21. Gender
If female skip to questions 23

22. If you are male, age 18–25, and not registered with Selective Service, you can select to be registered through the FAFSA

23. Have you been convicted for possession or sale of illegal drugs for an offense that occurred while you were receiving federal student aid?
If you answer yes (and are completing the online FAFSA) you will automatically be presented with an online Student Eligibility Worksheet to complete. Once you complete the worksheet, you will receive your current eligibility status immediately.

24. Highest school your father completed

25. Highest school your mother completed

26. When you begin college what will be your high school completion status?
Choices include high school diploma, GED, Home schooled, None of above.

27. Will you have your first bachelor’s degree before July 1, 2010?

28. When you begin the 2010–2011 school year, what will be your grade level

29. When you begin the 2010–2011 school year, what degree or certificate will you be working on?

30. When you begin the 2010–2011 school year, what do you expect your enrollment status to be?
Full-time enrollment status generally is 12 credit hours, 3/4-time is generally 9 hours, and half-time is generally at least 6 hours.

31. In addition to grants, are you interested in being considered for Work-Study or student loans?
Answers can be Work-study, Student Loans, Both or Neither. I suggest saying yes even if you may not be interested in these options. You can always say no after you receive your award letter.

32. Are you planning to complete course work necessary to become an elementary or secondary school teacher, either now or in the future?
The Teacher Education Assistance for College and Higher Education (TEACH) Grant program provides grants to students enrolled in participating colleges who intend to teach in a public or private elementary or secondary school that serves students from low-income families. Answering yes to this question will get you more information on the TEACH Grant. See information at www.teachgrant.ed.gov.

We got through the first step of the FAFSA! It wasn’t that bad, was it?

Next we will start Step Two. This section is financial-data heavy, but we will walk through each question so you understand what is needed. See you soon!

So it’s just what you have been waiting for! Not a late holiday party, a big birthday bash, or a ‘winter’s almost over’ celebration… it’s time to apply for financial aid. Okay, so party hats are not required for this one, but by applying for financial aid, you won’t miss out on any opportunities to find funds to help you pay for college. This post starts my series on the Free Application for Federal Student Aid (FAFSA).

So maybe the form is worrying you — most anything with 107 questions might be scary — but remember that answering these questions is the only way to qualify for federal financial aid.

The best way to tackle the FAFSA is to plan ahead and follow a few tips:

• Complete the FAFSA online. It’s quicker, it gives you online assistance, you can save it and come back later, and you get your results faster (3–5 days). You'll need a PIN from www.pin.ed.gov.
• Have the documents you need to complete the form right by the computer, including: (All of the items listed are required of both student and parent, if both are completing the form.)
• • Social Security number
  • driver's license (if you have one)
  • 2009 W-2 Forms and other records of money earned
  • 2009 Federal Income Tax Return (if completed)
  • IRS 1040, 1040A, 1040 EZ, or foreign tax return
  • 2009 untaxed income records
  • child support received
  • worker's compensation
  • current bank statements
  • current business and investment mortgage information
  • business and farm records
  • stock, bond, and other investment records
  • alien registration or permanent resident card (if you are not a U.S. citizen)
• Set aside some time so you can get it all done at once. It will take more than five minutes but shouldn’t take more than an hour or two. Remember part of the FAFSA is for the student and part is for the parent (the parent who the student lived with more during the past 12 months. If your parent is remarried, include information about that stepparent.). Parents and students can complete their portion of the form at the same time or separately.
• The sooner you submit it, the better your chances are of getting financial aid: Some aid, especially state aid, is first-come first-served. Check the FAFSA deadlines for your state at www.fafsa.ed.gov/before003a.htm#state_deadlines.

Most people don’t love doing their taxes, so I understand why many people dread the FAFSA. But I find that reading the PDF version of the current form really helps to make the process easier.

What if you haven’t completed your taxes yet? You can estimate your taxes or use your previous year’s tax return, and update the information later if needed. Remember, it’s important to file the FAFSA as soon as possible.

So sit back, breathe deeply, get a strong cup of coffee, a healthy snack, and apply for federal financial aid.

Over the next few weeks, we will use this space to break down the seven sections of the FAFSA. It won’t be quite as exciting as the start of American Idol, but hopefully it will make you feel more confident.

Last week we discussed Four Money Mistakes You Can’t Afford. Here are four more:

Mistake #5: Not recognizing…or acting on!...ways to cut costs when money is tight.
Spend less or make more! Let’s say you’ve completed your spending plan, and it looks like you’re going to be short each month. You’ve only two options: You need to either reduce your spending or increase your income. Let’s start with…spend less. Since it can be difficult to increase your work hours while maintaining the focus on your schoolwork, let’s concentrate on the first alternative: reducing your spending. Just a little bit of creativity, and the list of possibilities are endless!

Mistake #6: Thinking of your credit card as “easy money.” “Charge!!!” General George Custer would have remained lots healthier if he didn’t race into the Battle of Little Big Horn with such an abundance of confidence and self-assurance. 

Although it’s not exactly the same thing, charging your way carelessly through life (the weapon of choice: a credit card) can result in big problems, too. (And in this case, you WILL live to regret it!) That’s why it’s important to select a credit card wisely and, once you have it in hand, to use it responsibly.

Mistake #7: Not appreciating the value that time has on money. What, in a nutshell, is “compound interest"? Basically it’s a method of computing interest payments that enables your money to grow exponentially (that means, like…it snowballs) over time.

That’s because not only does your principal (the actual deposit) earn interest, but the interest itself earns interest. And as the years pass — wow! — this “interest on interest” method of earning can amount to an incredibly large sum of money.

Mistake #8: Overlooking financial aid. A Q&A section for parents. It’s time to call your parents into the room. This is more for them than for you. That’s because many parents make a big mistake when figuring out how to pay for — or help their kids pay for — a college education: They figure they make too much money for financial aid and fail to apply. Parents, read on: 

Do I make too much money for federal financial aid? While it’s true that some federal programs are available only to low-income families, there are programs open to everyone, regardless of financial status. They offer below-market interest rates, delayed repayment, and other advantages. Even Donald Trump would qualify. All you (and he!) need to do is apply: File the FAFSA!

Which programs are available regardless of financial status? Even if your family doesn’t qualify for need-based aid, you’ve still got two excellent federal government programs available to you. They are:

• Stafford loans. These loans are the most common source of education loan funds, and for good reason. Payment does not begin until six months after the student leaves school and the interest rate is low.
• PLUS loans. A Stafford loan probably won’t cover all of your child’s expenses (since the limit is currently $5,500 for freshman year for subsidized and unsubsidized Stafford loans). A federal PLUS loan can make up the balance of the costs.

It’s that time of year again: College-bound students and their families are getting financial aid award letters from the colleges where they were accepted. While the letter might seem simple to understand, parents and students should take a close look at its contents.

The financial aid jargon can confuse the most prepared families. Financial aid award letters show students and their families the type and amount of aid they are eligible for, funding sources, and conditions of the award. The type and amount of federal aid awarded depends on many factors, including the cost of education, family information provided on the Free Application for Federal Student Aid (FAFSA), and the availability of funds.

The letters generally include information on some of the more common financial aid sources, such as:

• Federal Pell Grant: Students who meet federal criteria for financial need automatically receive this grant, which does not require repayment.
• Federal SEOG (Supplemental Educational Opportunity Grant): This grant is awarded to low-income students based on availability of funds at the college and does not require repayment.
• College or University Grant: Individual colleges or universities determine eligibility for this award. The college funds this grant and does not require repayment. 
• Federal Work-Study: This program is awarded to students with financial need. Students work part time to earn this award and are responsible for tuition payment. Work-study funds are not credited directly to students’ school accounts. 
• Federal Perkins Loan: This low-interest-rate (5%) loan is for students with exceptional financial need and is based on the school’s loan pool. Repayment is required. After the school disburses the loan funds and students sign a promissory note, funds are credited to their college accounts. 
• Federal Stafford Loans: These low-interest-rate student loans must be repaid. Annual borrowing limits vary depending on a student’s year in college; freshmen receive a maximum of $5,500. Students must follow their college’s guidelines receiving the loan. After students sign a promissory note, the lender disburses the loan funds to the college. Two types of Stafford loans are available:
  Subsidized: These loans are awarded to students with financial need. The federal government pays the interest on the loan while students are in college and during deferment and grace periods.
  Unsubsidized: These loans are awarded to students regardless of family income. Borrowers pay interest while attending college or may defer payment and allow interest to accrue.

If the award letter is not enough to cover all college expenses, parents should consider applying for the federal PLUS Loan, which is available to parents of undergraduate dependent students and is not based on income or assets.

When it's time to pay for school, there is a simple way to cut through all the financial information. It's as easy as "get the cheapest money first." And that's as easy as Sallie Mae's 1-2-3 approach to paying for college.^SM

1. Get the free money first. Scholarships and grants are funds that don't have to be paid back. Ask around, visit Sallie Mae's free scholarship search, and get all the "free money" you can.
2. Apply for federal student loans. Step two is federal student loans. They generally have below-market interest rates and more flexible repayment options. Even if you think you are not eligible for federal student loans, you can't be sure until you try. Submit the FAFSA and start the process.
3. Fill any gap with private loans. After you've exhausted free and federal money, private student loans can make up the difference. There are a variety of private student loans, each with its own requirements and features.