Do Outstanding Loans Affect Eligibility for Financial Aid?

Do Outstanding Loans Affect Eligibility for Financial Aid?

How do outstanding loans affect future financial aid awards for my

children? Is there any advantage to trying to pay them back early

(other than less interest)? Are they counted towards my outstanding

debt thereby potentially increasing my aid package?

— Linda H.

Most forms of consumer debt, including auto loans and credit card

debt, are ignored by the Free Application for Federal Student Aid

(FAFSA). Loans are considered on the FAFSA only if they are secured by

an asset that is reported on the FAFSA. In such a circumstance the

value of the asset is reduced by the debt against the asset. For

example, the net asset value of a stock market investment is reported

on the FAFSA by subtracting any margin loans from the investment’s

market value. Similarly, the value of investment real estate

is reduced by the amount of any mortgages secured by that real

estate. But a mortgage against your home (your “principal place of

residence”) does not count — even if it was used to buy the

investment real estate — because it is secured by your home, and

the net asset value of your home is not reported on the FAFSA.

This means that there is generally no advantage to having outstanding

loans. Money in a bank or brokerage account counts against you, while

most consumer debt does not help. You will not get more student aid

because of your debt.

Using your savings to pay off your debts might improve your

eligibility for need-based financial aid. Use a financial aid

calculator like the one on FinAid to see if it will affect your

expected family contribution (EFC). Sometimes it improves the EFC and

sometimes it has no effect, depending on family income and the amount

of reportable assets.

However, even if paying off your high-interest loans doesn’t improve

your eligibility for need-based financial aid, it can still save you

money. For example, let’s suppose that you are earning 1% interest on

your bank account balance but paying 14% interest on your credit card

debt. Each year you are earning $10 in interest for every $1,000 in

your bank account, but paying $140 in interest for every $1,000

you owe on your credit cards. Paying down the credit card balance by

$1,000 will net you $130 in savings a year, tax fee.

Keep 3-6 months salary in a rainy day fund for emergencies, but

otherwise use excess cash to pay down debt. You should pay off your

highest interest debt first in order to maximize the savings. Usually

this is credit card debt.

Try to avoid running up the balance on your credit cards after you’ve

paid them off. Cut up the cards if necessary to avoid the

temptation. Only charge as much on your credit cards as you can afford

to pay off in full when you get the monthly bill. Otherwise you are

spending beyond your means.

I am trying to go back to school. I have a student loan in

default. They have been taking deductions out of my paycheck. What are

my financial aid options if any?

— Cedric C.

Borrowers who are in default on a student loan are ineligible for

further federal student aid.

There is, however, a one-time opportunity to rehabilitate your loans

by making 9 out of 10 consecutive on-time full voluntary monthly

payments. Voluntary payments do not include any payments obtained

through wage garnishment or the offset of federal income tax

refunds. You will regain eligibility for federal student aid after you

have made 6 consecutive payments. After you have made all 9 payments

the default will be removed from your credit history.

You can also regain eligibility for federal student aid by paying off

your student loans in full.

Source: Fastweb

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