4 Financial Aid Rules You Absolutely Must Follow
Honestly, I had a hard time thinking of a title for this post. I was going to title it “4 Ways to Lose Your Financial Aid.” Then I realized no one is looking for advice about how to lose their financial aid.
I settled on “4 Financial Aid Rules You Absolutely Must Follow.” If you don’t follow these rules, you’ll lose your financial aid. So, it’s the same idea, but more people will read this post now that it has the word “rules” in the title.
That’s the power of rules. Even Prudent Prof, a rebel at heart, understands the…well, prudence of following rules. And there are some important rules you should know and follow if you want to keep your college financial aid.
You may have heard some of these before, but here we’ll go into more detail about four financial aid rules and what they mean for you and your money. I've also created a free printable with even more financial aid tips. To get the free financial aid tip sheet, fill out the form near the bottom of the post.
4 Unbreakable College Financial Aid Rules
Rule #1: You Must File a FAFSA Every Year
I’m still surprised by the number of students who don’t know they need to file a FAFSA every year they want financial aid.
Many students (and parents) mistakenly think you only have to file the FAFSA when you first apply to college. But, like taxes, the FAFSA is an annual thing. If you want to keep your financial aid from one year to the next, you must file a FAFSA.
The Renewal FAFSA
The good news is that after your first year, you can file a Renewal FAFSA. This is a shorter version of the FAFSA that asks you to update any information that has changed over the previous year. So if you or your parents had a major change in income, or if another of your siblings entered college, you would report that on the Renewal FAFSA.
When to file the FAFSA
In the past you couldn’t file your FAFSA until after you (and your parents) had completed your tax returns. That meant students were filing FAFSAs in March and April for college aid starting in the fall.
A few years ago, the rule changed and now you can file your FAFSA as early as October 1 the year before aid starts. For example, this year you could file in October 2018 for financial aid beginning in fall 2019.
Remember that some federal and state financial aid is awarded on a first-come, first-serve basis. To avoid losing some (or all) of your financial aid, you should file your FAFSA or Renewal FAFSA as soon after October 1 as possible.
Rule #2: You Must Tell the Truth on the FAFSA
It seems this rule should go without saying, but FAFSA fraud is a real thing that can get you in real trouble.
Some applicants intentionally commit FAFSA fraud by lying about their income to try and qualify for more aid. Other applicants mean well and end up unintentionally committing FAFSA fraud. This is often the case with parents who try to help their children qualify for more financial aid.
Common FAFSA fraud
One common type of FAFSA fraud is trying to shield a child’s income. If a child is classified as a dependent student, the FAFSA asks about income for both students and parents. The FAFSA also asks about current balances in checking accounts for both students and parents.
If your child worked a minimum wage part-time job in high school, it may not seem fair that those earnings count against them when applying for college financial aid. I’ve heard of parents telling their child to take most of the money out of their checking account before filing the FAFSA. By cashing out their money, the child is able to report a much lower checking account balance on the FAFSA.
Similarly, I’ve heard of parents transferring money from their child’s checking account into their own account. This also allows the child to report a lower checking account balance on the FAFSA. It does increase the size of the parents’ checking account balance, but given how the FAFSA formula works, that actually has less of an impact on the student’s financial aid.
Moving money around specifically to avoid reporting it on the FAFSA is fraud. If you do this there’s a good chance you’ll get caught in the FAFSA verification process.
FAFSA verification occurs when either the Department of Education or the college you attend selects your FAFSA to undergo a review process. If selected for verification, you’ll have to provide documentation, including tax returns, supporting the information you reported on the FAFSA.
Even if a student doesn’t report their true income on the FAFSA, they’ll likely report it on their taxes. So when a student reports to the IRS that they earned $6,000 their last year of high school, but reports a current checking account balance of only $125 on the FAFSA, red flags will be raised.
About 35% of applicants are subject to FAFSA verification each year; some schools require all their students to undergo verification. So there’s a very good chance you’ll get caught if you lie on your FAFSA.
Consequences of FAFSA fraud
If the Department of Education determines you committed FAFSA fraud, your child will probably lose their federal financial aid. They would probably lose any state financial aid too, since many state aid programs use the FAFSA to determine eligibility.
So, bottom line: don’t be a FAFSA fraudster. Tell the truth on your FAFSA application.
Rule #3: You Must Go to Class
Sure, you know you’ll lose your financial aid if you fail your classes – but did you know you can lose your financial aid for skipping classes? It’s true. I see it happen to students every semester.
Financial aid disbursement in the past
Back in ye olden days, like 2010, schools disbursed financial aid to students at the beginning of each semester. Every August and January students could look forward to thousands of dollars in grants and loans hitting their bank account. And if they did well and passed their classes, the money kept appearing semester after semester.
But then someone realized, hey, a lot of students quit showing up for class after they get their financial aid! So students were given thousands of dollars for school – and lots of them weren’t actually going to school. They were enrolled, but not attending or participating in class. And then someone decided, hey, if we give students money for school, they need to actually go to school!
Financial aid disbursement now
So at my university and many others, the financial aid disbursement process changed. Now students get their money in two disbursements: half at the beginning of the semester and half midway through the semester. And in-between those disbursements, I have to report students who aren’t attending class to the financial aid office. If a student isn’t coming to class, they don’t get their second aid disbursement.
Lots of students are shocked to learn that skipping too many classes can cause them to lose financial aid. They think earning a passing grade at the end of the semester is all they need to keep their aid, but that’s not true anymore.
Of course, there are lots of reasons you should go to class, but one big reason is that if you don’t, you could lose your financial aid.
Rule #4: You Must Graduate In Six Years
Another change that came about in the last few years is that there is now a time limit on how long you can receive certain types of federal financial aid. For example, undergraduate students can get the federal Pell Grant and federal subsidized student loans for 12 semesters, or about six years.
Six years may sound like a long time, but the average time to complete a bachelor’s degree is now 5.1 years. So a lot of students may hit the six year time limit for some types of financial aid.
There are two groups of students who are particularly at risk of timing out on their financial aid: students who change majors and students who transfer schools.
How changing majors affects financial aid
The time limit for certain types of federal financial aid is calculated as 150% of the time estimated for your degree. Since most bachelor’s degree programs are meant to be completed in four years, the financial aid time limit for those degrees is six years. This is known as your maximum period of eligibility.
The time clock on your maximum period of eligibility doesn’t reset if you change majors. Say you begin college as a math major, then halfway through junior year decide to switch to a business major. Since you’re still pursuing a bachelor’s degree, you’re still subject to the six year time limit for financial aid.
You may run into problems trying to finish all the classes for your business degree before your maximum period of eligibility expires. If you do change majors and end up staying in school an extra semester or year, then you could lose some of your financial aid. Be sure to consult with a financial aid adviser before you make the switch.
How transferring schools affects financial aid
The time clock on your maximum period of eligibility also doesn’t reset if you transfer schools. As long as you’re still pursuing a bachelor’s degree, you still have six years to graduate or face losing some of your financial aid.
Since general education and other degree requirements vary among schools, be sure to talk to both academic and financial aid advisers if you’re planning to transfer colleges.
You should be especially aware of the financial aid time limit if you’re doing a “reverse transfer,” going from a university to a community college, as most community college degree programs are for associate degrees.
The estimated time to complete associate degrees is two years, which means the maximum period of eligibility for these is three years (150% of 2 years). If you’ve already spent a year or two at a university before transferring to a community college, you might hit the three year financial aid time limit before you finish your associate degree. Again, be sure to consult with the proper advisers before you transfer schools.
Most students know they need good grades to keep their financial aid, but clearly bad grades aren’t the only thing that can cause you to lose your grants and loans. Sometimes students lose aid simply because they file the FAFSA too late or make decisions that extend their graduation date. But if you get good grades and follow the four financial aid rules listed here, you won’t have to worry about losing your college aid.
Have a question about financial aid? Go ahead and ask in the comments...someone else probably has the exact same question. And don't forget to grab your free financial aid tip sheet in the resource library.