Financial Aid

Do Outstanding Loans Affect Eligibility for Financial Aid?

The Fastweb Team

August 23, 2017

Do Outstanding Loans Affect Eligibility for Financial Aid?
<b>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.

You Might Also Like

Join Fastweb.
Match Instantly.

Become a member and gain exclusive access to our database of over 1.5 million scholarships.

I am a:
Parents: Complete the questions using your child's information
Please select a grade level
Please enter a valid zip code.

By clicking, I agree to the Terms & Conditions and Privacy Policy.