10 Things You Need to Know About Financial Aid

Soon the class of 2014 will start applying for college, and many current students will be getting ready to hit the books again this fall. For many, this time brings a focus on financial aid. Applying for financial aid can seem daunting, but it doesn’t have to be – there are many resources to help students and parents navigate the process.

To get you started, here are 10 things to keep in mind when it comes to paying for college and applying for financial aid:

You’re in good company.

Approximately two-thirds of full-time undergraduate students receive financial aid in the form of grants, scholarships, loans or work-study, according to the College Board.

You don’t have to be a straight-A student.

While there are scholarships awarded on academic merit, most government aid is based on financial need, so it’s worth exploring your options.

Don’t forget to reapply every year.

Unfortunately, applying for financial aid isn’t like applying for college, where you apply once and are admitted for four (or more) years. If you’re applying for federal financial aid, you’ll need to reapply each year using the Free Application for Financial Student Aid (FAFSA).

Get your paperwork in order.

You’ll need the income tax forms for yourself and, if you are a dependent, your parents/guardians from the previous year to apply for federal financial aid. These include income tax returns, W-2 forms and 1099 forms. If you’re a married student, you also will need the documents for your spouse.

File your taxes early.

You can submit financial aid applications as early as January 1, and it’s a good idea to submit your forms as soon as possible. Though you do not have to wait until you've filed your tax returns with the IRS – you can estimate your income for the previous year – it’s easier if you complete your tax returns early so you can include the most accurate information on your financial aid applications.

Ask about tax credits.

You may be able to receive tax credits for your college expenses. The American Opportunity Tax Credit (AOTC), introduced in 2009, may be available for expenses paid for tuition, certain fees and course materials for higher education. Anyone who takes college classes also may be eligible to claim the Lifetime Learning Credit, which provides a tax credit of 20 percent of tuition expenses. Ask your tax preparer about the credits you may be eligible to receive.

Double-check accuracy.

Errors involving taxes are among the most common on financial aid applications. If you’re using on online tax filing tool or other software, double-check your numbers for accuracy. If you’re using a preparer, ask them to double check for errors. FinAid.org also offers information on how to avoid these mistakes.

Special military programs exist.

If you’re a veteran or have family members in the military, you may be eligible for additional financial aid. Special scholarships, grants, benefits and loan terms are available for veterans, future military personnel, active duty personnel or students related to veterans or active duty personnel. Check out the U.S. Department of Education’s website, which has a wealth of resources on federal student aid, including a section dedicated to aid for military families.

529 plan withdrawals are tax-free.

If you will use savings in a 529 plan to pay for part of college expenses, the withdrawals are tax-free. However, be sure your withdrawals do not exceed the amount of qualified expenses or you may have to pay a penalty. Qualified expenses include tuition, fees, books, school supplies and equipment.

Once you start paying back student loans, the interest may be tax-deductible.

The interest paid on qualified student loans – loans you took out solely to pay qualified higher education expenses – can be deducted from your federal taxes. According to the College Board, in 2010, 7.6 million taxpayers with taxable returns deducted $7 billion in student loan interest, which generated more than $1 billion in savings.

Applying for financial aid takes time and careful planning, but the process goes much more smoothly if you get all the information you need and your paperwork in order from the beginning. Don’t hesitate to ask for help from your tax preparer. He or she can make sure you have the correct forms and don’t miss out on valuable tax credits – and perhaps inspire you to take a finance class, too.