The Federal Application for Student Aid (FAFSA) is used to determine the amount of financial aid a student is eligible for based on government guidelines for the distribution of grants and offers for student loans. With the exception of Unsubsidized Stafford Loans and PLUS loans, financial aid packages awarded by the government require a demonstrated financial need on the part of the student. To determine eligibility, the FAFSA form does ask for financial information.
FAFSA Income Reporting Basics
The FAFSA gleans much of the information used to determine your financial need from information reported on your or your parent's most recent tax return. Not only is this a convenient way to populate the income section of your FAFSA, it also provides a point of cross-reference should you need to provide additional data to the Department of Education. In addition to financial reporting questions that reference particular lines on your income tax return, the FAFSA does ask for a reported total of all money you and your parents have in checking accounts, savings accounts and cash.
Expected Family Contribution
The FAFSA application asks for a variety of information outside of the income and savings oriented questions. For example, the FAFSA asks for the number of exemptions reported to the IRS, for the number of people in the household who will be attending college and for household expenditures such as child support payments. All of this information is plugged into a formula that supplies the Expected Family Contribution (EFC). The EFC is the amount of money you and your parents could contribute towards college expenses. Funds in a bank account are considered when arriving at your EFC, but they are only a part of the cumulative decision-making process.
Federal Aid and Financial Need
Government grants such as the Pell grant are awarded based on financial need. If your EFC is large enough to cover the cost of your college education, you are not eligible for these awards. You will also be ineligible for Direct Subsidized Stafford Loans and the Federal Perkins Loan, as both of these require a demonstrated financial need.
Alternatives to Federal Aid
It is important to attempt to receive financial aid even if you feel like your income or funds stored in your bank accounts may render you ineligible. Even if your EFC prohibits you from receiving grants, the Subsidized Stafford Loan or a Perkins loan, there are still options for federal aid. No matter the amount of money in your bank account, you can apply for a Direct Unsubsidized Stafford Loan as an undergraduate student or a PLUS loan if you are in graduate school. Federal loan programs offer lower interest rates and deferment periods for interest and principle payments that privatized loans do not match.