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Student loan debt in the US has reached a staggering $1.2 trillion. Many refer to the seemingly inexorable levels of mounting debt as a “crisis.”
Some of that debt, however, may have been avoided if only borrowers understood a key tool that helps them avoid paying loans in the first place: the Free Application for Federal Student Aid, also known as the FAFSA.
In fact, not filling it out is the single, biggest mistake students make when applying to college, according Kelly Peeler, founder and CEO of NextGenVest.com.
Peeler is a Harvard graduate who worked in investment banking at JP Morgan before launching NextGenVest, a NYC-based startup that helps students navigate the complicated financial aid and student loan process.
“Last year alone, students left $2.7 billion of unclaimed but qualified for free federal aid,” she told Business Insider.
An analysis by Nerdwallet confirms that amount and noted that the average amount per eligible student left behind was $1,861.
Instead, many of these students took out private loans to finance college, according to Peeler.
To qualify for federal loans and Pell grants, applicants must complete the FAFSA. But it’s notoriously difficult for even the savviest of applicants. Further, research has suggested that the complicated FAFSA actually discourages some applicants from attending college.
Additionally, Peeler says that not filing the FAFSA early enough hurts students who rely on federal aid because students aren’t in a good negotiating position.
“A lot of kids will commit to a school, put their security deposit down, but not fully understand the total cost because they haven’t gotten their financial aid package from the school,” she said.
These students must then find other ways to pay for school, like taking out private loans. Some of them instead just don’t show up to school in the fall, an unfortunate phenomenon she called the “summer melt.”
All these reasons contributed to the recent overhaul of the FAFSA. Starting October 1, the FAFSA went live, three months earlier than the normal January 1 start date in prior years. The earlier start time has the added benefit of allowing families to use 2015 tax information rather than guesstimating for the most recent year ended. Previously, families had to look ahead to their April filings.
The new date also allows families to directly import tax information from their previous IRS filings into the FAFSA.