Credit freezes and financial aid

http://www.savingforcollege.com/articles/credit-freezes-and-financial-aid

In the wake of the recent Equifax security breach, many people have taken the prudent step of freezing their credit. Among the multitudes with frozen credit, however, are thousands of parents of high school seniors or current college students who are in—or will shortly be in—the midst of the financial aid application process. Many are wondering, will the credit freeze affect the financial aid application process or prevent me from accessing the aid I need?

What is a credit freeze?

To step back a bit, let’s define what a credit freeze is. Placing a freeze on your credit will prevent new potential creditors from accessing your credit report. As lenders generally pull credit reports prior to extending credit (in the form of a loan, line of credit, or credit card), a freeze will halt such applications. If a bank cannot check your credit, they are unlikely to extend credit in your name. Therefore, as a fraud prevention measure, a freeze makes it unlikely that a scammer can open up a new account in your name.

There are three major credit reporting agencies that a creditor may contact to check your credit:

• Equifax
• Experian
• Transunion

To ensure that no new credit is issued in your name, an individual will need to freeze their credit separately with all three agencies.

Applying for financial aid

To apply for college financial aid, families must complete the Free Application for Federal Student Aid (FAFSA), and, at some colleges, an additional form called the CSS Profile, administered by the College Board. While the Department of Education does run a few checks on FAFSA applicants—to ensure that they are a U.S. citizen or permanent resident, have a valid Social Security number, and (if male) are registered with the Selective Service—they generally do not run a credit check. Nor does the College Board. Therefore, a family should have no trouble completing the financial aid application process, regardless of any credit freezes.

RELATED: How much financial aid will you get? Use this tool to get an idea.

Financial aid verification

One exception to this rule may occur if a student’s FAFSA application is selected for verification. Verification is simply the process a college uses to confirm that the information a family reported on their financial aid application is accurate. A fraction of FAFSA applications are randomly selected for verification, and some colleges choose to verify 100% of their applications. Applicants will be notified by the college aid offices if their application is selected for verification.

The verification process can normally be undertaken using the IRS Data Retrieval Tool (DRT), a simple process which allows an applicant to quickly and easily import their income tax data directly from their IRS’s website into their FAFSA. The vast majority of FAFSA filers can (and should) use the IRS DRT to verify their income data, and this majority is, again, unaffected by a credit freeze.

There is, however, a small segment of the population who is unable to take advantage of the simple verification process provided by the DRT, and this would include married parents who file separate tax returns and parents who are unmarried but live together. If their child’s FAFSA application is selected for verification, these parents must request tax return transcripts from the IRS.

Requesting a tax return transcript is usually another quick and easy process that can be accomplished almost instantly on the IRS website once the IRS has verified your identity with information from your credit report. If, however, the taxpayer has frozen their credit with Equifax (the only credit bureau that the IRS uses to verify identities), the IRS will be unable to issue an online tax transcript, and the taxpayer will need to undertake one of two options:

• Temporarily lift their credit freeze with Equifax (they can leave freezes with Experian and Transunion in place); or
• Request their tax transcript be sent by mail to the mailing address on their last tax return

According to the Federal Trade Commission, lifting a credit freeze should take no more than three business days (and will likely be much quicker), while, per the IRS, a mailed tax transcript may take five to 10 calendar days to be received. If you are coming up against a financial aid office’s deadline, a temporary thawing of your credit is likely the faster option, though there may have a small charge associated with the lift, depending upon the state you live in.

Again, the credit freeze is not an issue for the overwhelming majority of financial aid applicants, but could become challenging in the relatively rare case that you are selected for verification and cannot utilize the IRS Data Retrieval tool to verify your tax data.

RELATED: What the new FAFSA rules mean for you

Borrowing student loans

Most aid applicants can get through the initial financial aid application process without issue, but the opposite is true once it comes time to actually pay the tuition bill—assuming they can’t afford to finance that bill out-of-pocket. If loans are going to be part of your college payment strategy, a credit freeze may become problematic.

A freeze will not affect a student’s ability to access the Federal Direct Subsidized and Unsubsidized Loans (also known as the Stafford Loans). These loans are available to all U.S. citizens and permanent residents attending college at least half-time (and who meet other very basic eligibility criteria). They are automatically awarded to eligible students who complete a FAFSA, and do not trigger a credit check. They are, however, capped at limited amounts, ranging from $5,500-$7,500 per year, depending on the student’s year in school.

However, if a family needs to borrow more than that limited amount, they must then turn to a credit-based loan such as a Federal Direct PLUS Loan, state alternative loan, a private education loan, or home equity loan. Eligibility for these loans is generally based upon the credit-worthiness (as determined by the lender) of the parent borrower or co-borrower of the loan, and will trigger a credit check. A credit freeze will prevent the lender from checking the parent’s (and student’s, if applicable) credit, so it must be temporarily lifted in order to apply for any of these credit-based loans. A loan applicant can check with their potential lender to see which credit bureau they pull credit from, so they can lift the freeze with just that bureau and leave other freezes in place, or, if shopping around for credit, the parent may need to thaw their reports with all three major credit reporting agencies until all loan applications have been processed.

Should you freeze your credit if you’re applying for financial aid?

In sum, freezing your credit will not prevent you from applying for financial aid and will only hold up the financial aid verification process in very limited circumstances. A freeze will not prevent a student from accessing the limited amount of student loans they are guaranteed by the federal government, but will prevent a family needing to borrow more extensively from accessing credit-based loans.

Still, any obstruction caused by a credit freeze can be dealt with relatively quickly and painlessly by initiating with each credit bureau a temporary lift of the freeze for a time period ranging from one day to one year (a few weeks should be sufficient to get through any part of the financial aid process). Once lifted, the verification and loan application processes should proceed without issue.

All in all, a credit freeze won’t prevent you from accessing college aid. What could prevent you from accessing college funding however—at least when it comes to borrowing credit-based college loans—is bad credit. Therefore, if your data was compromised in the recent Equifax breach and you haven’t frozen your credit yet, you may want to consider doing so. A freeze will prevent an imposter from taking on new credit in your name, damaging your credit, and impairing your ability to finance your children’s education. For most people, this protection is worth the minor inconvenience a credit freeze could bring to the financial aid application process.

RELATED: 4 steps to help your child manage student loan repayment

About the author: Shannon Vasconcelos is Director of College Finance at College Coach, the nation's leading provider of educational advisory services to organizations and families. At College Coach, Shannon delivers workshops and provides individual counseling on the college finance process to employees at over 100 companies nationwide. She helps parents and students understand the processes of saving for college, paying for college, and education loan repayment, and maximize the tax break, financial aid, and scholarship resources available to them in a family-focused and ethical way. Shannon has been featured as a college finance expert in numerous publications, including Forbes, Money, Consumer Reports, and U.S. News and World Report. She is a frequent guest on the podcast, Getting In: A College Coach Conversation, and writes regularly for The Insider blog. Prior to joining College Coach, Shannon worked in student financial assistance at Boston University and Tufts University. She has a BA in Economics from the University of Massachusetts and an MA in Urban and Environmental Policy and Planning from Tufts University.