As we reported in our last article, the net price of higher education will depend on the amount of financial aid that’s received. The greater the financial aid, the lower the net cost of college.
In order to obtain financial aid, a key step is filling out the Free Application for Federal Student Aid (FAFSA). This is a complex form with many questions. The form aims to get a picture of a student’s family income and assets. Some of the questions request tax return information. Our office can help if you have difficulty with any FAFSA tax questions.
After filling out the FAFSA, your answers go through a formula that determines your expected family contribution (EFC). The lower your EFC, the greater the amount of financial aid a student might receive. This number may change every year, so if aid is requested each academic year, you must complete a FAFSA annually.
Potential financial aid awards are determined by comparing an applicant’s EFC with a given school’s listed cost.
Example 1: Carla Davis, a high school senior, fills out the FAFSA. Her EFC, based on family income and assets, is placed at $27,000 for the next academic year. Suppose Carla is accepted at a college where the published cost for the coming academic year is $44,000. Carla could be awarded as much as $17,000 in need-based aid: the $44,000 published cost minus her family’s EFC of $27,000.
Note that this process would not result in any need-based aid for Carla at a college where the published cost is $25,000. Carla and her parents would be expected to pay the full price.
Important new rules for the FAFSA
Starting this October, new FAFSA rules go into effect. Under the current process, including the one for the 2016-2017 academic year, the FAFSA could be submitted no earlier than January 1 of the coming school year. Thus, Carla Davis could submit her FAFSA no earlier than January 2016 for the 2016-17 academic year.
Carla will be able to submit a FAFSA for 2017-18 as early as October 2016. Because of this shift in submission timing, “prior-prior year” tax return information will be required, rather than prior year numbers. This will result in using the 2015 tax return information for two school years.
Data shows that early filers tend to get more college financial aid than latecomers.
Example 2: Assume Carla submitted her FAFSA in January 2016, as early as possible. Data shows that early filers tend to get more college financial aid than latecomers. However, in January 2016, Carla’s parents had not yet prepared their 2015 (“prior year”) tax return. Therefore, they submitted the FAFSA with estimated information, subject to subsequent verification once the Davis’ 2015 tax return had been filed.
If Carla wants to get an early start again, she can file her FAFSA for the 2017-18 year in October 2016. Under the new rules, Carla will use the 2015 tax return (now the “prior-prior year”) information for the 2017-18 FAFSA. She won’t have to estimate income numbers, assuming her parents’ and her own 2015 tax returns already have been filed.
Going forward, the October submission date and the prior-prior year tax returns will be used on the FAFSA.
College financial aid planning pointers
As mentioned previously, reducing your child’s EFC may result in increased financial aid. In determining an EFC, income typically is the most important factor. (Assets count, too, but generally to a lesser extent.) Therefore, holding down income can be helpful. Under the new rules, timing strategies have changed.
Example 3: Greg and Heidi Irwin have a daughter Jodi, age 15. The Irwins expect Jodi to go to college, starting with the 2019-2020 school year. They hope that Jodi will receive some need-based aid. Even so, the Irwins believe they’ll have to dip into savings to pay college bills, and the money might come from selling stocks they feel have become overvalued. Selling those stocks at a gain in 2017 could increase the income they’ll report on the FAFSA, for 2019-2020, so the Irwins could decide to sell the stock this year. If they realize these gains in 2016, the income will never show up on the FAFSA.
On the flip side, suppose the last FAFSA filed for Jodi will cover the 2022-2023 school year. Then the last relevant tax return will be for 2020. If the Irwins plan a bump in income, perhaps from selling a vacation home at a profit or converting a traditional IRA to a Roth IRA, they might decide to wait until 2021 or later, when the income won’t affect Jodi’s financial aid.
Be aware that the new schedule poses a peril: income might decline in the interim. In example 3, Jodi Irwin files a FAFSA for the 2019-20 year, using tax return data from 2017. However, Jodi’s family might have much lower income in 2018 or 2019, perhaps because of a job loss, so the FAFSA understates her financial need. In this case, the Irwins can request a professional judgment review by a college’s admissions office, which could verify the increase in need.
The Bottom Line
With the new FAFSA rules, planning for college financial aid needs to start two to three years before the first year of college. Let our office help with your income planning.