If you have ever filed a Free Application for Federal Student Aid (FAFSA), then you know that it is no walk in the park. The approximately 130-question application can be tedious and sometimes difficult to complete if you have not yet filed your tax return. However, it will soon become a little bit easier to file due to a recent announcement by President Barack Obama in September.
For each year of college, the FAFSA must be filed for those students seeking eligibility for financial aid. This application determines the Expected Family Contribution (EFC) to a student’s college education (this is not necessarily the amount the family will actually pay for college) and schools use this information to determine how much need-based aid they will offer to a student. The EFC is calculated based on the family’s income, assets, family size, etc. Therefore, several of the questions asked relate to your tax return.
In the past, families have had to wait until January 1st of the year in which their child is a senior to file the FAFSA and they had to use the previous year’s tax return. For example, if the student’s first year in college is the 2015-2016 school year, then the family would be able to file the FAFSA after January 1, 2015 but they would have had to use the 2014 tax return (which normally would not be completed until April 2015 and for some families, October 2015). The FAFSA does allow you to file your FAFSA with estimated tax information and then correct the information after you have filed your return.
In September, President Obama announced major changes to the FAFSA process. As of the 2017-2018 school year, students will be able to file the FAFSA as early as October 1, 2016 (instead of January 1, 2017). Applicants will also use the income information from one tax year earlier. For example, for the 2017-2018 school year, the 2015 tax return information will be used for the FAFSA filing, thereby reducing the need for parents to estimate income. In addition, the FAFSA allows you to pre-populate the form from your completed and filed tax return, which might actually work well under this timeline, knowing you have already filed the prior year return.
While these changes will positively impact many families, the new rules may also require additional planning for some families. For example, one of our clients recently received a large sum of money this year (windfall for this year only) and her daughter is a high school junior. Under the old rules, she would not have had to worry about reporting her 2015 tax information on the FAFSA. However, since her daughter will be entering college in the 2017-2018 school year, she will be required to use the 2015 income information. The solution to this dilemma is to ask for a Professional Judgement Review; however, this is a school by school process. If you think you might be facing a similar situation, you can find out more information about the Professional Judgment Review by clicking here.
Overall, the new FAFSA rules and timeline provides better alignment with the college admission process. Instead of waiting until April or May to find out if your student will receive scholarships and financial aid at a certain school (and therefore waiting to make a decision as to whether or not they will be attending that school), college financial aid offices will receive the FAFSA much earlier. This will provide parents and students with more time to analyze the various college financial aid packages available to them before making the final decision as to which college to attend.
Kim Butler, CFP®
Associate Financial Planner