An important and positive change has been made to the way families will submit federal financial aid applications for their college-bound children.
However, for those with children who are currently juniors in high school, that change could require some unexpected financial planning right now — this month.
Under the new rules, federal financial aid and other assistance determined by the FAFSA (Free Application for Federal Student Aid), for a student beginning college in the fall of 2017, will be based upon the family’s income in 2015. Under the previous rules, income from 2016 would have been used.
The FAFSA determines federal grants and loans, but most colleges also use the form for student aid decisions.
So, those who were anticipating that their 2016 income would determine financial aid in 2017, and planned accordingly, will have to look at this year’s income instead and make any changes quickly. For example, a family might want to maximize tax deductions this year (perhaps by paying a property tax bill or mortgage payment early), delay capital gains or hold off on a taxable conversion from a traditional individual retirement account to a Roth IRA.
The change in FAFSA procedures, first announced in mid-September, will change the way families make financial plans aimed at keeping their aid-related income from appearing larger than it needs to be. Applicants will want to focus on the tax year two years prior to a student starting college. For example, 2016 income would be the basis for financial aid for a student starting college in the fall of 2018.
The next two years will be the tricky part, because the switch to what’s known as prior-prior year income will mean that 2015 income will be used for both the 2016 FAFSA, under the old rules, and 2017 FAFSA, under the new rules.
Why the change?
The old rules caused lots of problems because there’s a disconnect between the dates when financial aid decisions are made, and the time when people file their tax returns. For a student starting college next fall, a family would want to get financial aid forms filed right away, but the 2016 FAFSA is still based on prior-year income, and those 2015 tax returns aren’t due until April.
Currently, the earliest date to file the FAFSA is Jan. 1. To get an application in quickly, a family could fill out the complex application online with estimated income information, then update it months later when their tax return can be electronically linked to the FAFSA.
“It’s a yearly headache that causes delays in financial aid awards and creates confusion about college costs ...” said Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators, in an article earlier this year urging the change to prior-prior year income.
Some families, Draeger said, can miss out on student aid that’s awarded on a first-come, first-served basis, because of delays in completing the FAFSA.
The prior-prior year rule will mean that families can fill out the aid application earlier — starting in October rather than January — and link it electronically to the IRS income tax form they already filed. For example, a family filling out the 2017 FAFSA, in the fall of 2016, would link it to the 2015 tax return they would have filed by April 15.
That should result in not only easier, earlier aid application filing, but earlier decisions on financial aid that will help families make decisions about the cost of different colleges.
One open question is whether the College Board will follow suit and switch to prior-prior year for the aid application known as the CSS Profile, which is used primarily by private colleges and universities. The CSS Profile, available Oct. 1, takes a closer look at family assets, such as home equity and retirement accounts.