Contributed by: Nick Defenthaler, CFP®
As like many Michiganders, fall is my favorite season. What’s not to love? College football, sweatshirt weather, Halloween festivities, the changing colors of leaves, and crock pot meals just to name a few. Fall is also the time where college students are in full gear with their first semester and getting back into the academic swing of things. This is also a time where parents often put pen to paper to determine how to help fund tuition for their kids, both with savings and the financial aid system. As parents consider their options for financial aid, the first place to turn is typically the FAFSA (Free Application for Federal Student Aid) form, which is the main determining factor of how much financial aid a student will qualify for. In years past, the FAFSA was due in February each year and was completed with financial information based on the previous year. The logistics of the filing deadline made it very difficult for families to gather the necessary financial information to make sure they completed the form accurately and timely for the February deadline. Talk about a hassle. Good news – this is all changing starting this year.
An Executive Order signed by President Obama in 2015 (made effective for October 2016) contained changes designed to streamline the process for the 2016-2017 school year. Now families can provide financial information based upon an earlier time frame, deemed the prior-prior-year. For example, a student who will enter college in the fall of 2017 will now furnish financial information from the 2015 tax return instead of the 2016 tax return. In addition, the FAFSA will now be made available in October of each year, rather than January 1st, giving parents more lead time to complete the form.
Here are some main takeaways from the change that could be relevant for your situation:
Easier Application Process: By using financial data from two years prior (PPY), applicants will be able to take advantage of the IRS Data Retrieval tool – an innovative tool where income tax data can be pulled directly from the IRS into the FAFSA form, saving time and improving accuracy.
Start Earlier: Initial college financial aid decisions will be made based on an earlier time-frame – the tax year which begins in the middle of the student’s sophomore year of high school.
Finish Earlier: The final financial aid decision will also be made at an earlier date during college—the tax year which begins in the middle of the student’s sophomore year of college will determine aid for the senior year.
Extended Family Assets: Assets held in grandparent-owned 529 accounts that are often saved for the final year of college as a planning strategy may now be used a year earlier with no negative impact on the student’s future financial aid eligibility.
2015 Deja vu: Because of the new rules with the FAFSA, the 2015 tax year will be used twice in calculating financial aid. The first usage will be for the 2016-2017 school year and once again for 2017-2018 due to the new prior-prior year arrangement.
If you have questions on filing the FAFSA or planning strategies around funding tuition with college savings, don’t hesitate to reach out to us!
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Raymond James is not affiliated with FAFSA.