In case you are not aware, the government has changed the date when you can submit the FAFSA application for financial aid. In the past, the FAFSA was made available on January 1. You completed it using tax data for the year just finished. However, with so many students now applying early decision or early action in the fall, colleges were not able to provide firm financial aid awards along with acceptance decisions. To address this, the government has pushed the FAFSA availability date back to October 1. As a result, the tax data used to populate the FAFSA will be backed up a year. This change will have tax planning implications for those who qualify for need-based financial aid. My blog this month takes a look at this change, its tax implications, and other financial considerations related to getting financial support for college.
My son started his freshman year of college a few weeks ago. Because the new law had not yet gone into effect, we completed the FAFSA back in January based on our 2015 tax data. But those who have children starting college in 2017 will be looking at a different timeline. The FAFSA will be made available to them on October 1, 2016 and will use 2015 tax data. (For those students who started college in 2016 or earlier, income from the 2015 tax year will be used to determine financial aid for two consecutive years). If you are expecting need-based financial aid, this could be a good or bad thing depending on whether 2015 was a high or low income year for you.
For those who have juniors in high school the base income year for financial aid for their freshman year in college is 2016; for current high school sophomores it will be 2017. The FAFSA calculates an Expected Family Contribution (EFC) based on family income and assets, with income being weighted much more heavily in the formula than assets. For the income contribution, FAFSA gives each family a spending “allowance” based on family size and assumes that any after-tax income in excess of that allowance is available to pay for college.
The income number that drives the calculation is Adjusted Gross Income (i.e., anything on the first page of the 1040). Some adjustments are then made. The most significant is that retirement plan contributions (IRA or 401K) that are not taxed are added back and considered income available for college. Therefore, increasing your 401K contribution to lower your income will not help you on the FAFSA. The same is true for HSA contributions. Business owners, however, may have some flexibility in terms of shifting income and expense between years.
If you are thinking about starting or quitting a job it is worthwhile to think about the impact of such a move on financial aid. Another consideration is if you are thinking about taking withdrawals from an IRA or 401K. Those withdrawals (if taxable) will be included in income and increase the family’s EFC.
Although assets are not counted as heavily as income, there are more opportunities to manage that number. For parents, 5.6% of includable assets (after an asset protection deduction) are assumed to be available for college expenses. Includable assets are primarily funds in college savings plans (529s, etc.) as well as in savings and taxable investment accounts, and the value of a property other than your primary home. Funds in retirement accounts such as IRAs or 401Ks are not included, nor is the home equity on your primary home.
The key is to file the FAFSA when your includable assets will be at the lowest point. If you are thinking of buying or selling a house or any other significant asset you’ll want to think through the timing.
One thing to keep in mind is that that students are expected to contribute a higher percentage of their income and assets than are the parents. The percentage for income is 50% and for assets it is 20%. Thus money set aside in a custodial account in the child’s name will have a greater impact on the family EFC than money in a 529 plan in the parent’s name. Also, if a grandparent has a 529 plan and uses those funds to pay for the child’s college, that amount is considered income of the child and will increase the family’s EFC by 50% of that amount the following year. But this is where the new timing of the FAFSA will help. In this case, the grandparent can wait until junior year to give the funds and it will have no impact on financial aid for the student.
One way to get a read on your FAFSA Expected Family Contribution (EFC) is to use the fafsa4caster provided on the Department of Education’s website. With this tool you can then do “what if” scenarios to see if it is possible to move the needle at all.
Of course just because there may be a gap between a family’s EFC and the cost of the school does not mean that the college will be willing or able to fully close the gap. Most don’t. The exception is a group of elite schools with significant endowments. There are approximately 60 schools that claim to meet 100% of demonstrated need. However most of these schools also require students to complete a second financial aid form called the CSS Profile that delves deeper into family income and assets than does the FAFSA. Some items such as home equity on the family’s primary home are considered by some of those schools to be assets available to pay for college. As a result, a school’s definition of EFC may not match the EFC on the FAFSA. What will help is that The College Board, which administers the CSS Profile, has agreed to change their process so that the CSS will also use prior year data to align it with the FAFSA.
As a side note, if your income will not quality you for financial aid, do not despair. A majority of the financial aid awarded these days is merit, not need based (with the exception of the top-tier elite schools). The competition for qualified students is fierce, and nearly any student can find a school willing to offer significant merit aid if the student is willing to cast a wide enough net. Factors the school considers when granting merit aid include academic credentials. athletic ability, musical or artistic ability, and geography. Do not underestimate that last criteria. Many regional schools are looking to expand their geographic reach and if your student is willing to look beyond the list of colleges that are “popular” at their high school, there are great values out there.
The best way to get a sense of what a college might cost is using the Net Price Calculator that every college is required to provide on their website. The Net Price Calculators factor in need-based aid based on EFC as well as an estimate of potential merit aid based on the GPA/Test Scores of the student.
The other option to keep costs down is to attend an in-state public college, but even there the costs have been escalating as state funding is being cut back around the country.
If your financial situation has changed (maybe a job was lost), be sure to reach out to the financial aid office directly. Most schools have some discretion in making adjustments to aid packages.
This new FAFSA timing is just now going into effect so I would anticipate some bumps along the road as the financial aid offices adapt. For example, I noticed that the financial aid timeline on the website of the school my son attends has not yet been updated to reflect this timeline even though the change is going into effect now. But with the right information, you can anticipate and plan for the FAFSA.
Please feel free to reach out if you have any questions.