As the cost of higher education continues to prove financially challenging for many families, the Free Application for Federal Student Aid (FAFSA), the federal program that awards financial aid, has just announced changes intended to simplify the complex financial aid system and provide some predictability to students and parents. Ironically, the changes themselves are not that easy to understand, so read on to see how they might affect you.
First, you should know that FAFSA is ground zero for financial aid. Federal aid in the form of grants and loans is determined by your FAFSA application, as well as many crucial state- and college-level aid awards.
College applications typically go out in the fall of a student's senior year of high school, and acceptance letters can be received as early as November. But because FAFSA requires financial information not available until tax returns are completed, you might be accepted into a school long before you know if you can afford it. For example, students applying for college in the fall of 2015 won't know their FAFSA award until sometime in 2016, depending on when 2015 tax returns (usually the student's and parents') are completed and shared with FAFSA. For most folks, this can be mid-to-late 2016.
Under the new system, families can furnish FAFSA with financial and tax-return information from the year before they're applying, known in government-speak as the “prior-prior year.” In the example above, the student filling out college applications in 2015 now will provide financial data to FAFSA from 2014 instead of waiting for the 2015 tax returns to be finished and submitted. Applications can be put forward to FAFSA as early as October, meaning the student could learn about both admission and aid results at about the same time and make more informed choices.
Some important takeaways from the new rules are
- The financial aid timeline has shifted. Now, the first year on which aid will be based is the year in which the student's sophomore year in high school ends and the last year will be the one in which the student's sophomore year in college ends. Revisit your plans for dipping into college savings, such as 529 plans, to make sure they align with the new schedule.
- The law takes effect in October 2016. Due to the transition, this makes the 2015 tax year one which will be used twice to calculate aid - once for the 2016-17 school year and then again for 2017-18. Therefore, deferring income beyond 2015 is a strategy worth considering.
- Funds awarded specifically by a college (especially private colleges), as well as many scholarships, use their own financial aid system and not FAFSA. Consequently, they might still use the “old” method, that is, prior year instead of prior-prior year. Although it's likely they'll all mirror the new federal system eventually, take a close look at each of your application's requirements.
Study the new rules with your financial planner to make sure you're properly educated.