With the arrival of autumn, students are back at school and either preparing for college or already navigating it. While they further their academic careers, their parents wrestle with the current or future cost of higher education and the complexities of the financial aid system.
As parents consider their options for financial aid, they learn quickly that it all starts with the FAFSA (The Free Application for Federal Student Aid) form which is the primary mechanism through which schools determine how much financial aid an applicant qualifies for. Historically, the form was due in February each year and was completed with financial information of the prior tax year (PY). Understandably, it was difficult for many families to gather the information and complete the form to meet the February deadline. Students found themselves being admitted to colleges without knowing if they could actually afford to attend. Once enrolled in college, the family would need to complete the form each year and repeat the process of collecting tax data and filing forms rather quickly to comply with the deadlines.
All of this is about to change…
An Executive Order recently signed by the President and effective October 2016 contains changes designed to streamline the process for the 2016-2017 school year. Now families can furnish financial information based upon an earlier time frame, deemed the prior-prior-year (PPY). For example, a student who will enter college in the fall of 2017 will now provide data from the 2015 tax return instead of the 2016 tax return. In conjunction with this change, the FAFSA form will now be made available for completion in October of each year, rather than January. As a result, the 2017 high school graduate in our example can apply for financial aid while concurrently applying for admission and can use the already completed 2015 tax return. In doing so, the student can learn both admission and financial aid results in basically the same time frame. For current college students, the 2015 return will be used twice – once for Fall 2016 and again for Fall 2017.
What does this mean for college applicants and their families? Some planning takeaways include the following:
- Easier Application Process: By using financial data of two years prior (PPY), applicants will be able to take advantage of the IRS Data Retrieval tool – an instrument through which income tax data can be pulled directly from the IRS into the FAFSA form – making the completion of the form much easier.
- Start Earlier: Initial college financial aid decisions will be made on the basis of 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 on an earlier time-frame 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: In light of the transition to the new rules, the 2015 tax year will be used twice in calculating financial aid. It will be used for the 2016-2017 school year under the existing PY system, and again for the 2017-2018 school year under the new PPY arrangement. It may be advantageous for parents to defer some income beyond 2015 if financial aid is being sought.
Michael Kitces, Pinnacle’s Director of Financial Planning Research, provides additional context and detail on his blog, which can be found here. As a Certified College Planning Specialist (CCPS®), I know that educational costs—and the planning issues they give rise to have implications for students, parents, grandparents, and people of all income levels. At Pinnacle, we have the resources to help you navigate this complicated landscape. Should you have questions on this topic, be sure to consult your Wealth Manager.
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