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What the Recent FAFSA Change Means for You

Sept. 28, 2015
Loans, Student Loans
What the Recent FAFSA Change Means for You
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By Brett Tushingham

Learn more about Brett on NerdWallet’s Ask an Advisor

Families applying for financial aid for college must complete the Free Application for Federal Student Aid (FAFSA). This application, which helps determine a student’s eligibility for aid, asks for information on the income and assets of the student and his or her parents for the previous year.

Because the FAFSA can be completed as early as January 1, and because many schools want the form filed early in the year, families commonly fill out the form with estimates of their previous year’s income and then adjust the figures later after completing their tax returns. This has sometimes created problems that affected students’ financial aid packages. To simplify and streamline the process, the Obama administration recently changed the application guidelines in a way that will affect college planning for most families.

Let’s take a look at the changes and see what opportunities they create from a college planning perspective.

The change

Beginning with the FAFSA for the 2017-18 school year, families will fill out the form using their income from the “prior, prior” year, rather than the prior year, as is currently required. In other words, the form for 2017 will ask for the family’s income from 2015, not 2016.

Further, the FAFSA for 2017 will become available in October 2016. So most families will have already filed their tax returns by the time they need the information for the FAFSA — eliminating the need to provide estimates and revise them later. The changes also make it more plausible to use the IRS Data Retrieval Tool to automate the reporting of income on the FAFSA. All in all, the changes should streamline the application process and encourage more families to apply for and receive the aid they are entitled to.

The effect

The major takeaway from all of this is to have an increased awareness of what years will be used to calculate your eligibility for financial aid. For starters, 2015 will now become the base income year for both the 2016-17 and 2017-18 school years. Families who expect to have students in college in 2017-18 should be aware that any changes to their income for the remainder of this year could affect financial aid eligibility for two academic years into the future.

Going forward, financial aid eligibility for a student’s freshman year in college will be based on income for the year in which the student began his or her junior year in high school. And assuming that the student finishes college in four years, aid eligibility for senior year will be based on the year in which the student was a rising sophomore.

The strategy

One potential strategy for capitalizing on the change would be to refrain from taking distributions from grandparent-owned 529 accounts until the student’s junior or senior year. At that point, those distributions will not affect future financial aid eligibility.

Keep in mind that the FAFSA changes do not currently affect private schools that use the CSS Profile to determine aid eligibility. However, these schools and most private scholarships are expected to align with FAFSA and use the “prior, prior” income rules, so stay tuned for changes there.

For now, you need to be incorporating these changes into your college planning strategy and be seeking additional guidance if necessary. Working with a financial advisor who specializes in college planning should prove valuable.

Image via iStock.         

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