Applying for financial aid will soon be less of a headache for college students and their families. Beginning with the 2017-2018 academic year, the Free Application for Federal Student Aid (FAFSA)—used to determine financial aid from the government as well as colleges—can be filed three months earlier, or as early as October 1, nearly a year before a student would start classes the following fall. This change in timing will allow completed tax returns to be used to report income and assets on the FAFSA.
Under current rules, however, families with students in the class of 2016 have to wait until January 1 to start filling out the FAFSA and often file the aid application before completing the income tax return required to verify income for the previous year. For example, those families need to file the FAFSA in Spring of 2016 for the 2016-17 academic year (the student’s first year of college), which means they will have to scramble to file tax returns early or estimate their 2015 income. But families with students in class of 2017 or younger will file during the Fall of student’s senior year. Those families who file the FAFSA for the 2017-18 academic year will use the 2015 tax return rather than the 2016 return to report income and assets.
Applying as early as possible remains important. Most schools dole out financial aid on a first-come, first-served basis, and a college’s free money runs out fast.
Steps to Take Before the End of 2015
Lower your 2015 income
If your child is currently a high school senior, college freshman or college sophomore, your 2015 tax information is doubly important because 2015 income will count twice for financial aid purposes—first for the 2016-17 academic year, before the FAFSA changes go into effect, and then again for the 2017-18 academic year, when FAFSA switches to the new timeline. Taking steps to reduce income before the end of 2015 could lower your expected family contribution (EFC) and boost your student’s financial aid award two years in a row.
Few colleges fill the entire gap between your expected family contribution and the cost of attendance, but lowering your income can lead to substantial increases in financial aid. Income, not assets, is by far the biggest factor in financial aid. Obviously, most families simply can’t change their income levels. But if possible, hold off on taking distributions from retirement plans or realizing capital gains because the money will count as income on the FAFSA.
The financial aid formula excludes assets held in retirement accounts, the cash value of life insurance policies, and the value of your home and other personal property (including cars, clothing and furniture). So consider directing a larger portion of your paycheck to your retirement accounts during your FAFSA-filing years.
3. Decrease cash sitting in a savings account
A fat savings account can also lower financial aid because the federal financial aid formula considers up to 5.6% of parents’ assets to be available to pay for college. If you’re planning to use cash to buy a new car, do a home-renovation project or make some other large purchase—even to pay down debt—do that before you file the FAFSA.