FAFSA Changes for College-Bound Students

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If you are the parent of a high school junior who is preparing to attend college in the fall of 2017, the filing process for financial aid just got easier!  President Obama’s recently signed executive order changes the rules for completing and submitting the Free Application for Federal Student Aid (FAFSA) beginning October 2016 for the 2017-2018 academic school year.  For this and subsequent academic school years, the FAFSA application process will start in October 1st of the year prior to the child starting college and it will rely on prior-prior year income.

October Start Date

Traditionally, the FAFSA opened on January 1st and utilized income figures from the previous year to determine how much aid a child or family might be eligible to receive at the start of the school year in September of the same year.  This may seem reasonable but colleges often want to provide student aid estimates by mid-March.  Since tax related documents are sometimes not available until mid-February, with K-1s from partnerships, LLC, S-Corporations or Trusts often not arriving until March, the window for completing the FAFSA is very tight and often inaccurate given the lack of final and complete tax information.  This inevitably forced applicants to make corrections to completed FAFSA forms once their taxes had actually been completed and filed.

Under the new rules, beginning with the 2017-2018 school year, the application process will open on October 1st 2016.  This will provide an additional 3 months to complete the FAFSA and will align it more closely with the college application process.    Students seeking early admission and working under the corresponding application deadlines will benefit even more from the earlier start date.  More notably, this earlier start date complements other changes associated with the executive order that effect what financial information is collected and used to determine eligibility for financial assistance.

Prior-Prior Year (PPY) Income

Adding to the importance of a October 1st application start date is the decision to use prior-prior year income. Currently, for a child entering college in the fall of 2016, the FAFSA opens on January 1st 2016, relies on 2015 income and is used by colleges for determining aid eligibility as early as mid-March.  Shifting to prior-prior year income means the financial information used in the FAFSA process will be complete and accurate even for those that file extensions as late as October.

Under the new rules, the 2017-2018 school year will rely on 2015 tax information.  Said differently, for that same academic year, the FAFSA will open October 1, 2016 and 2015 financial information will be used to determine aid eligibility.  For most tax payers who finalize and file their returns electronically on April 15th,2016, this means the FAFSA financial information will be accurate and complete and will not need revising as is often the case today.  Even families filing extensions as late as October will benefit from the shift to PPY and the longer application window.

Another positive impact of the change comes in the form of automated data retrieval.  PPY will facilitate the use of the IRS Data Retrieval Tool (DRT).  Historically, using DRT was problematic because data was not available until several weeks after the Federal Income Tax return was filed electronically.  Unless the tax return was filed extremely early in the tax season, the FAFSA deadline for college aid estimates (mid-March) had usually passed.  With the implementation of PPY, tax return data filed electronically with the IRS will be available at the start of the application process and will ease the process by automating much of the financial data entry.

Planning Considerations

The new rules associated with PPY and the October 1st enrollment will be welcome news to most but there are other elements that should be remembered.  At this point, PPY applies only to the FAFSA Federal system.  Even though needs based financial aid information from Federal sources is considered, many private colleges and universities use their own alternative methods to determine how much aid a student may receive.  The National Association of Financial Aid Administrators is actively encouraging schools to shift to the PPY method but many schools continue to rely on the Institutional Methodology (IM) when determining eligibility.

Transitioning from the old rules to new will mean 2015 financial information will be used twice.  For the 2016-2017 school year, 2015 tax year financial information will be used under current prior-year rules.  Going forward, this same 2015 tax year information will be used for the 2017-2018 school year under the new prior-prior year rules.  Families applying for financial aid may want to be careful about any possible future income events within their control as 2015 draws to a close.

The most significant impact of the new rules is to recognize the fundamental time shift that applies and which years matter the most.  In the past, these years began when the student was a high school junior and extended through their junior year of college.  With the new rules, the critical years are accelerated and start as a sophomore in high school and conclude with their sophomore year in college.  For those prone to procrastination, this might negatively impact any late stage planning for rising college juniors and seniors.  If you are unsure how this might affect your family’s particular education situation, contact your financial advisor to discuss the filing changes.