Now that college application season has begun, it’s time for students and families to consider college costs and how they’re going to pay them. The key to college financing is the FAFSA, the Free Application for Federal Student Aid, which every school, both public and private, uses to calculate how much aid is available for a particular student and which all government student loans — for students and parents — require before dispensing any funds.
“Everyone should complete the FAFSA,” Mark Kantrowitz, an expert on student financial aid author of six books on the topic. Even returning students who didn’t get any financial aid the previous year should complete the FAFSA, says Kantrowitz, explaining that changes in student assets or parents’ income could impact the amount and type of financial aid available.
“You can’t get money if you don’t apply, so always apply,” says Kantrowitz. “Even if you don’t qualify for aid, FAFSA is a prerequisite for unsubsidized federal Stafford loans and federal PLUS loans, which are available without regard to financial aid.”
In a far-ranging webinar on “Filing the FAFSA,” Kantrowitz laid out some tips on filing the FAFSA and updates on changes that students, their families and financial advisors should be aware of:
1. File the FAFSA ASAP. This year, that means as close to Jan. 1 as possible – the first date the latest FAFSA will be available. Even if you don’t know where your child will be going to college and haven’t filed your tax return for the previous year, file early, says Kantrowitz. “The earlier you file the FAFSA the better off you will be,” he said. You can update the income data after your income tax form is filed.
There are several reasons to file sooner than later, all related to the early bird getting the worm. “Nine states offer aid on a first come, first serve basis until the money runs out, three states have February deadlines, and 11 states have March deadlines,” Kantrowitz explained. In addition, he noted, colleges get a fixed allocation for federal supplement education opportunity grants and federal work study. “When the money runs out, there’s no more.” And some colleges have two deadlines for financial aid – a preferred deadline and regular deadline. File by the preferred deadline because more money will be available then.
“Students who file the FAFSA in January, February and March tend to receive more than twice as much grant dollars as on average as students who file later, and they get more money the earlier they file, in January instead of February, in February instead of March, etc.” said Kantrowitz. The final deadline is June 30.
2. File two FAFSAs in 2016. The federal government has changed the starting date for filing the FAFSA beginning with the 2017-2018 academic year, moving it back from January 1 to October 1 of the previous year. In 2016, then, families can file the FAFSA for the 2016-2017 academic year as early as January 1 and the FAFSA for the 2017-2018 academic year as early as October 1.
The earlier October 1 start date reflects a change in the base tax year used in future FAFSA filings. Instead of reporting the previous year’s income on the FAFSA, families will report the income from two years ago starting with the 2017-2018 academic year. They will no longer need to update their filing with the actual data from their tax return because they will be using a tax return that has already been filed. That has implications for how parents handle their finances.
3. Adjust income for the new, earlier FAFSA filing date. Since FAFSA will look back two years instead of one, parents of high school juniors this year should try to minimize the income they report on their tax return. “Offset capital gains with losses or don’t realize any more gains that you can offset with losses,” Kantrowitz advises. “In the future don’t make changes during [your kid’s] junior year but in the sophomore year of high school” because of the new income reporting lookback.
Kantrowitz also advises parents to pay down debt, maximize retirement plan contributions, defer income and retirement distributions until after your student graduates — whatever can be done to reduce reportable assets. And he warns against setting up trust funds to reduce reportable income. “Trust funds mostly backfire even if they include restricted access to principal,” says Kantrowitz.
4. Use the IRS Retrieval Tool to report income. Not only does this save time but it also reduces the odds of delays because the numbers won’t be subject to verification, says Kantrowitz. In the meantime for the upcoming 2016-2017 academic year he advises that parents estimate income using their latest tax return filed or 2015 pay stubs, then update that data with the IRS Retrieval Tool after the 2015 tax return is filed.
5. Get an FSA ID. Before parents or students can file a FAFSA they need a Federal Student Aid ID, which can be obtained at the fsaid.ed.gov website. This ID replaces the PINs that students and parents used previously because it is not tied to Social Security numbers, birthdates and other personal data and therefore considered more electronically secure.
6. Double-check everything. “Nothing will delay a FAFSA faster than errors or omissions,” says Kantrowitz. Use legal names for parents and students, check social security numbers, addresses, etc. And note that every reference to “I” or “You” refers to the students, not the parents or FAFSA preparer, if one is used.
7. File the FAFSA electronically. This allows parents and students to receive results in a few days which will include the Expected Family Contribution that schools base financial aid on and that government loans require.
The FAFSA can be sent to a maximum 10 schools; after that, schools can be switched out with more names. Starting in the 2016-2017 academic year, FAFSA will not share the list of colleges on a student’s FAFSA with other colleges they have applied to. That could help students qualify for admission and financial aid because some colleges have used the list of students’ preferred schools when considering their applications. Since some college ratings lists consider the percentage of accepted students who then enroll, a college was more likely to turn down a student who ranked it a low priority.
— Related on ThinkAdvisor: