Paying for a college education is one of the biggest outlays any family will ever make, so they should take notice of several new developments that can help finance rising college costs.
For starters, the interest rate on federal student loans for the 2016-2017 academic year has declined a little more than half a percentage point. Loans issued after July 1 carry a 3.76% rate for undergraduates, down from 4.29% last year, and 5.31% for graduate students, down from 5.84%. PLUS loans for parents of undergraduates and graduate students will charge 6.31% interest, down from 6.84%.
Equally or more important is the change in the filing date for the Free Application for Federal Student Aid (FAFSA), which is the primary source that public and private institutions use to calculate a student’s eligibility for financial aid.
Families and students can now file the FAFSA beginning Oct. 1 for the 2017-2018 academic year, using income tax returns from 2015, which will also be used for the current 2016-2017 academic year, doing double duty during this transition period. Even if families don’t think their student will qualify for federal aid, they should file the FAFSA anyway because most colleges require it be filed before considering an application for student aid and because their student may qualify for some assistance.
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Previously, families would file the FAFSA starting Jan. 1, estimating their income taxes for the previous year, then updating the information once their taxes were filed. Now the lookback will be two years beginning with the 2017-2018 academic year, and there will be no need to estimate income taxes and then revise them.
“This is good because you don’t have to estimate … and it also speeds things up a little bit,” says Matt Sommer, vice president and director of the retirement strategy group at Janus Capital Group.
“People will find out about their [financial aid] awards sooner [and] people can make their decisions about where they want to go to college sooner.” But he cautions all those families who have grown used to the Jan. 1 FAFSA deadline for the upcoming year: “Before you know it Oct. 1 will be here and you don’t want to be flatfooted.”
These changes in the FAFSA filing calendar also change the strategies that families can use in order to maximize their student’s chances of qualifying for financial aid. Here are some strategies they should consider, according to Sommer.
Delay Recognition of Income
Since the new FAFSA rules take into account income earned two years prior, parents of future college seniors should try to delay recognizing income until the tax year that lands at the beginning of their student’s junior year.
For students who will be sophomores this upcoming academic year — and seniors during the 2018-2019 academic year — that means delaying the recognition of income into 2017 because it won’t be included in the FAFSA filing for that senior year. Parents could delay selling appreciated securities or taking a distribution from a tax-deferred retirement account until 2017.