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Updated on Friday, October 23, 2015
Before making a major financial decision, you want to have all the facts. You want to know the price tag, and if there are any competitors willing to give you a product of equal quality for less money. At this point in time, that information is not available to would-be college students until late in the decision-making process.
The Problem With the FAFSA: Making a Decision Without All the Information
Some students make a final decision on where they will be going to school in the fall of their senior year of high school or are at least applying to a variety of colleges. At that point in time, they have little to no idea what their financial aid package will look like. All schools require that the Free Application for Federal Student Aid (FAFSA) be returned before a school-sponsored financial aid package offer is cobbled together. These students decide where they will go to school before they know how much the college or university will ultimately be charging them.
Currently, the FAFSA is not available until the January 1st prior to fall semester. That means for the 2016/2017 school year, you cannot apply for federal aid until January 1, 2016. When you apply you must use the prior year’s tax information, which in our example would from the 2015 tax year.
This presents yet another problem: employers are not required to mail or otherwise distribute W2s and 1099s until January 31st. This means many students do not have their parents’ tax information until a month after applications have opened. Some approximate their numbers, going back to file amendments later. Some wait until taxes are filed, which gives them a very short or non-existent time frame between filing for federal aid, and filing for state grants. Some state grants close their application window as early as March.
These problems have not gone unnoticed. On September 14, President Obama announced some major changes to the FAFSA application process for the 2017/2018 school year and all subsequent years. These changes will help prospective students and their parents makes better financial decisions when it comes to selecting a school for their post-secondary education.
Fix 1: FAFSA Available on October 1, 2016
The first change is that the application window for FAFSA will open on October 1, 2016. This coincides with the timeframe when most students are trying to make decisions about where they will spend the next four years of their lives. It also allows them time to obtain institutional financial aid packages, compare them, and use them to get the schools to bid against each other, which could drive prices even lower.
How it Helps: Knowledge Earlier + Ability to Apply for State Funding
Even if they can’t get the schools to participate in a bidding war, they can make an educated decision once armed with full knowledge about what each school will actually cost them out-of-pocket. The widened application window also means students will have a greater opportunity to apply for state funding.
Fix 2: Tax Information Will be Prior-Prior Year’s Data
You may be wondering about tax information. Since the application process opens sooner, there will be no way to use 2016 tax information for the 2017/2018 school year. Instead, students and parents will use prior-prior year’s tax data. Because of this change, 2015 tax information will be used two years in a row.
How it Helps: The Government Can Use IRS Data Retrieval Tools
By pulling the prior-prior year’s data, the government enables itself to use IRS data retrieval tools for everyone, making the process easier on both sides of the equation. Parents no longer have to scramble to file their taxes early, or amendments later. The government and colleges no longer have to spend valuable time verifying the accuracy of submitted tax information on FAFSA forms, as the information will come directly from the IRS itself.
What Will Not Be Fixed
Pulling IRS data does not mean there is no paperwork involved. Assets will still need to be reported. Retirement accounts are immune, but you will have to report the following:
Other Assets You Have to Report:
- Contributions to retirement accounts in the prior-prior year
- Investment real estate
- Checking account balances
- Savings account balances
- Brokerage accounts
- Mutual Funds
- 529 plans
- Grandparent-owned 529 distributions
- Present value of trust funds as calculated by your trust officer
How a Student is an Independent for FAFSA
You do, and still will, have to report these assets for both the student and the parents unless the student does not qualify as a dependent student according to FAFSA rules. To become independent for FAFSA, you must meet at least one of the following qualifiers: be 24 years of age, be in the military or a veteran, be in graduate school, be married, have legal dependents of your own, be an orphan or ward of the court yourself, or have your school’s financial aid administrator manually change your status due to extenuating circumstances.
Issues Remain for Military Families and Parents with Student Loans
There are additional FAFSA complaints that the new changes do not address. Military families with a parent stationed at certain bases receive a Cost of Living Allowance (COLA) to offset just that: the cost of living. This income is not taxable as far as the IRS is concerned, but is included as non-taxable income on the FAFSA. The same is true for military members’ Basic Allowance for Subsistence (BAS.)
A common complaint among middle-class Americans is that debt, particularly the student debt of parents, is not taken into consideration when the Estimated Family Contribution (EFC) is calculated. The EFC determines the size of the student’s aid package. This leaves many students with no aid, and parents who are unable to assist their children in paying for college because of their outstanding obligations from their own days in the halls of scholarship.
Not Perfect, But Certainly Better
If these changes are to be made, the legislation to do so needs to be passed by Congress. While still not a perfect system, the deadline and tax data changes made by the president go a long way to help ease the paperwork burden on all those involved, and help students make a more informed financial decision when selecting their school.
Brynne Conroy of Femme Frugality