New Financial Aid Changes
Chances are you had no idea October 1st, 2016 was a historic day for millions of families.
This day marked the start of significant rule changes that dictate how families apply for financial aid.
The new changes are expected to represent a big win for parents by making the financial aid process less stressful and hectic while providing parents with more time to make incredibly important decisions.
The recent changes will impact more than parents applying for need-based aid. The new rules will also have a ripple effect on higher-income families who will not qualify for need-based aid and instead will be looking for merit scholarships.
What you should know about new financial aid changes
Here are the key points that you need to know about the new financial aid developments:
Where you’ll see the changes
The financial aid changes will impact the Free Application for Federal Student Aid (FAFSA) that millions of parents fill our annually. Completing this aid application is necessary to qualify for federal and state aid, as well as institutional financial aid at most colleges and universities.
After the federal government announced the upcoming changes last year, the College Board, which is the creator of the other main financial aid application (CSS/Financial Aid PROFILE), decided to also implement them. Roughly 230 mostly private colleges and universities use the PROFILE to determine who gets their institutional grants.
Two-year-old tax returns
One of the big changes is the requirement that parents use two-year-old tax returns when filing for financial aid. You’ll see this change referred to as prior- prior year (PPY) taxes.
For new and returning students heading to college next fall (2017-2018 school year), parents will complete their financial aid forms using 2015 tax returns. Up until now, parents have always used one-year-old tax returns.
Families seeking aid for students enrolled in the 2018-2019 school year will use 2016 tax returns. Students heading to school in 2019-2020 will rely on 2017 taxes.
Two-year-old taxes are not optional.
Some parents may wonder if they can use their latest income tax returns instead of the older ones. This is a question that tends to come from parents who enjoyed a particularly good financial year in 2015 while income in 2016 declined.
When aiming for aid eligibility, it’s better to earn a lower income in the so-called base year. Parents, however, can’t pick which tax return to use. The use of two-year-old tax returns is not optional.
However, families in this circumstance can ask the financial aid officer at the school to exercise professional judgment. In an appeal the family can ask that 2015 income not be considered or that it won’t carry as much weight. Depending on the financial aid officer, there is the possibility of them obliging with the request.
Benefits of two-year-old tax returns
A major benefit of the switch to older tax returns is that the financial aid process will no longer be rushed.
Historically, the tax season and the financial aid season have uncomfortably overlapped. Parents had to wait until January 1 to file the FAFSA, but to complete it they had to finish their tax return. Taxpayers, however, usually wouldn’t have the documents they needed to file taxes quickly. Despite this reality, some state aid programs impose early deadlines—as early as mid February—and some schools give out money on a first-come, first-served basis.
Under this time crunch, many parents were forced to use estimated tax figures so they could complete the FAFSA and PROFILE. If they estimated wrong, they ran the risk that their financial aid awards would be withdrawn or reduced.
Earlier filing opportunity
Here’s the other major change: parents can now file the FAFSA three months earlier than the traditional January 1 start date. The first date to file was now October 1. Parents could also file the PROFILE beginning on the same date.
Parents will be able to file for financial aid nearly a year before their child will be in college. This early start can be advantageous for families because it’s anticipated that many schools will provide students with financial aid packages sooner. Early notification will give parents and students more time to review offers and make smart decisions.
A higher-ed industry survey earlier this year reveals that 69% of college administrators said their institutions would be releasing financial aid verdicts earlier beginning with the current admission cycle or next year’s.
Families need to think about college earlier
As a result of the financial aid changes, the admission cycle will now be getting an earlier start. That means that families need to be even more mindful of admission and financial aid deadlines.
Ideally students should know before their senior year in high school starts what schools they intend to apply to. In reaction, many colleges are planning to reach out aggressively to teenagers in their junior year when they have previously reserved the big push for seniors.
How are Social Security death benefits counted in FAFSA? My sons, who are juniors in high school, currently receive income from their deceased father’s Social Security death benefits but those payments will cease when they turn 18 or graduate high school, which will be the case by the time my sons are eligible to enter college. That income will not be available so do I have to report it in this calculation (i.e. all other untaxed income)?
The FAFSA and PROFILE treat Social Security income differently. The income is not included in the FAFSA and is in the PROFILE.
For the FAFSA, untaxed Social Security, either for the parents or children under 18, is NOT included on the FAFSA. For a parent, some Social Security is often taxed if the family’s adjusted gross income (AGI) is over about $40,000, but that’s only to a max of 85% of the Social Security received. The other 15% is considered untaxed Social Security and this 15% is not taxed. In general, all Social Security received by a child (or their siblings) is untaxed, as they very seldom earn over $40K in other income.
For the PROFILE, they treat it differently:
The PROFILE treats this income differently by including this instruction: Enter the untaxed Social Security benefits your parents received or expect to receive for all family members except you, the student.
The PROFILE wants to include the 15% of the parent’s Social Security income that is never taxed for federal income tax purposes, and the Social Security received for other children in the family but not the student (in case the family has multiple children receiving the federal benefit). The PROFILE realizes that students’ Social Security ends when they go to college.
Michael Howell is a registered representative with, and securities offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.