Mid-fall is a special time for many families of college-bound high school seniors, as early acceptance letters for universities are being received and I’ve been enjoying the Facebook posts of proud students announcing their plans for next year.
The experience of receiving a first-choice acceptance notice is one of the true joys of parenthood. The combination of validation and hope is hard to beat. But this moment is also closely followed by a reality check, as the financial planning component of a college education immediately goes from being a hypothetical future goal, to a real current expense.
For nearly all families of next year’s freshman class, part of the financial planning process will involve filling out the dreaded Free Application for Federal Student Aid form, known more commonly as the FAFSA.
The FAFSA is used to determine eligibility for federal education cost assistance programs such as Pell Grants and government subsidized student loans, as well as by most universities as a starting point to award institutional level financial support in the context of what is called the Expected Family Contribution, or EFC. The level of potential aid derived from the FAFSA can literally make a mission-critical difference for many families, especially when their student is bound for a high-cost private university.
So needless to say, understanding the FAFSA is vital to most families of college-bound students, and in September the government announced some important changes occurring with this process that may involve some potential planning opportunities during 2015.
The primary change will involve when the FAFSA is filed and what tax year’s information will be reported on the form. Previously the FAFSA was filed between Jan. 1 and June 30 using the prior tax year’s income and asset information. In 2016, a new earlier filing window, now beginning Oct. 1 and ending June 30 will be added. This new earlier filing window will then become a permanent change going forward.
This means for families of freshman starting college in the fall of 2016, the income and asset information from 2015 will be used to determine aid levels for both the student’s freshman and sophomore years. So with nearly three months left in 2015 to do some planning, now is the time to learn how the FAFSA works.
While a full discussion of this complicated process is beyond the scope of this column, it’s important to understand that income levels typically have the largest impact on the FAFSA aid formula. With this in mind, if it is possible to reduce income in 2015 by deferring a bonus until next year, or making some capital investments if parents own a business, or by deferring distributions from retirement plans if parents are retired, now is the time to think about this type of planning.
On the asset side of the equation, it’s important to understand what assets are considered countable resources for college expenses, and what assets are not. While once again this is a big discussion, one easy to understand concept is student assets are always weighted heavily in the equation, so repositioning items such as UTMA accounts or other accounts in a child’s name could be a smart move.
The FAFSA is important and intimidating. While a lot of information is available online, some parents may want to consider getting professional help for this complicated endeavor.