Beginning with the 2017-2018 school year, the Free Application for Federal Student Aid (FAFSA) will begin using income from the prior-prior year when determining financial aid eligibility. The FAFSA is an extensive form used to determine how much and what kind of financial aid a student is eligible for and the Expected Family Contribution, which is how much the government expects a family to cover on their own. The application period for the FAFSA historically opened January 1 for the following fall semester. The form also used the prior year’s income and other information often found on your tax return. With financial aid awarded on a first-come, first-served basis and many families unable to file their tax returns until March or April, many applicants had to rely on estimated returns, and furnish completed returns by the tax-filing due date.
Thanks to an executive order, the form will now use income from the prior-prior year and the application window will open October 1, 11 months before the student matriculates. For example, if your student is beginning college in Fall 2017, the application for financial aid will open in October 2016 using information from the 2015 tax year, which was likely filed in April 2016. It is important to note that the 2015 tax year will count twice—under the old prior-year rule for the 2016-2017 school year and under the new prior-prior year rule for the 2017-2018 school year. This change also shifts the relevant tax years to a student’s sophomore year of high school to his sophomore year of college.
Most families will benefit from the extended timeline as they will be able to furnish accurate information. Others who will benefit are families with grandparent-owned 529 Plans. 529 Plans are very flexible savings plans with several tax benefits that help families save for the costs of a higher education. However, 529 Plan ownership affects a student’s eligibility for federal financial aid. In the financial aid methodology, 2.6% to 5.64% of a parent-owned 529 Plan account value is assessed in determining financial aid eligibility. If a dependent student owns the 529 Plan, the plan’s assets are also considered a parental asset. If the student is independent and owns the 529 Plan for his own benefit, the assets are counted at 20%.
Grandparent-owned 529 plans are considered neither a parent or student asset; therefore the funds in these plans are not counted. However, once distributions are made from a grandparent-owned 529 Plan, the money is considered untaxed income to the beneficiary. A student’s income can reduce financial aid eligibility significantly as it is counted at 50%. Rather than saving a grandparent-owned 529 Plan for a student’s senior year of college, distributions can now be taken during both the junior and senior year without negatively affecting the Expected Family Contribution calculation, assuming the student does not intend to apply for financial aid to attend graduate school.
A college education can be one of the most significant expenses for a family. Planning is essential for both saving and withdrawing funds. If you have questions regarding paying for college expenses, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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