Recent FAFSA Changes Hasten the College Financial Aid Process

Last week, President Obama announced two changes to the process for submitting the Free Application for Federal Student Aid (FAFSA).  The changes will not take effect until October 2016, but the implications for financial aid strategizing are immediately relevant for those who will be entering college the following year.

Change #1:  Earlier FAFSA Availability. Under the current system, the FAFSA for the upcoming school year is available starting on January 1^st. Starting with applications for the 2017-18 school year, however, the FAFSA will be available on October 1^st of the previous year (i.e. October 1, 2016).  Since many schools award financial aid on a first-come, first-served basis, families planning to apply for aid should take advantage of this earlier start date.

Change #2:  Earlier Income Information. The current system requires that students report family income for the prior tax year (i.e. when applying for aid for the 2016-17 school year, a family will use their 2015 income). However, the new rules will allow families to use their “prior prior” tax year income (i.e. when applying for the 2017-18 school year, a family will still use their 2015 income).

Purpose of the Changes. These changes aim to further simplify the financial aid process and better align the timeline for financial aid decisions with that of college admissions, so that students in need of aid will actually apply for it and will (ideally) have aid information in hand when making decisions about college acceptances. Using “prior prior” year income information will allow more families to take advantage of the option to electronically import income data from the IRS to their FAFSA, since their tax returns for the relevant year will be complete. This will also alleviate the need for many families to estimate income for the FAFSA and then file an amended application thereafter.

Implications for Financial Aid Strategy.  Due to these new changes, 2015 is a significant year for those entering college and planning to apply for financial aid starting with the 2017-18 school year.  The FAFSA calculation of your Expected Family Contribution (EFC) for college expenses will be based in large part on your income this year.  To some extent, your 2015 income is beyond your control.  (Anyone planning to ask their boss for a pay decrease for the sake of the FAFSA?  I think not.)  Furthermore, you cannot simulate a lower income by increasing pre-tax retirement plan contributions or HSA contributions, e.g., because the FAFSA takes into consideration your “untaxed income” as well as your taxable income for the relevant year.  However, if you expect any lump sum income (e.g. a bonus, commission, family gift, withdrawal from a retirement account, etc.) that could be pushed to the subsequent tax year, it may be in your best interest to do so.  The first year (or “base year”) of applying for financial aid often anchors the amount that you will receive for the subsequent years of college, so keeping your income relatively low for that year may benefit the aid packages that you receive throughout the college years.

For those with above-average income wondering if it is worth even applying for financial aid, online resources, such as the College Board’s EFC calculator or its net price calculator for individual colleges, can give a better idea as to your eligibility.  Keep in mind that many colleges require a FAFSA on file even for merit-based financial aid, so it may be worth completing one, even if you do not expect any need-based aid. 

We see these changes as significant improvements to the financial aid process.