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Tuesday, August 30, 2016

The Far Reaching Impacts of the 2016 FAFSA Financial Aid Application Changes: Families can Avoid Crippling Loans by Starting College Planning Early

This year, the financial aid application process has been significantly changed.  The Free Application for Federal Student Aid, better known as the FAFSA, can be filed for the 2017/18 school year starting October 1, 2016.  Previously, the FAFSA was filed in the first few months of the year.  With the filing date change comes a second deviation from the past: the use of the “prior, prior year” income information.  For the 2017/18 school year, FAFSA filers will use their 2015 taxes.  These two changes have numerous implications for all college bound families.

First, families should receive their financial aid awards considerably earlier.  This will give them several months to determine how they will fund the upcoming school year.  For those applying to college, alarming changes to their financial aid awards well after the May 1 decision date should be eliminated.  In the past, numerous families received very unwelcome news after having committed to a school.

Second, families need to begin serious college planning much earlier.  The financial aid base year is now the calendar year which begins in the middle of sophomore year. Used well, this information can help families avoid taking on crushing amounts of debt.  Those working with me will benefit even more from my expertise.

The FAFSA is the financial aid form required by nearly every college and university in the US. In order to be able to take federal student or parent loans or to get any federal grants, the FAFSA must be filed.  In California, the FAFSA must be filed by March 2 in order to qualify for a CalGrant.  Additionally, most of the colleges and universities across the country use the FAFSA results to determine how to distribute their own grants and tuition reductions.

With annual college costs exceeding $70,000 at a number of schools and many more topping $60,000/year, even many wealthy families are qualifying for need based aid.  The FAFSA uses what is called the “federal methodology” to calculate the EFC, or Expected Family Contribution.  In turn, financial aid offices use the EFC to determine the aid they will award.

There are two primary reasons for the filing date change.  A few years ago, the IRS and Department of Education introduced the DRT or Data Retrieval Tool.  This tool enables filers to transfer their tax information from the IRS database into their FAFSA. Unfortunately, the IRS could not process returns fast enough to provide the data in a timely fashion.  As a result, some families committed to a particular college or university, only to have their financial aid package altered months later when their tax return data was finally available. 

Additionally, with the earlier filing period, financial aid offices will be able to provide financial aid awards to families much earlier in the application process.  Families will then have more time to determine how to pay for the upcoming year of college.  They will also have time to work with the financial aid office to create a workable plan or to apply to additional schools, if needed.

In order to make October filing happen, the income information had to come from what is called the prior, prior year.  This is the calendar year before the calendar year that is finished before the year of school starts.  For example, for the 2017/18 school year, the prior year is 2016 and the prior, prior year is 2015.  By October of 2016, when families can file the FAFSA for the 2017/18 school year, the IRS should have been able to process their 2015 tax return.  When the families use the DRT in the process of filing their FAFSA, the tax information should be processed and ready to be pulled into the FAFSA.

The reason you need to start working with me during freshman year is because of this shift to using income data from the prior, prior year.  Here's an example:

For students who just started high school in August 2016, their high school timeline was this:

2016/17 Freshman year
2017/18 Sophomore year
2018/19 Junior year
2019/20 Senior year

Their first college year, assuming they go directly from high school to college, will be 2020/2021.  These students will apply for college during the 2019/20 school year.  In October of 2019, they will also be able to file their FAFSA form.  2018 will be their financial aid base year, the year of income used by the FAFSA processor to calculate the EFC (Expected Family Contribution).  2018 is the prior, prior year to 2020, their first year of college.  Take a look at those high school years again.  When does 2018 start?  It starts in the middle of the sophomore year.  Therefore, any changes which would be beneficial to a family’s financial aid eligibility need to be identified and executed during 2016 or 2017, the freshman year.

Unfortunately, most families don’t consider working with me until the junior or, even, the senior year.  With the changes, college funding planning can start sooner, since families will be able to know their EFC and financial aid eligibility a year earlier in the process.  With student loan debt crippling so many college graduates’ lives, finding good colleges which are affordable is more important than ever.

Additionally, the average time to complete a bachelor’s degree is six years.  Often this is due to students arriving at college lacking sufficient academic skills, the necessary life skills, or a clue what they want to study.  Without these three elements, students cannot complete their degree on time.   By starting to work with a college planning specialist like me who works both with student preparation as well as college financial aid and funding, the student has time to develop a focus for college and the family has time to prepare for their first financial aid base year, 2018.

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