If you have ever been through the college application process, then you know that it can be daunting. Add in the financial aid application process and the entire system seems to have two left feet. There was an executive order issued from the White House in September that will affect everyone applying for financial aid for college. It’s an important change and one that makes a lot of practical sense.
You are allowed to apply for colleges in the fall of your senior year. Most students apply in the fall. However, you can’t apply for financial aid until January 1 of the year you will start college. In addition, the Free Application for Federal Student Aid (FAFSA) is reliant on tax returns for parents and students for the prior year. Many students and their families have to use estimated tax information to apply. I don’t know the number but I am assuming that most Americans don’t have their taxes complete on January 1. In fact, I have a lot of clients who just completed 2014 taxes on October 15 due to extensions. So how does that impact the financial aid process?
First, it can be overwhelming to apply for several colleges and not find out until March or April that you were denied aid due to the tax returns. It can put certain institutions out of financial reach, and it could be a university or college that a senior had sent in the application for more than six months prior. In some situations, students could have already been accepted and then find out they can’t afford to go to the school of their dreams.
I am not a proponent of saddling students with debt to pay for college. A student who has never worked full-time and taken care of themselves financially doesn’t understand the impact of debt on long-term financial health. However, student loans are only one part of financial aid, and most students should apply for financial aid. There are often scholarships involved in addition to traditional financial aid. There are many strategies and financial products used to pay for college. My post from last year is a good starter crash course: College Is Coming!
So what is this new change and how will it affect families?
First, families will be required to use the “prior-prior year” tax returns on their FAFSA starting with the 2017-18 academic year. In other words, if you are applying to start college in the fall of 2017, you will be using the 2015 tax returns. The other big change is that the FAFSA application date is moving back from January 1 to the previous year’s October 1. This means that students can apply for college and financial aid at the same time.
Benefits include having accurate and filed data automatically retrieved from the IRS (with the family’s permission) to complete the FAFSA. Families will know their financial aid resources much sooner for each school and may be able to apply to fewer colleges.
Here is one important consideration with the transition. The 2015 tax return will be used for two years (2016-17 and again for 2017-18). If that was an unusual year and families had a larger than normal tax return due to a substantial bonus, large commission or even large capital gains, it could hurt the financial aid eligibility. Each institution can make a decision if the family asks for a professional judgment, but you will have to ask and show the anomaly.
Overall, this is a logical change that will make the college and financial aid application process a little less daunting and a lot more efficient.
College planning and retirement planning tend to be the hottest topics for folks in their late 40s and 50s. If you have any questions or would like to see how we can help guide you through the planning process, please give me a call or email me.
Jason Wheeler is currently the CEO and a Wealth Consultant at Pathfinder Wealth Consulting. Pathfinder specializes in comprehensive financial, estate and tax planning services, investment management, and risk management (insurance) for business owners and successful executives. Jason Wheeler offers securities and advisory services through Commonwealth Financial Network®. Member FINRA, SIPC, a Registered Investment Adviser. To learn more about Pathfinder Wealth Consulting, visit www.pwcpath.com. Jason can be reached at [email protected] or 910-793-0616.
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