Is there a FAFSA in your future? Even if you are a FAFSA pro, read on, there may be a few tips for you. The Federal Application for Free Student Aid (FAFSA) is the federal government’s way of helping us pay for college. After entering your income and assets you are presented with your EFC or Expected Family Contribution. The difference between the EFC and the actual cost of college will then be supplied in the form of grants and work study, as well as subsidized or unsubsidized student loans. I have not spoken to anyone who hasn’t wondered how in the world the EFC is calculated. For many families, it often feels like the choice comes down to paying for college or eating. In fact there is a complex formula of assets and income.
Beginning with the 2017 school year, for those planning on attending college for the year beginning 7/1/17, new federal regulations are giving you a bit of breathing room. In past years, FAFSA applications were based upon the tax return for the year before college. So the 2017 application would have been based on the 2016 return. Many colleges award scholarships and other types of aid based upon the completed FAFSA. Since these benefits are based on the timing of the application, it is in the student’s best interest to file the FAFSA as early and as accurately as possible. Late winter and early spring became a race to complete tax returns, and then the FAFSA. With the new legislation, you can use the completed tax return from the previous tax year. So, in this case, you can use the 2015 return to complete the 2017 FAFSA. The start date for the application has been moved up as well. For the 2017-2018 college year, you could have filed your FAFSA as early as October 1, 2016.
The FAFSA does not consider an applicant’s debt, so all of your nonretirement assets are in play for your EFC. If you have a potential college student of any age, the time to plan is now. Retirement and real estate assets are not considered for the EFC. Defer as much as is reasonable into your retirement accounts. If possible, before you file a FAFSA, pay off debt. It will reduce your assets. Contribute to 529 plans, and encourage family members to do the same. For instance, 529 plans owned by a grandparent for the benefit of your student are not considered in your or your student’s EFC. Once distributions from a 529 plan begin, they will be considered income for that student. Unless that 529 is large enough to cover all of the college costs, we recommend waiting to deploy the grandparent’s 529. In the past, it was beneficial to wait until the last year of college. With the new deadlines, you can now use these assets in the junior and senior years.
As for parent or child-owned 529 plans, use the parental ownership with the child as the beneficiary. The impact of the parent-owned 529 on the EFC is only 5.64% while the child owned or UTMA 529 plans are assessed at 20%. 529 plans remain a great way to fund college and often have state tax savings on the initial contributions, so don’t overlook these.
Plan carefully, and you can use the FAFSA to your maximum advantage. Now, what are you waiting for? Get moving!