FAFSA Form Availability and Tax Reporting “Base Year” Changes | Improved Planning Opportunities
[September 14, 2015 Department of Education Announcement Summary of Changes]
The FAFSA (“Free Application for Federal Student Aid”) form typically changes each year when the government announces clarifications and enhancements intended to help simplify the completion process.
FAFSA submissions result in families receiving the Student Aid Report that provides the family’s Expected Family Contribution (“EFC”) number.
The EFC number is a primary component for calculating the family’s financial need; total cost of attendance less EFC equals the family’s financial need.
Rarely are their major revisions to the actual mechanics (“structure”) of the FAFSA process.
2015 is a different year with three major changes that provide several advantages to families.
- FAFSA Form is now available three months earlier.
- The “Base Year” definition for reporting tax information changes.
- Asset Allowance reduces sharply.
These changes provide a great opportunity for planning. For example, we will show you increased opportunity for Grandparent Owned 529 Plans as a result of the second change.
FAFSA Now Available on October 1, Starts 2016
In the past the FAFSA form became available on January 1 of the calendar year for the academic year starting in the fall of that year extending into the next calendar year for the second semester of an academic year. For example, for the 2015-2016 academic year the FAFSA became available on January 1, 2015.
Now the FAFSA becomes available on October 1 preceding the calendar year when the academic year starts. The revision starts with the academic year 2017-2018, the form becomes available October 1 2016.
There are several important improvements with this change. One, families will have more time to become familiar with how to complete the FAFSA form.
A second big advantage families have more time to really answer the college affordability question. In the past many financial aid awards were received just a few weeks prior to the student’s enrollment decision.
Earlier Affordability Answers Will Shock Schools’ Admissions and/or Admitted Students Numbers
The earlier FAFSA timeline will probably benefit some schools and others will possibily see their admission / admitted student numbers drop.
Shopping schools or creating competition may diminish as a result of knowing a school’s actual cost early in the admission process,
That said, the actual cost is a projection albeit a much better projection (actual EFC number known much earlier) than the current situation where various calculators project EFCs with their accuracy limited by shortcuts making many of the projections unreliable for planning purposes.
Another possible disadvantage for some schools might occur where their budget cycle and their financial aid award cycle are out of sync. Schools who align these two budget processes properly could benefit.
“Base Year” Definition Changes for Tax Reporting
This revision changes the tax return year for FAFSA reporting from the previous year (known as the base year) to the previous year of the base year referred to as the prior-prior year.
The revision becomes effective with the FAFSA reporting for the 2017-2018 academic year, form available October 1, 2016 as referenced above.
Strategy Alert: The phase-in of the prior-prior year tax reporting information results in using your 2015 tax information twice; for academic years 2016-2017 and 2017-2018. This means you should do everything you can to review your situation and evaluate possible EFC strategy moves before the end of 2015.
Under the current system many families wait to file the FAFSA until after they file their tax return.
Families can lose out on possible state aid and other forms of aid that have early deadlines where filing the FAFSA is required.
Prior-Prior Year Change Puts IRS Retrieval Tool More into Play Reducing Mistakes
Redefining the base year tax reporting requirements to the prior-prior year return helps curtail the aid deadline problem and expands the possible use of the IRS Retrieval tool.
Part of an ongoing FAFSA simplification effort is the expansion of the IRS Retrieval tool. Before the change, many families estimated their taxes, then had to go back into the FAFSA after their taxes were filed to manually update information.
A few years ago the IRS Retrieval Tool became available with some confusion.
Many would have to try to use the retrieval tool several times especially when they were not aware of how long to wait to access the tool after filing taxes. The results were frustration, wasted time, and many open ended tax questions at the schools waiting on applicant file updates.
The advantage of the tool is it automatically syncs the appropriate tax return numbers into the FAFSA form.
There are filing situations that also delay the use of the tool such as filing an extension without paying the full amount of tax due. By using the year-to-year tax return compared to the current base year definition many of these delays will be eliminated.
The retrieval process also helps reduce the likelihood of being selected for verification (in this situation submitting a tax transcript requested from the IRS).
Strategy Alert: The form availability and prior-prior year changes provides more time for strategic planning in the areas of college affordability and selection.
Finally, colleges and universities with the old system spend millions of hours verifying the FAFSA information in the areas of income and other tax return data.
No longer since the increased use of the IRS Retrieval Tool allows for tax data to come directly from the IRS eliminating a high percentage of previous verification issues.
Planning Opportunity – Grandparent 529 Plans Benefit from FAFSA Change
The change to the prior-prior year tax reporting opens an extended 529 distribution opportunity without adverse financial aid consequences for grandparent owned 529 plans.
The traditional distribution strategy for 529 plans owned by Grandparents is to wait until the calendar year the grandchild entered the final year of college. By then the distribution does not count towards the EFC calculation.
When a distribution occurs from a grandparent 529 plan, the distribution counts as untaxed student income. The amount is assessed at 50% and is added to the student’s financial aid income for the EFC calculation.
In contrast, a Parent owned 529 Plan distributions are not assessed as income in the EFC calculation. The balance as of the FAFSA official filing date is assessed as an asset at 5.64%
However, contrary to common knowledge parental owned 529 plans’ gains in such distributions can be taxed (plus 10% penalty) when used for non-qualifying educational expenses.
Moving to the prior-prior year tax information expands the window for grandparent plans’ distributions without resulting in adverse financial aid consequences.
Now grandparents can initiate 529 distributions the calendar year that the grandchild enters their junior year. The grandchild’s sophomore second semester will be included in the distribution window.
The result is a distribution window of 2.5 years.
Asset Protection Allowance Change Shields Far Less from From Assessment
The FAFSA calculation includes several allowances that provide relief (a reduction) in the calculation of a family’s EFC number. For example; state income tax allowance, income protection allowance, social security tax, etc.
The asset protection allowance (“APA”) does change each year but this year the change is a major reduction in the amount that families are permitted to shield from the FAFSA asset assessment calculation of 5.64%.
On June 9, 2015, the U.S. Department of Eduction announced this years APL changes for the 2016-2017 academic year. However, the published information was incorrect.
Unfortunately there are articles in circulation that are incorrect because the Department of Education announced corrected asset protection allowance values as of August 3rd, 2015 for the 2016-2017 academic year (for FAFSA form available January 1, 2016).