2016-2017 FAFSA Changes Are a Mixed Bag
Posted By Donna Fuscaldo on November 24, 2015 at 3:48 pm
New and proposed changes to the Free Application For Federal Student Aid are a mixed bag for college borrowers, with the potential to help some and harm others, depending on their financial and family situation.
The federal government says that the FAFSA is a clear-cut, straightforward application that should only take an hour to complete. However, far too many families struggle for hours on end and get stuck on tricky questions, often resulting in missed deadlines and mistakes. In an effort to streamline the process, the government has been rolling out changes to the FAFSA, and plans to put more into effect for the 2016-2017 school year. Some are nominal, but others are likely to have a more meaningful impact on families.
Asset protection allowance takes a hit
One of the changes coming to the FAFSA for the 2016-2017 school year has the potential to cause some harm to many families. That’s because the Department of Education has lowered the amount of assets a family can keep off the application. Called the asset protection allowance, parents are allowed to shelter a portion of their assets, so they don’t count toward aid eligibility. But that rate has been on the decline in recent years. According to Edvisors, the asset protection allowance for married parent assets when the older parent is 48 years old will be $18,700 for 2016-2017. That’s down from $30,300 in 2015-2016, and $52,400 in 2009-2010. Edvisors says the allowance could go away completely by the 2018-2019 school year. While that may not seem like a big deal to some people, it can be a big consideration for families. After all, people with multiple children in college will see those extra costs add up quickly.
In order to get around this rule, Jeanmarie Keller, creator of the Smart Plan For College, says families need to change their saving strategy, effectively moving assets into savings vehicles that aren’t counted by the FAFSA to determine their child’s aid eligibility. For instance, if a parent is contributing money to a 401(k), the pretax income is still counted by FAFSA. But if that money is in a Roth IRA and the withdrawals are taxed, it won’t count against them when it comes to applying for federal financial aid. A note of caution: Keller says savers should only employ this strategy if it makes overall financial sense.
Borrowers can get an earlier start on the application
While the reduction in the asset protection allowance may not impact that many borrowers, one proposed rule that will go into effect for the 2017-2018 school year will. Something many advocates have been calling for, it will change in when the application opens to borrowers. In the past, borrowers had to wait until January to apply for federal financial aid. Now, they will be able to start the process in October. Students who need to complete the 2017–18 FAFSA will be able to access and submit the form anytime from October 1, 2016, through June 30, 2018. That’s a big deal, because with the application opening in January, students are forced to apply to college without knowing how much federal financial aid they are eligible for. “By moving it to October, the government is enabling students to apply to college already knowing their eligibility,” says Abigail Seldin, co-founder of College Abacus. That could have big impact, especially if it causes people to rethink where their children apply to school. If students and families know they aren’t going to get as much aid as expected, they could search for a comparative school that costs less. It’s not as easy to walk away from an expensive school if your child has already been accepted.
Prior-prior income information to be required
Another change that should benefit many borrowers (but could actually complicate the process) is a change in reporting income requirements. Borrowers of today are required to provide income information from the prior year. That means if you were applying for aid for the 2016-2017 school year, you would report 2015 income. Starting with the 2017-2018 FAFSA, applicants will have to show prior-prior year income information, something that lawmakers recommended earlier this year. For 2017-2018 applicants, that means you’ll need to provide 2015 income information instead of 2016 income information. According to the government, the change will increase the accuracy of the form and give borrowers an earlier and more accurate estimate of financial aid. It also gives more people access to the IRS Data Retrieval Tool (DRT), which automatically populates the student’s tax return data on FASFA. Since the tax data is from two years prior, it’s available when applying online.
However, there is a downside to this change, says Keller of Smart Plan For College. Financial aid is based in part on your income, and if that changes during that two year period, you could either lose money or have to file an appeal and go through a lengthy process to retain it. Instead of streamlining it, for a small portion of people, it adds an extra step if their circumstances change. “A lot can happen,” in a year, says Keller. “It’s complicated to parents.”