As we slide into the last two weeks of the year, many people begin their tax planning. This often includes setting goals for the new year. The end of 2015 brings with it changes to college funding that are substantially different from previous years. President Obama recently announced changes for the Free Application for Federal Student Aid, aka FAFSA. While the announcement came late, there is still time to look make adjustments lessening the impact of the new direction.
NEW THIS YEAR
Two changes start with the 2016-2017 FAFSA. Firstly, the form will no longer share the list of colleges that students place on the application. On a recent teleconference call, Mark Kantrowitz discussed the unspoken practice of colleges reviewing the list of colleges placed on a student’s FAFSA form. The reviewing institution prefers to see their name listed in the top 3. Students typically list colleges on the form in order of preference (1.)
The second and larger change deals with the timing and tax returns used for FAFSA filing. First, please note there are NO CHANGES for the 2016-2017 filing for parents and students (2). However, starting with the 2017-2018 school year FAFSA, parents and students will no longer be using the prior year tax returns and they may submit the form as early as October 1st. The information from tax returns from two years ago will be used for the application. See the table below (2).
After reviewing the table, note the 2015 tax return will be used for two years and the submission date is earlier. Earliest submission is recommended by financial aid advisors because colleges can choose to decrease the amount of funds available as the application period progresses.
REVIEW OF EXPECTED FAMILY CONTRIBUTION FOR COLLEGE FUNDING
The Federal Student Aid office uses personal and family income as an important determinant of the amount of funding a student may receive. Better understanding of that formula helps parents and students develop strategies that increase the amount awarded.
The funding formula may require zero to 47% of a parent’s income (minus taxes and allowances) to fund a college education plus 5.6% of reportable assets (not including the family home, retirement accounts, small family businesses, or assets
up the protected amounts (1.)) The number of children in college adjusts the amount of expected family contribution. Students should be ready to use half of their income over the income protection allowance plus 20% of all reportable assets (typically UGMA/UTMA, and other savings accounts (1.))
- As noted above, 2015 will play in important role in college planning for the next two years. Since the calendar year closes soon, here are a few items to consider for reducing your income.
- If you have large realized capital gains, consider selling your losers to reduce income.
- Contribute as much as you can to tax deferred accounts (IRAs, 401ks.)
- Consider placing your dividend and interest paying investments in your tax-deferred and Roth accounts. Consider the potential gains paid out by mutual funds.
- Make two years of charitable contributions in 2015 (up to the allowable limits.)
- Make your January house payment at the end of December to claim the extra interest on your 2015 taxes.
- If you itemize deductions, pay your state taxes by year-end.
- Some states allow deductions for contributions to your state sponsored 529. Here is a link for more information. http://news.morningstar.com/articlenet/article.aspx?id=718471
As you head into the end of 2015 and examine the story you tell the IRS, keep in mind the potential impact on your college funding for the next two years. Any income deferred may help increase the chances of receiving aid. Please check with your financial or tax professional for additional information and questions about your situation.
- 10/20/15 Teleconference with Mark Kantrowitz. The Fundamentals of FAFSA & College Planning
- https://studentaid.ed.gov/sa/about/announcements/fafsa-changes. Information accessed 10/22/15