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Pay Attention to Changes in Federal Student Financial Aid Program

If you have a child hoping to receive financial aid for college, pay heed to changes in the Free Application for Federal Student Aid program.
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Filing taxes promises to be pretty routine this year. Few changes in the tax law mean most taxpayers will focus on the usual last-minute tactics — deferring income, taking losses and finding deductible expenses.

The exception? If you have a child in high school, college or graduate school looking to receive financial aid, you’ll want to pay special attention to recently announced changes in the Free Application for Federal Student Aid (FAFSA) program.

The FAFSA is used by the federal government and colleges to determine how much aid a student receives each year. Last month the government announced that it will start accepting FAFSA applications three months earlier for the 2017-18 academic year. That means students and their families will be able to submit applications as early as Oct. 1, 2016, rather than waiting to Jan. 1, 2017.

The deadline was challenging because applicants and their families either had to scramble to finish their tax returns by Jan. 1 or use estimates that often had to be amended later. As a result of the earlier application start date, families may now use information from the prior year’s tax return. (Families still have until June 30 to complete the form, but because most schools award aid on a first-come, first-served basis, it’s important to pay attention to the earlier deadline, says Mark Kantrowitz, a student financial aid expert.)

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Families submitting FAFSA applications for the 2016-17 school year still have the Jan. 1 opening date, and will use 2015 tax return information to fill out the form. Then they will use the same tax information again for the 2017-18 school year, explains Kal Chany, head of Campus Consultants and author of “How to Pay for College Without Going Broke.” That means the tax data you file this year will do double duty in determining the amount of aid a student is eligible to receive.

The federal financial aid formula awards money to students primarily based on their families’ current income and savings, not counting retirement savings, the cash value of your home, personal property and life insurance policies. So taking steps to lower your income can help increase your chances of receiving more financial aid.

How can you make this happen?

  • Contribute more to retirement accounts. Because assets in your IRAs, 401(k) or other retirement accounts do not count against aid, you’ll want to make sure you’re contributing the maximum possible in 2015 (and any other year you are filling out the FAFSA).
  • Avoid capital gain distributions. They will be counted as income. If you’ve already taken some gains, check to see if you can offset them with any losses before year’s end.

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  • Avoid retirement account distributions. Withdrawing a large amount from a retirement account will count as income. If you can put off distributions or lower the amount withdrawn, that will help.
  • Avoid hording cash. If you’ve been stockpiling cash for a new car or other big expense, spend it before the end of the year. Otherwise your savings will be counted against your financial aid award.

Here are some other important points to keep in mind about the new FAFSA rules.

  • Sophomore year is key. Under the old system, the advice used to be pay careful attention to your finances during your child’s junior year in high school – shifting assets, avoiding cash, etc. says Chaney. But now with the use of prior year’s income tax returns, that timing shifts to your child’s sophomore year.

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  • Remember you have to file every year. So short-term moves such as deferring a bonus from one year to the next won’t make a big difference over the long run unless you’re fairly certain your income will be lower in the year you defer to.
  • You may need to appeal. Some experts believe the new rules will cause a big increase in financial aid appeals because many families’ financial circumstances may change dramatically from the time the appropriate tax return is filed to the point the child receives his or her aid package. If you fall into that category, don’t hesitate to appeal.
  • Private schools have different rules. Many private schools use the CSS/Financial Aid Profile application or their own forms to determine aid. Many of these schools look back on your tax returns for two or three years and some take home equity and other assets into account when awarding aid.