Every January millions of high school seniors, and college students, and parents sit down together to fill out the dreaded FAFSA form -- the Free Application for Federal Student Aid. The form is more intrusive than the Federal tax forms, because it asks not only about income but assets of parents and students.
The FAFSA is the basis for almost all student aid, loans and grants -- whether aid that is based on financial need or merit-based aid. You'll find it explained thoroughly at www.fafsa.ed.gov. There you can fill out the forms, save your information, and then click to file online. Financial aid is often given out on a first-come, first-served basis -- so don't delay.
And according to Susie Bauer, head of 529 and college planning for Baird, the Midwest-based international financial services firm, you should get ready for some big changes in FAFSA for the 2017-2018 school year -- including some moves you should make now -- even if your child is only a high school sophomore.
Here are five key things to know about FAFSA, financial aid, and 529 plans:
1. Financial Aid is income-driven, but assets count, too. The FAFSA form asks for all income, substantiated by the parents' tax return (both parents, if divorced). Capital gains count as income, so selling stocks and taking gain in the year before filing can impact aid. Similarly, harvesting up to $3,000 of capital losses can reduce parental income. If the student has income, it reduces financial aid on a dollar for dollar basis - creating a disincentive for students to work and contribute to their education.
2. 529 College Savings Plans can impact financial aid. A 529 plan owned by the parent is treated as any parental asset for FAFSA and has minimal impact on financial aid. When a grandparent or other person is owner of the 529, it does not show up as an asset on FAFSA. BUT, when you start withdrawing from a grandparent-owned 529, it is counted as direct income to the child - with a much larger impact on financial aid. If grandparents hold such an account, don't start withdrawing until the junior year of college - after you have filed the FAFSA for that year.
3. Assets owned by a child weigh heavily against the family in the aid formula. UTMA (custodial) accounts should be spent for the benefit of the child in advance of the FAFSA filing year - or rolled into an UTMA 529 account, where they will be treated as a parental asset.
4. You can't use a 529 to pay student loans. Careful planning to use 529 money is essential. No, you can't withdraw to pay down student loans. You can withdraw 529 money tax and penalty-free only to pay for "qualified expenses" such as tuition, room, board, books and certain other fees. If used for something else, there is a 10 percent penalty and taxes must be paid on any earnings over the years. (The exceptions to the penalty occur when a student gets a scholarship, or dies, or is disabled.)
5. Timing is everything. Not only should you file early, but you should be aware of two important FAFSA changes coming in 2017.
First, instead of waiting to file your tax return, or estimating income, you will be able to use the FAFSA IRS Retrieval Tool to verify income from your 2015 return, the prior-prior year. Thus, the income you report for your 2015 return, which you file next April, will impact financial aid for the 2017-2018 college year.
The other big changes is that the starting date for filing the 2017-18 FAFSA will begin on October 1, 2016, instead of January 1, 2017. So there won't be a last minute rush - if you get started early!
Procrastination on FAFSA penalizes the family and the student. Get started now to accumulate as much financial aid as you can. It's a good investment of your time. And that's The Savage Truth.