Countdown to college: Beware of upcoming changes in financial aid
Big changes are afoot for the form nearly every college-bound family should fill out — the FAFSA, Free Application for Federal Student Aid.
Colleges use the FAFSA to determine how much need-based aid each applicant will receive. The form asks about income as well as assets in the names of the parents and the students. The changes in the FAFSA timeline won't take place until October, 2016 but families need to take note.
Currently the required FAFSA form is not available until Jan. 1 of a student's senior year. The form specifically asks for your previous year's tax return, and since many families haven't completed their taxes by Jan. 1, they have been using an estimate that they later updated.
Under the new timeline, the form will become available on Oct. 1 of a student's senior year and will be using the prior year's tax information. So your 2015 tax forms will be used for 2016 graduates, and the same 2015 tax forms will be used for the 2017 graduates. So, whatever you report on your 2015 taxes will impact your potential aid for the next two years.
Here are some other things to know about financial aid:
■ Capital gains count as income. That's important to know if you plan to sell stocks at year-end. Similarly, capital losses can reduce parental income.
■ Student income is assessed at a higher rate than parental income.
■ 529 College Savings Plans can impact financial aid. When the 529 plan is in the parent's name, it is considered a parental asset, but when it is in the name of a grandparent, it does not show as an asset on the FAFSA. But — and this is particularly important — when you start withdrawing from a grandparent-owned 529, it is counted as direct income to the child, and that is assessed at that higher rate and has a much larger impact on financial aid.
Tip from Terry Savage, a nationally recognized expert on finance and contributor to the Huffington Post www.huffingtonpost.com: "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."
You can't use 529 plans to pay off student loans. Read the fine print on exactly what you can use the 529 funds for: tuition, room, board, books and certain other fees.
Another tip from Savage, "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."
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