Big Changes to College Financial Aid

By on October 14, 2016

This fall marks the start of major changes in how parents of college students will seek financial aid. The new rules, which took effect October 1, are expected to make the financial aid application process less stressful for parents and allow them more time to make important financial decisions.

The changes affect the Free Application for Federal Student Aid (FAFSA), the federal aid document that millions of parents fill out annually. Completion of the FAFSA is required to qualify for federal and state aid, as well as institutional financial aid at most colleges and universities.

After the federal government announced the new rules last year, the College Board, creator of the other major financial aid application (CSS/Financial Aid PROFILE), also decided to implement them. Roughly 230 mostly private colleges and universities use the PROFILE to determine who gets their institutional grants.

Two-year-old tax returns

One big change is that parents can now use two-year-old tax returns when applying for financial aid.  This is referred to as prior-prior year (PPY) taxes.

For new and returning students heading to college in the 2017-2018 school year, parents will be able to complete their financial aid forms using 2015 tax returns. Under the old rules, parents would have had to use their 2016 returns.

Families seeking aid for students enrolled in the 2018-2019 school year will use 2016 tax returns. Students heading to school in 2019-2020 will rely on 2017 taxes.

Two-year-old taxes are not optional.

Some parents wonder if they can use their most recent income tax return instead of the older one. This question tends to come from parents who enjoyed a particularly good financial year in 2015 while income in 2016 declined.

When aiming for aid eligibility, it’s better to earn a lower income in the so-called base year. Parents, however, can’t pick which tax return to use. The use of two-year-old tax returns is mandatory.

They can, however, ask a college for a professional judgment if their 2015 tax return does not reflect their current financial situation. In an appeal parents can ask that 2105 income not be considered or that it not carry as much weight.

Benefits of two-year-old tax returns

A major benefit of the switch to older tax returns is that the financial aid application process will be less rushed.  Historically, the tax season and the financial aid season have overlapped uncomfortably. Under the old rules, parents could file the FAFSA as early as January 1 but were unable to complete the form until they had finished the prior year tax return. Most taxpayers, however, do not receive the documents they need to file tax returns that early in the year.  This was problematic because some state aid programs have deadlines as early as mid-February and some colleges award aid on a first-come, first-serve basis.

Given the time crunch, many parents were forced to use estimated tax figures to complete the FAFSA and PROFILE.  If their estimates proved incorrect, parents ran the risk that their students’ financial aid awards would be withdrawn or reduced.

Earlier filing opportunity

The other major change is that you can now file the FAFSA three months earlier than the traditional January 1 start date. The first date to file is now October 1. You can also file the PROFILE beginning on the same date.

Consequently, parents will be able to apply for financial aid nearly a year before their child starts college. This early start can be advantageous for families because it’s anticipated that many colleges will provide students with financial aid packages sooner. Early notification will give parents and students more time to review competing offers and make smart decisions.

In a higher-education industry survey earlier this year, 69% of college administrators said their institutions would be releasing financial aid verdicts earlier beginning with the current admission cycle or next year’s.

Families need to think about college earlier

As a result of the changes to the financial aid application process, the admission cycle will get an earlier start. That means that families need to be even more mindful of admission and financial aid deadlines.

Under the new system, students should ideally identify the colleges they plan to apply to before the start of their senior year in high school.  As a result, many colleges that previously reserved their big recruitment push for seniors will begin aggressive outreach efforts to students in their junior year.


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