College planning is a huge priority for U.S. families. According a study from Fidelity Investments, 85 percent of parents reported that saving for college was “one of their top three savings priorities.
Additionally, 34 percent stated college planning was their “top savings priority.”
New rules now are in place for the primary platform for college savings – the U.S. government’s Free Application For Federal Student Aid. This means that financial advisors need to get up to speed on the changes, and keep family clients on track to get junior through college with flying colors, and minimum student loan debt.
Here’s the deal: For the 2016-2017 academic year, interest rates on U.S. government federal student loans for undergraduates dropped half of a percentage point. Any loan offered through Uncle Sam as of July 1 includes a 3.76 percent loan interest rate, compared to 4.29 percent for 2015.
Graduate student loan interest rates, while marginally higher, have dropped from 5.84 percent to 5.31 percent over the same time period.
College PLUS loan interest rates for both graduate and undergraduate students fell from 6.84 percent to 6.31 percent.
New Starting Dates
Another new wrinkle with FAFSA is that starting filing dates have been moved up to Oct. 1, starting with the 2017-2018 academic year. That’s moved 90 days from the traditional FAFSA starting line of Jan. 1, of the following year. Government student aid officials wanted to leave some space between the filing deadlines, and provide for complete, accurate federal and state tax returns, which will start with 2015 tax returns for the 2017-2018 academic year. In previous years, parents scrambled to provide accurate estimated returns, which didn’t always prove accurate.
(The U.S. government’s Financial Aid Toolkit page provides a good summary of the FAFSA changes here.)
College savings experts say the changes are mostly positive for parents and students, but that financial advisors have to be nimble in including the new FAFSA rules into a comprehensive college financial plan for their clients.
“The good news is that families can use their completed tax info moving forward, 2015 taxes in the case of their aid application for 2017-18,” said Blaine Blontz, founder of
Financial Aid Coach. “This allows families to avoid making estimates which has been a confusing part of the filing process.”
But with the earlier open date of Oct. 1, families will need to be on the lookout to see if schools change any of their deadlines for forms to be submitted, Blontz advised. “Previously, the standard recommended deadline was March 15, but that was when the form opened January 1.”
Getting Clients A Head Start
The 90-day head start isn’t only about switching from prior-year income and tax
information (PY) to prior-prior year income and tax information (PPY), said Mark Kantrowitz, publisher and vice president of strategy at Cappex.com.
“Students who file the FAFSA sooner tend to get more grants, on average, than students who file the FAFSA later,” he said. “For example, eight states award state grants on a first-come, first-served basis, until the money runs out.”
The switch to PPY means that most families will have filed their federal income tax returns by the FAFSA start date, he added.
“Even families who obtained an automatic six-month extension will have filed federal income tax returns by Oct. 15,” Kantrowitz said. “This allows them to use the IRS Data Retrieval Tool to transfer information from their federal income tax returns to the FAFSA. Not only
does this simplify the form, but it reduces the likelihood that the FAFSA will be selected for verification. Any data element that is transferred unmodified from the IRS to the FAFSA will not be subject to verification.”
For financial advisors, the use of one-year earlier income and tax data brings other factors into play.
“It’s best to avoid artificially increasing income during the base year for the freshman year FAFSA and subsequent years,” Kantrowitz said. “The FAFSA depends heavily on income, so realizing capital gains and taking distributions from retirement plans will increase income, thereby decreasing eligibility for need-based financial aid. So, families should realize capital gains before January 1 of the sophomore year in high school.”
On the other hand, the workarounds for certain problems, such as grandparent-owned 529 plans, can start a year earlier, he noted.
“Instead of waiting to take a distribution from a 529 plan until the senior year in college, when there is no subsequent year's FAFSA to be affected, distributions can start during the junior year in college (technically, after January 1 of the sophomore year in college),” Kantrowitz said.
Changing College Financial Thinking Patterns
The upshot for financial advisors? Job one is to get college-bound families thinking about financial aid earlier – way earlier.
“The real takeaway of this change is that families will need to start planning for
college earlier,” said Joseph Orsolini, president of College Aid Planners. “The freshman year FAFSA will be based on the tax return that begins during sophomore year of high school. Most parents aren't thinking about arranging their finances for college at that point.”
Maybe they’re not. But if parents are lax on college financing campaigns, it’s up to their financial advisors to pick up the slack. They can’t do that if they don’t know how the rules of the college financial planning game have changed, and how to take advantage of them.
Brian O'Connell is a former Wall Street bond trader and author of the best-selling books, such as The 401k Millionaire. He's a regular contributor to major media business platforms. He resides in Doylestown, Pa. Brian may be reached at [email protected].
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