Now that the FAFSA uses tax return information from two years before a student’s high school graduation year, families of current HS juniors (2022 grads) will use tax information from 2020 when they complete their first FAFSA in the 2021-2022 school year.
This is a huge deal because whatever those families are doing (or not doing) now, will be used on the FAFSA to determine aid eligibility.
Families with HS seniors and college students will also use 2020 tax year information when they file their FAFSA, as the FAFSA is filed each year for when a student is in college.
Many families are not aware of this detail, and poor planning can have significant aid eligibility ramifications and cost families precious aid dollars by not being on the ball sooner.
Here are 4 last-minute college financial aid strategies every parent should consider before the end of the year. As always
1. Accelerate losses to lower income and capital gains
Income on your tax return is a key component of financial aid formulas , so reducing it by harvesting investment losses can both lower your taxable income and improve eligibility for need-based financial aid. Students entering or attending college in Fall 2022 will use tax information from 2020, meaning those losses would need to be executed before the end of the year.
2. Consider where the student of divorced parents lives
In the case of divorced parents, the FAFSA requires it be completed by the parent whom the student lived with for the majority of the year, but not the other parent. The FAFSA requirement is independent of which parent has legal custody or even who claims the student as a dependent when filing taxes, so while it may seem extreme, there are some circumstances where modifying the living arrangements slightly can have real financial aid benefits.
Note that although the FAFSA does not require the other parent to provide information for the FAFSA, it does require the parent completing the form to also include his or her current spouse’s income and assets if remarried.
3. Avoid selling your home if possible
While the value of your primary residence does not have to be reported on the FAFSA, the cash on hand from a sale does need to be, regardless of the intended purpose (i.e. a down payment on a new home).
The family can appeal how the dollars are treated to the college, and it is possible an adjustment will be made, especially if evidence is provided of an impending new home purchase with the dollars. However, relying on financial aid offices to make an exception is risky at best.
4. Avoid home equity loans
Any unspent part of a home equity loan is treated as a cash asset that has to be reported on the FAFSA. And a home equity loan won’t increase your financial aid eligibility by reducing the amount of home equity because home equity isn’t reported on the FAFSA.
These are intended to be general strategies and do not constitute advice specific to your situation. You should always discuss your financial needs with the appropriate professional regarding your individual circumstance.