College students and their families may be the latest victims falling off the fiscal cliff if Congress fails to act. While federal tax returns have an annual April 15 deadline, the Free Application for Federal Student Aid (FAFSA) to help pay for college is available on January 1.
In years past, the Federal Department of Education (ED) permitted income estimates so students could file their FAFSA early before filing their tax returns. The resolution of the fiscal cliff will determine how much 2012 taxes students and parents will owe. If the college-bound delay filing their FAFSA because of the uncertainty of tax calculations, they risk losing funds they otherwise may be eligible to receive.
For those attending college in the 2013-14 school year starting next fall, their FAFSA is coming out on January 1, 2013. Although this year’s questions are not public yet, past years require income and asset information about students and their families.
Certain financial information is shared between the IRS and the ED, such as amounts of income earned and taxes paid in the last full year before attending college. Under FAFSA, most students are considered dependent. For dependent students, custodial parent(s) financial information is also required. That makes 2012, the year we are still in, the key income year for parents and their dependent students attending school next fall.
The fiscal cliff is the term referring to the expiration of tax cuts and the implementation of significant spending cuts that will occur after midnight, December 31, 2012. The result is many government programs will have funding decreases, including the ED, and many Americans will pay more in taxes.
Tax rates may increase because of changes in the alternative minimum tax, payroll tax cuts that cause a tax increase for workers, or taxes that go up from a loss of deductions. According to the Tax Policy Center, the average American household will owe an additional $3,500 in taxes.
WHAT IS FAFSA?
FAFSA is the application for federal student aid. Filing the FAFSA is a major part of college prep because it is the source of over $150 billion worth of free money grants, student loans and work-study jobs for those who qualify.
Under New York State TAP, like other state programs, students must file their FAFSA before they can apply for state aid.
Each college may require a FAFSA before it awards its institutional funds to admitted students. Private sources may also insist that a FAFSA be filed first.
Every year, students and their families scramble to file their FAFSA in early January, even though deadlines may be much later, because many colleges give out money to the early birds first.
WHAT TO DO
Because of the fiscal cliff, when the college-bound do their college prep, they may find they have thousands less to help them pay for college. However, here are five things they can do:
1. File FAFSA Despite the fiscal cliff, students and their families shouldn’t put off filing their FAFSA when it becomes available in January. Use estimates and report actual numbers when tax returns are filed. Update income information on the Student Aid Report (SAR) that is sent by the ED when a FAFSA is filed.
2. Search other financial aid sources In addition to state programs, students can search for scholarships from colleges they attend and private sources such as local businesses, national companies, high schools, organizations and individuals.
3. Defer income It’s not 2013 yet so there is still time to change finances to increase eligibility for aid. If possible, defer income until next year (of course that may become next year’s problem if filing FAFSA again).
4. Lower assets Asset information for both dependent students and their custodial parents are included on FAFSA but are counted as of the day the FAFSA is signed and submitted. Since that date will be in 2013, families have time to pay their outstanding bills, including those from holiday purchases, before they file their FAFSA.
5. Appeal If the college award does not reflect a family’s financial situation, FAFSA filers can appeal for a review by that school. By law, Financial Aid Administrators may exercise their professional judgement to increase initial awards based on additional information such as job loss, property loss and high child care expenses. For example, Long Islanders severely affected by Super Storm Sandy may have suffered significant losses but the FAFSA does not have an explanation section. Students must communicate such information directly with their college. They should contact their schools to determine who hears appeals and what forms, if any, to use.
If you are worried about the fiscal cliff and college prep, let me know via Twitter and the comments section below.