You (and the parent listed on your FAFSA, if needed) will be providing financial information for your 2021-2022 FAFSA®. The FAFSA will ask questions regarding your income for the 2019 tax year. It will also ask about assets from calendar year 2020. The information input will be used to calculate your expected family contribution (EFC).
Student income and assets are assessed differently than parent income and assets. Here’s what you need to know.
There is no income limit to complete the FAFSA. If your family makes a certain level of income, you may be correct to assume that you may not qualify for much, if any, need-based aid. But you don’t want to rule yourself out. Not all financial aid programs will have the same income criteria to qualify. And not all financial aid is need-based.
The FAFSA is also used to help you apply for certain types of non-need-based aid. For example, Direct Unsubsidized Stafford Loan funds are non-need-based loans. And some colleges may require you to complete the FAFSA to receive any type of aid, including merit aid.
Here’s the bottom line, unless you are planning on paying directly out of pocket, you should complete the FAFSA.
You may be wondering which tax year the FAFSA uses. The 2021-2022 FAFSA will be asking for your 2019 tax information. You will have three options when it comes to identifying your tax filing status for tax year 2019:
If you have indicated “Will file” or “Not going to file,” you will not be eligible to use the IRS Data Retrieval Tool to import your financial information into the FAFSA. But that’s okay, the FAFSA will provide you detailed instructions to help you complete the required financial information.
If you completed your tax filing, you may be eligible to use the IRS Data Retrieval Tool to import your financial information into the FAFSA. Using the IRS Data Retrieval Tool is optional, you can always choose to manually input your information.
Having to complete the income section manually is relatively easy if you have the necessary forms ready to go. All versions of the FAFSA will provide you with detailed instructions for the information being asked, even the paper application.
The IRS Data Retrieval Tool (IRS DRT) will import relevant information from your filed tax return from the IRS to your FAFSA. Using the IRS DRT does make it easier to complete the financial section of the FAFSA, but it doesn’t provide answers for all financial questions.
For security reasons, the information you import using the IRS DRT will be masked. If you believe there are any issues or concerns with the information reported, you will need to work with your Financial Aid Office. Bring copies of your tax returns so they can complete a review.
For the most part, if you filed an IRS 1040 with a social security number (not an ITIN), and have an FSA ID, you will be eligible to use the IRS DRT. Using the IRS DRT is optional for both you and your FAFSA parent.
You (student and/or parent) can’t use the IRS DRT if:
The 2021-2022 FAFSA will transfer appropriate information from filed Schedule 1 forms using IRS DRT. If you use the IRS DRT, you will not be prompted to answer the question if you filed a Schedule 1.
If you are not using the IRS DRT, and you filed a Schedule 1, you want to make sure you correctly indicate this on your FAFSA. This was a common error last year! Reporting a Schedule 1 form is extremely important for low-income families, it can help qualify eligible students for an automatic zero EFC (expected family contribution).
Along with taxed income, you will also be asked questions about certain types of untaxed income.
Here is what you need to report:
Untaxed income you don’t need to report:
Carefully read what is being asked of you, and don’t include unnecessary untaxed income.
Don’t include the following:
Excluded Income: The FAFSA will ask you to identify certain types of income that can be excluded from the FAFSA calculation. Some of these amounts are automatically included in your adjusted gross income.
FAFSA income protection allowance is something that can help you; especially when there is a lot of concern about how income can hurt you in financial aid formulas. Basically, income protection allowance is an amount of income that doesn’t get counted when figuring out your financial aid.
If you are an independent student without dependents other than a spouse that is:
If you are an independent student with dependents other than a spouse, your income protection allowance will vary depending on how many people are in your household and how many of them are in college. For a family of four with one student in college, the income protection allowance will be $42,200.
If you are a dependent student, the student income protection allowance is $6,970 — meaning there is nothing counted toward your contribution if you have $6,970 or less in yearly taxable and untaxable income.
The parent income protection allowance will vary depending on how many people are in your household and how many of them are in college. For a family of four with one student in college, the income protection allowance will be $29,890.
Income above those income protection allowances is considered your “discretionary” income — and that’s what counts toward your contribution. A student contribution for discretionary income is calculated at a flat 50%. While a parent contribution from discretionary income is on a sliding scale, from 22-47%.
What does that all mean? Well, student income above the income protection allowance will be assessed at a higher percentage than parent income above their income protection allowance.
One of the most popular FAFSA topics is the impact of reporting assets on your FAFSA. Not everyone will be required to answer questions about assets. You’ll get a pass if you are below the income threshold for the year and file certain types of tax forms. Certain states do require you to answer questions about assets to determine eligibility for state aid, even if you aren’t required to answer those questions for federal aid.
Reportable assets (you are required to list these on your FAFSA):
Non-reportable assets (you are not required to list these on your FAFSA):
Note: Some of these assets do have to be reported on the CSS Profile™, including the net worth of the family home, the family farm, and small businesses owned by the student or parents.
Net worth, for FAFSA purposes, is the total of your reportable assets. The FAFSA will determine the net worth for you and your parents separately.
Parent assets have an asset protection allowance which is based on the age of the oldest parent living in the student’s household. Parent net worth is assessed at 12% for reportable assets above the asset protection allowance.
Dependent student assets are assessed at a flat 20% rate, so $10,000 in the student’s name will reduce eligibility for need-based financial aid by $2,000.
Independent student assets have an asset protection allowance which is based on marital status and age of the student. The net worth of an independent student without dependents other than a spouse is assessed at 20% over the asset protection allowance. The net worth of an independent student with dependents other than a spouse is assessed at 7% over the asset protection allowance.
Yes, the FAFSA does factor in your savings account. The FAFSA will ask you to report all cash on hand. This means you will need to report the balance (on the day you are completing your FAFSA) of all your bank accounts, including your saving account.
Yes, and no.
The yes part. The FAFSA will ask you to report untaxed income (for the respective tax year), which includes voluntary contributions to your retirement accounts. This includes the amounts you voluntarily contributed to your retirement accounts, like a 401(k), 403(b), IRA, or TSP plan. It doesn’t include any mandatory contributions, or contributions made by your employer.
The no part. Your retirement account balance is not reported as an asset on the FAFSA.
When it comes to college savings plans, including 529 plans, this can get tricky. In most cases, you will report your 529 plan in some way at some point.
The owner and beneficiary of a 529 plan play big factors into the way they are reported.
A 529 plan owned by your FAFSA parent (a parent providing FAFSA information on your FAFSA) will be reported on the FAFSA as a parent asset.
A 529 plan owned by a parent who is not providing information on the FAFSA, will not be reported on the FAFSA. However, any money you receive from this 529 plan will be reported as untaxed income received as “Money received or paid on your behalf” on your FAFSA next year.
If you are a dependent student, you will report this asset as a parent asset on your FAFSA.
If you are an independent student, you will report this as a student asset on the FAFSA.
A 529 plan owned by a grandparent (or any other family member who did not provide information on your FAFSA), will not be reported on the FAFSA. However, any money you receive from this 529 plan will be reported as student untaxed income received as “Money received or paid on your behalf” on your FAFSA next year.
If the 529 plan is owned by a grandparent, or other family member who is not reporting information on the FAFSA, and the student waits to receive a qualified distribution in their last year of higher education (or at least takes a year off), the 529 plan will not impact the student’s financial aid eligibility.
That was a very specific scenario. In most cases, you can likely expect a 529 plan to impact financial aid eligibility, but this is only one piece of the calculation. You want to consult with a certified financial planner, or legal adviser before making any changes to your 529 plan to increase your financial aid eligibility.
An important thing to keep in mind. Families with enough assets to affect the student’s eligibility of need-based aid, will likely have enough income to affect the student’s eligibility for need-based aid before assets are even considered.
There is a lot of advice out there, from spending down your savings, to shifting assets. Some of these fixes can create other issues. The short-term solution to pay for college can have long-term consequences. If you want to see if there’s an option that makes sense for you and your family, it’s best to discuss your situation with a certified financial planner or legal advisor.
If you want to run some numbers, you can always use the FAFSA4caster offered by the U.S. Department of Education. You can input different scenarios and see the impact on your estimated expected family contribution.
Related Content
Copyright © 2021 by Edvisors.com. All rights reserved.