3 Reasons Every Client Should Complete a FAFSA
Are you wondering if all of your clients should complete the Free Application for Federal Student Aid (FAFSA) for their college-aged children even if they don’t anticipate qualifying for any federal aid?
Consider the following scenario: A successful couple own and operate a business and have two children in college. At 58 years old, the husband suddenly and unexpectedly passes away from a heart attack, rocking the family and ending the business.
The family, however, had faithfully completed the FAFSA annually for their children, although they had never previously qualified for financial aid. Within one week of the death of the father, both universities contacted the children with financial aid packages that allowed them to stay in school.
This is not a far-fetched scenario. In fact, I encountered this exact set of circumstances with a client, and the speed at which the universities responded underscored how important it is to ensure all clients complete the FAFSA for their children.
Still not convinced? Let’s look at a few of the reasons you should be encouraging and assisting your clients in this process, and review some planning opportunities to enhance their financial aid eligibility.
Regardless of your clients’ income or assets, if they have children attending college, they should complete the FAFSA.
- In order to qualify for any federal aid or financing, including non-need based loans, students must complete a FAFSA. Additionally, many colleges use the FAFSA for their own scholarships and aid, even merit or non-need based options.
- Circumstances change. College is generally a four-year endeavor, and a lot can happen in that time. If your clients experience a death in the family or a loss of income, having filed FAFSAs in the past will make it easier for the family and college to react.
- Many colleges mine these forms for data on students and their finances – including whether the student fits the profile of what the school is looking for.
Planning Opportunities to Enhance Aid Eligibility
CPAs can offer tremendous value to clients who complete the FAFSA, and it’s critical to start planning early. In a change effective for the 2017-18 school year, families can begin filing the FAFSA on October 1, 2016 using their 2015 tax information, which means the base year for purposes of computing the expected family contribution (EFC) is two years prior.
- Start with income. Assets are assessed at 5.6% when computing the estimated family contribution (EFC), however, 47% of parents’ assessable income is available for college costs. Deferring income such as bonuses, capital gains, and distributions is a logical place to start your planning. For example, a client with a C Corporation can drop his or her salary or have the C Corp make larger contributions to the retirement account. Don’t neglect planning for untaxed benefits; the FAFSA requires that you add back certain income items including employee retirement account contributions, child support, and untaxed interest.
- Relocate assets. Retirement assets and home equity are not assessed for purposes of computing the EFC, so clients can proactively shift assessable assets by making contributions to retirement plans before the base year, or by paying down their mortgage. When considering retirement contributions, plan early! If these contributions are made in the base year, they will be added back as untaxed benefits on the FAFSA. However, for future years, they will not be assessed again. Additionally, using cash to make large purchases in the base year or pay down consumer debt can also be considered to reduce cash on hand.
For more planning ideas and customizable client articles on education planning, the AICPA’s Personal Financial Planning Section members have access to content from Broadridge Advisor Solutions, including “Positioning Your Income/Assets to Enhance Financial Aid Eligibility.” If you are a CPA offering advice to individuals, be sure to use resources from the PFP Section to help you as you provide estate, tax, retirement, risk management, education and investment advice.
Gary E. Carpenter, CPA, CCA, Executive Director, National College Advocacy Group. Based in New York, Mr. Carpenter has over thirty years of experience in tax and financial planning and has spent the past seventeen years in college planning and consulting. He is a CPA and Certified College Advocate (CCA), the co-founder and Executive Director of the National College Advocacy Group, and an active committee member for the New York State Society of CPAs.
FAFSA application image courtesy of Shutterstock.