Category Archives: Need-based Aid

Simplified Formula: Not So Simple

Divorce, FAFSA, Financial Aid, Need-based Aid

The FAFSA offers a “Simplified Formula” that eliminates asset reporting for low-income families– those with household incomes below $50,000. There are some eligibility limitations, primarily designed to limit the Simplified Formula to those who truly have low incomes, not those who are able to manage or artificially reduce their incomes. In the past, in order to qualify for the Simplified Formula, filers must have filed or been eligible to file a 1040A or 1040EZ, or have received a means-tested federal benefit such as Medicaid, SNAP or SSI. However, the Trump tax reform of 2018 eliminated the different versions of the 1040, so the eligibility criteria changed.

To understand the change, you need to understand the tax forms. 1040A and 1040EZ do not allow for itemized deductions or for self-employment or business income, including from rental properties. You also cannot use these forms if you’re the beneficiary of a trust. Both forms are also limited to incomes below $100,000.

The new tax law that went into effect in 2018 eliminated the different versions of the 1040 and replaced some forms with different schedules, so the Department of Education needed to come up with new criteria for the Simplified Formula for the current FAFSA, which is the first to use the 2018 tax return.

This year, the Simplified Formula is available to those who did not file a Schedule 1 or if so, only used it to report “capital gains, unemployment compensation, Alaska Permanent Fund dividends, educator expenses, IRA deductions, or student loan interest deductions.” What else is on Schedule 1? Besides self-employment, business, rental property and trust income (and the above items), Schedule 1 is used to report:

  • Taxable refunds, credits, or offsets of state and local income taxes
  • Alimony received or paid
  • Farm income or (loss)
  • “Certain business expenses of reservists, performing artists, and fee-basis government officials”
  • Health savings account deduction
  • Moving expenses for members of the Armed Forces
  • Penalty on early withdrawal of savings

Two big groups are thus eliminated from the pool of Simplified Formula filers unless they receive a means-tested benefit:

  • Divorced parents (who were already ineligible if alimony was paid or received)
  • Participants in high deductible health plans

Some others: people who use CDs for savings and cash them out early, or who cash out retirement accounts before age 59-1/2 to pay for college or other needs.  

While it certainly makes sense to keep business owners or investment property owners from using the Simplified Formula, others who should be eligible will need to be aware of the new limitations. And before you pull out the pitchforks, remember that the Simplified Formula does not change the FAFSA calculation at all; it merely removes questions about assets. A family who doesn’t qualify for the Simplified Formula based on the tax form criteria will just need to answer the questions about assets. The first asset question in the online FAFSA is whether you have assets in excess of the asset protection allowance for your family, and if you answer “No,” you won’t see any further questions on the topic unless required by your state. 

When to File the FAFSA

FAFSA, Financial Aid, Need-based Aid

It’s the big day: the FAFSA is here! So, you need to file it right away, right? Not exactly.

First, schools generally won’t do anything with your FAFSA until they have an application from your student, so the earliest you need it done is the end of this month if you’re applying Early Decision or Early Action. Remember that the main factor that you can influence at this point in the FAFSA is your assets, since income is from 2018’s tax return and assets are on the date you file. So here are some factors to consider: Continue reading When to File the FAFSA →

FAFSA Basics: Student Income

Cost saving strategies, Divorce, FAFSA, Financial Aid, Merit-based Aid, Need-based Aid, Student Loans

Student income seems pretty straightforward on the surface. Students get an income protection allowance of $6,840 plus the same tax allowances as parents. Income in excess of the allowance is assessed at 50%. Given the prevailing minimum wage, it would appear that student income is not much of a factor. However, there are a few big items that get added into student income: Continue reading FAFSA Basics: Student Income →

FAFSA Basics: An Example

Cost saving strategies, FAFSA, Financial Aid, Need-based Aid, Tax Credits and Deductions

Having gone through the FAFSA formula, let’s take a look at how it works with a few scenarios that illustrate how small changes can have big impacts on EFC, or alternatively, how big changes can have small impacts. Our hypothetical family is a family of four with two children, one a high school senior and the other a high school junior. Both parents are 48. Their 2018 household income was $106,800 and they filed married filing joint in 2018. They live in Oregon. To simplify life, let’s assume that all $106,800 is earned income. Neither student has income above the student income protection allowance ($6,840), nor does either have any assets. Continue reading FAFSA Basics: An Example →

FAFSA Basics: Parent Assets

529 Plans, CSS PROFILE, FAFSA, Financial Aid, Need-based Aid

Parent assets seem to be the area that most families and planners focus on, despite the fact that they typically have the smallest impact on the formula of each of the components. Strategies and tactics to minimize parent assets abound, but for most families these result more in nibbling around the edges than actually making a significant dent in EFC. Continue reading FAFSA Basics: Parent Assets →

“Where Do I Begin?”

Application Process, Cost saving strategies, Financial Aid, Merit-based Aid, Need-based Aid, Student Loans, Tax Credits and Deductions

I’m taking a brief break from the programming I outlined for myself a week or so ago. It’s September and that means that many people are looking seriously at college for the first time. They may be parents of seniors, parents of freshmen, parents at any point who think now is a good time to start investigating this big future step. And after a few google searches or conversations with friends or counselors, they have concluded, “This is overwhelming! Where do I begin?” Continue reading “Where Do I Begin?” →

EFC Formula Guide 2020-2021 & FAFSA Basics

Divorce, FAFSA, Financial Aid, Merit-based Aid, Need-based Aid, Student Loans

Last week, the Department of Education released the FAFSA Formula Guide for the coming FAFSA. Before I give you that link, I want to share some basics about the FAFSA. I’ll also break out each section of it in depth in the coming weeks– hopefully before the new FAFSA arrives on Oct. 1. Continue reading EFC Formula Guide 2020-2021 & FAFSA Basics →