Author Topic: Does the new tax law make the FAFSA really easy?  (Read 797 times)

sol

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Does the new tax law make the FAFSA really easy?
« on: July 17, 2018, 03:36:59 PM »
Prior to 2018, families with high-school aged children who were applying to college (and thus filling out the Federal Application for Federal Student Aid) were required to report income and assets to determine aid eligibility.  Typically, income was assessed at 22-47%, and assets were assessed at 5.65% per year, and families like ours with huge nest eggs were basically ineligible for aid.

One way around this problem was to qualify for either the auto-zero Expected Family Contribution (if family income is below $25k, you owe nothing) or the Simplified Needs Test (income <50k, your assets are excluded).  The problem for us is that in order to qualify for either of these options, your family must file either a 1040EZ or a 1040A.  Since we own rental properties, we have to file a schedule E every year, which means we have to file a 1040.  This means we can't qualify for either of the simplified FAFSA forms.

Then the Republicans passed the Tax Cuts and Jobs Act in late 2017, which did a whole bunch of shitty thing like add 2.3 trillion dollars to the national debt, repeal the individual mandate in the ACA, give a giant tax break to the most profitable corporations, and open ANWR to oil drilling.  As a side effect, it got rid of the 1040EZ and the 1040A.  They don't exist anymore.  There is only the new 1040.

Suddenly, the requirement to file a 1040EZ or 1040A in order to qualify for the simplified FAFSA is impossible to meet for the 2019 tax year.  To my knowledge, there have been no efforts to update the FAFSA rules to reflect this change.  So while it's possible that the FAFSA just stops using the auto-zero EFC and simplified needs test (which would be a huge hidden FU to poor people), I think it's more likely that the FAFSA folks just drop the 1040EZ/A requirement entirely, and rely solely on the income requirements.

This means that a typical mustachian retiree with a million dollar nest egg, low expenses, and a handful of rental properties will suddenly be eligible for significantly reduced college costs.  Getting your AGI down under $50k is pretty easy, even for a large family, if your mortgage is paid off and you're living off of previous Roth IRA contributions (which come out tax and penalty free), taxable brokerage accounts (which are mostly return of principal) and rents (which are offset by depreciation).

Did the Republicans just send my kids to college for free?

lhamo

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Re: Does the new tax law make the FAFSA really easy?
« Reply #1 on: July 17, 2018, 03:56:20 PM »
Time will tell, I suppose.

I am inclined to guess that they will close the loophole that allows high net worth individuals with low taxable income to take advantage of the FAFSA.  Those individuals/families who really have low income and limited assets will continue to benefit, as intended -- they will continue to file a tax form, as required, and will also have to file the FAFSA, in which they will state limited assets.    Those of us with significant assets will have to report them on the FAFSA even if they don't show up on our tax forms, and we will be assessed an EFC based on a percentage of those assets.  So basically no way to shield assets from FAFSA calculations any longer.

The loophole was nice while it lasted for those who could use it.  We were not able to -- our income in 2016 was within 1040EZ/A limits, but I had some I-bonds that I tried to redeem in 2015 that didn't actually cash out until early 2016, and that pushed our interest income above the threshholds for simplified filing.  And in 2017 we had to declare the large capital gain on our apartment sale, so that ruled us out -- won't even bother to file a FAFSA this year.  It is fine -- we have plenty in the kids 529s to cover their undergrad expenses. 

robartsd

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Re: Does the new tax law make the FAFSA really easy?
« Reply #2 on: July 17, 2018, 05:05:44 PM »
Most likely they will list which schedules you are allowed to include with your 1040 in order to qualify for the simplified versions - I bet the schedules needed for your rental empire won't be on the list, so your situation with FAFSA is not likely to change. When FAFSA opens for 2019-2020 in October it will be based on 2018 tax forms, not the new forms. They probably won't publicize any update the rules until we are approaching the opening for 2020-2021 in October 2019 to avoid confusion.

So basically no way to shield assets from FAFSA calculations any longer.
Retirement accounts, primary residence, annuities, and cash value of life insurance are still excluded.

seattlecyclone

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Re: Does the new tax law make the FAFSA really easy?
« Reply #3 on: July 17, 2018, 06:38:58 PM »
The problem for us is that in order to qualify for either of these options, your family must file either a 1040EZ or a 1040A.

That's not strictly true. The other option (as defined in this document) is:
Quote
Anyone included in the parentsí household size (as defined on the FAFSA) received benefits during 2016 or 2017 from any of the designated means-tested federal benefit programs: the Medicaid Program, the Supplemental Security Income (SSI) Program, the Supplemental Nutrition Assistance Program (SNAP), the Free and Reduced Price School Lunch Program, the Temporary Assistance for Needy Families (TANF) Program, and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC);

If anyone in your family is on any of these programs you can qualify for the simplified EFC formula regardless of what tax forms you fill out.

sol

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Re: Does the new tax law make the FAFSA really easy?
« Reply #4 on: July 17, 2018, 07:30:56 PM »
If anyone in your family is on any of these programs you can qualify for the simplified EFC formula regardless of what tax forms you fill out.

Right, I have realized that this is an OR instead of an AND option.  I previously thought you had to do both.

Qualifying for the Free and Reduced Price Lunch program is pretty easy.  My family (of 5) can have up to $54,427/yr of income and still qualify.  That's more than my family typically spends in a year anyway (excluding the mortgage), so apparently I'm about to sign up for reduced price lunches.

protostache

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Re: Does the new tax law make the FAFSA really easy?
« Reply #5 on: July 18, 2018, 02:14:27 PM »
Retirement accounts, primary residence, annuities, and cash value of life insurance are still excluded.

Family owned businesses are also excluded to the extent the student doesn't own any of it, right?

teen persuasion

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Re: Does the new tax law make the FAFSA really easy?
« Reply #6 on: July 20, 2018, 11:18:18 AM »
If anyone in your family is on any of these programs you can qualify for the simplified EFC formula regardless of what tax forms you fill out.

Right, I have realized that this is an OR instead of an AND option.  I previously thought you had to do both.

Qualifying for the Free and Reduced Price Lunch program is pretty easy.  My family (of 5) can have up to $54,427/yr of income and still qualify.  That's more than my family typically spends in a year anyway (excluding the mortgage), so apparently I'm about to sign up for reduced price lunches.

It was always (meet AGI test) AND (1040A OR EZ OR free/reduced lunches OR...)

It was easy to hit the free/reduced lunches income level when we could count 7 - 5 family members.  After that it got much harder - smaller family size + higher income as my part-time job ramped up a bit.  Remember, that benefit is based on gross income, not AGI, so you can't game it.  We are putting lots in HSA, 401k, and IRAs - that's all counted as income for free/reduced lunch.

The nice part is, if you qualify during the student's senior year of HS, it works for the next 3 years of FAFSA testing.  Only the 4th year of college won't meet the test that way.

CrustyBadger

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Re: Does the new tax law make the FAFSA really easy?
« Reply #7 on: July 24, 2018, 04:46:17 PM »
Did the Republicans just send my kids to college for free?

My understanding is that getting your FAFSA Expected Family Contibrution down to $0 does not mean that college will necessarily be free for that student.

EFC on the FAFSA means that student will qualify for a Pell grant of about $5700 and a Direct Loan of $3500.

Schools would look at your FAFSA and expect the student to get the grant, take out the loan, and of course contribute some money as well; I've seen expectations of $5000 from earnings online.  If the school your child is applying to guarantees to "meet need"... they would then make up the rest of the tuition, room and board which would of course be a huge savings.  But not free.

If the school does not have a large endowment or doesn't guarantee to meet need, then it might not offer a financial aid package that only partially meets this need.

Public schools that agree to meet need are more likely to use the FAFSA.   Private schools that agree to meet need are more likely to use the Profile (which asks about assets in detail).      So if you can get the EFC down to 0 the best bet is to look at a state school, but some loans and work study are probably included in the financial aid package even there.

madamwitty

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Re: Does the new tax law make the FAFSA really easy?
« Reply #8 on: July 25, 2018, 10:01:12 AM »
PTF

Cranky

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Re: Does the new tax law make the FAFSA really easy?
« Reply #9 on: July 25, 2018, 01:09:13 PM »
Did the Republicans just send my kids to college for free?

My understanding is that getting your FAFSA Expected Family Contibrution down to $0 does not mean that college will necessarily be free for that student.

EFC on the FAFSA means that student will qualify for a Pell grant of about $5700 and a Direct Loan of $3500.

Schools would look at your FAFSA and expect the student to get the grant, take out the loan, and of course contribute some money as well; I've seen expectations of $5000 from earnings online.  If the school your child is applying to guarantees to "meet need"... they would then make up the rest of the tuition, room and board which would of course be a huge savings.  But not free.

If the school does not have a large endowment or doesn't guarantee to meet need, then it might not offer a financial aid package that only partially meets this need.

Public schools that agree to meet need are more likely to use the FAFSA.   Private schools that agree to meet need are more likely to use the Profile (which asks about assets in detail).      So if you can get the EFC down to 0 the best bet is to look at a state school, but some loans and work study are probably included in the financial aid package even there.

Right. Your EFC is just the cash up front, everything else may well be loans (and scholarships typically come out of the loan end of the package, not off your EFC.)

Also, the CSS Profile is even more depressing to fill out than the FAFSA.