Congress recently approved a handful of measures aimed to make the process of paying for college easier for Massachusetts students.
Here are the details for each of the changes, including who can benefit and when they’ll take effect.
Applying for Federal Financial Aid May Get Easier
FAFSA is the gatekeeper to billions of dollars of federal grants and student loans. Yet filling out the form is a notorious struggle for Massachusetts students and their parents. In the best cases, the process simply causes headaches for families who have to retrieve information from their tax files and input it into a different format. But in the worst-case scenario, it acts as a barrier to college access blocking lowincome students from aid they’re eligible for.
Now, that process should be more seamless, thanks to increased cooperation between the IRS, which has tax records on file, and the Department of Education, which needs information about families’ income and assets to determine how much they can afford to pay for college.
Families have been able to use the IRS’ Data Retrieval Tool to assist with inputting their tax data into the FAFSA form for years. But the recent change takes that a step further by allowing the IRS to share information directly with the Department of Education. It will also eliminate up to 22 questions on the form.
The new data sharing should capture a larger share of the people applying for financial aid as well. That’s because there are some families who can’t use the existing Data Retrieval Tool, including married couples who file separately, people who file as head of household, and parents who earn too little income to file a tax return.
Simplifying the FAFSA has been a goal of advocacy groups and lawmakers from both political parties for years, and there have been series of improvements over the past decade. Three years ago, in one of the biggest changes to the process, the Education Department made it easier for families to complete the form by allowing them to use older tax information. This cooperation between two federal agencies is the next step in that series.
- When You Can Expect to See Changes: It’s not clear when families will be able to opt-in to the automatic data sharing.
A Popular Student Loan Repayment Program Will Be Simpler to Manage
Nearly 8 million student loan borrowers are enrolled in repayment plans that tie their monthly payments to how much money they earn. An administrative change approved by lawmakers aims to make it easier for those borrowers to manage those plans.
Anyone with federal Direct Loans can use the most recent version of income-driven repayment, officially called Revised Pay As You Earn (REPAYE). Enrolling is relatively easy: You file paperwork with your loan servicer showing how much you earn and how many dependents you claim. But after you’ve enrolled, you have to regularly submit your income to stay in the program even if nothing has changed.
That’s where the problem comes in: This process, called income recertification, tripped up more than 50% of enrollees back in 2014. More recent numbers suggest about 20% of borrowers or 1.3 million people are still failing to recertify on time.
Missing the recertification deadline can have serious financial ramifications. Monthly payments can jump up by hundreds of dollars. Worse still, if your bill under the income-driven plan wasn’t enough to cover the monthly interest that accrued, all the unpaid interest can capitalize, meaning it will be added onto the principal loan amount. About 30% of borrowers who failed to recertify in 2014 fell into forbearance or deferment.
Now, though, Congress has given the IRS and Department of Education the power to automate the recertification process-similar to the FAFSA change. Borrowers will have to opt-in to the program once, but then they’ll no longer have to worry about about submitting a form each year.
- When You Can Expect to See Changes: The law requires regular implementation updates over the coming year from officials at the Treasury and Education departments.
More Flexibility to Spend Money in 529 Accounts
Families using tax-advantaged college savings plans got another small boon in the form of additional spending options. The federal tax code now considers money used on apprenticeships and paying student loans as acceptable expenses for 529 account holders.
Money invested in college savings accounts grows tax-free, and when you withdraw the money, you don’t pay any federal or state taxes, as long as the money is used for “qualified expenses.” Those expenses used to be limited strictly to college tuition, room and board, and books, but changes in the past five years have added computers, software, and K-12 private school tuition to the list.
Now, families get even more flexibility with the definition. The apprenticeships must be registered with the U.S. Department of Labor. (There are currently more than 23,000 such programs.) The debt repayment, meanwhile, carries a lifetime cap of $10,000.
The new uses give more options to families who either saved in a 529 plan for a child who does not plan to attend a traditional college or who have left over money after graduation. There’s no data tracking how many 529 account holders end up with leftover money to spend, but anecdotally, it’s not particularly rare. The average 529 account has about $25,000, according to the College Savings Plans Network.
That said, there’s little to stop a graduate who lives in a state with a generous 529 tax benefit from opening an account with the sole purpose of using it for the new student debt benefit and reaping a tax deduction in the process. Thirty states allow you to withdraw money one day after you’ve deposited it.
There’s also no double-dipping on federal tax benefits. That means student loan interest paid for with tax-free 529 earnings cannot also be used to claim a student loan interest deduction on your federal income taxes.
Finally, if you live in one of the more than 30 states that offer a state tax break on 529 account contributions, you’ll need to check your state’s rules before withdrawing for either of the new qualified expenses.
Since Congress expanded the federal definition at the end of 2017, for example, 13 states have either chosen not to update their own rules to follow the federal path or have not clarified how they’d treat a withdrawal for K-12 expenses. And if you spend on something considered non-qualified, your state could require you to pay back the income tax you otherwise would have owed in what’s called a deduction recapture.
- When You Can Expect to See Changes: For federal tax purposes, withdrawals made after December 31, 2018 qualify for the new definition. But state rules are more varied. Start by checking your state’s plan website for any announcements and note that some states may require legislative action-meaning it will take time-to change their rules.
Should you be in the midst or contemplating divorce, paying for your child’s college education should be an issue addressed and memorialized in writing in your separation agreement to avoid further conflict after divorce.
Contact the Law Offices of Renee Lazar at 978-844-4095 to schedule a FREE one hour no obligation consultation to discuss your unique situation.