As students prepare for college costs this summer, they may find that certain pandemic support they got two years ago could affect the amount of financial aid they're entitled to receive.
Those who received unemployment benefits in 2020 may not get the maximum financial aid they deserve from FAFSA, or the Free Application for Federal Student Aid, while those who got the Child Tax Credit or a stimulus payment could receive too much, according to the federal government.
Having an accurate FAFSA is crucial since the application is often the first step in the financial aid process with students using it to gain access to federal aid, grants, loans, work-study programs – as well as state-based non-federal aid and scholarships.
“It’s imperative that they iron that issue out before the financial aid package is awarded,” Andrew Pentis, certified student loan counselor at Student Loan Hero, told Yahoo Money. “That’s to make sure the student gets as much access as they need to federal student aid and other financial sources to pay for school.”
Problems with unemployment benefits
The Federal Student Aid (FSA) office warned that 2022-23 Free Application for Federal Student Aid (FAFSA) filers could see their financial aid eligibility reduced compared with former years due to erroneous reporting of their (or their parents’ or spouse’s) adjusted gross income (AGI) on their 2020 tax forms. The FAFSA for the 2022-2023 academic year is based on 2020 federal tax returns.
That’s because the American Rescue Plan (ARP) made the first $10,200 of jobless benefits non-taxable for taxpayers with incomes less than $150,000. But the tax break was enacted in March 2021 after some taxpayers filed their federal returns reporting a higher AGI that included unemployment benefits.
If the higher AGI is used on FAFSA, that could result in a higher Expected Family Contribution (EFC) and potentially reduce the taxpayer's eligibility for federal, need-based aid.
“Schools have no way of knowing which students may be affected by the ARP guidance, so an applicant who believes that they fall into this category should reach out to their school’s financial aid office to request a correction to their FAFSA,” Karen McCarthy, vice president of public policy and federal relations at the National Association of Student Financial Aid Administrators (NASFAA), told Yahoo Money. “In some, but not all cases, such a correction may increase a student’s eligibility for need-based aid.”
Avoid Data Retrieval Tool
If you filed your 2020 tax return and reported the full amount of unemployment benefits without excluding the income tax break issued by the American Rescue Plan, don't use the IRS Data Retrieval tool, according to a warning from the agency on the IRS urged applicants on Feb. 24.
Typically, this tool can help estimate your tax information and speed up the FAFSA process. But the tool automatically transfers your tax information to your 2022-23 FAFSA form and if you haven’t corrected your AGI, it will report an inaccurate amount on your form.
Fortunately, if you suspect an error, you can talk to your financial aid counselor or correct the FAFSA yourself, though it may trigger a verification process, according to the FSA.
Problems with the CTC or stimulus payments
Folks who received the advanced Child Tax Credit or stimulus payment and want to apply for FAFSA may also have issues reporting an accurate AGI.
Anyone who used the new non-filer tool – which many used to determine eligibility for the tax credit or stimulus checks – should also avoid using the IRS Data Retrieval tool to fill out their FAFSA forms, according to the agency.
The tool could “generate an incorrect AGI” of $1, the IRS warned on March 5, if a taxpayer used the non-filer tool when they were required to file a tax return. Applicants may end up with a lower and inaccurate Expected Family Contribution, resulting in a higher Pell Grant award for students who may not be eligible.
If you suspect your FAFSA application may be affected, act fast ahead of the fall semester. Individuals who used the non-filer tool should request a Verification of Non-filing Letter (VNF) from the IRS. If you are unable to get a VNF letter, the FSA recommends contacting the IRS Customer Service at 1-800-829-1040 and requesting an IRS Letter 3538.
Applications for the 2022-2023 academic year close June 30, 2023. Applications for the 2021-2022 academic year, which are based on 2019 tax returns, close June 30, 2022.
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.