FAFSA and Your Tax Return: What Families Need to Know

If you are a parent guardian or grandparent with a student heading toward college you have probably heard the acronym that makes families everywhere cringe: FAFSA. It can feel confusing overwhelming and downright frustrating. But once you understand how FAFSA works and how much your tax return drives your students aid eligibility you will see that FAFSA is not just paperwork. It is a planning opportunity.

In this edition of The Informed Taxpayer I break down the key lessons from my recent conversation with college funding expert Brian S. Eyster, CCFS®, ELA™, LIC of Essential Strategies . Brian helps families navigate FAFSA the CSS Profile and the financial aid system with clarity and confidence. If you have a high school student at home this is must read information.

FAFSA What It Really Measures

FAFSA stands for Free Application for Federal Student Aid. It determines eligibility for federal grants subsidized loans and even many merit based scholarships. And here is the part most families miss:

FAFSA is driven almost entirely by your Adjusted Gross Income.

When your student applies the Department of Education pulls your tax return directly from the IRS. This means tax planning during your students high school years is absolutely critical. For example:

• For todays high school juniors the 2025 tax return is the one used for 2027 college aid
• Parent income is assessed at roughly 22 to 46% depending on income level
• Parent owned assets are assessed at 5 point 6%
• Student assets are assessed at a painful 25% and their income over a small threshold gets hit at 46%

Simply put having assets in the students name is costly.

FAFSA also separates assets into two categories:

Countable assets

• Checking savings and brokerage accounts
• Parent owned 529 plans

Not counted at all

• Primary residence equity
• Retirement accounts
• Certain business assets depending on the structure

This opens the door for smart moves like paying down a home equity line instead of holding large amounts of cash in a savings account. Positioning matters.

The FAFSA Timeline You Must Pay Attention To

Brian outlined three critical phases for families:

Phase 1: Birth through Grade 9

Focus on saving and building healthy financial habits. No major FAFSA decisions yet.

Phase 2: Grade 10

Meet with a specialist to understand what your aid picture may look like. This is your practice phase.

Phase 3: Grade 11

This is where the planning rubber meets the road. Your junior year tax return is the one that will be used for the first year of college.

This is the time to explore strategies such as

• Increasing retirement plan contributions
• Maximizing business deductions
• Deferring certain types of income when appropriate

Not every approach fits every family which is why personalized planning matters.

FAFSA vs CSS Profile

Some private universities require the CSS Profile which is far more detailed and far more intrusive. Unlike FAFSA the CSS Profile does count home equity and may assess some retirement plan contributions depending on the institution.

Two key notes from Brian

• Private schools rely heavily on their own funding sources which makes their formulas more selective
• Some schools require FAFSA CSS and their own internal aid form

If your student is applying to private colleges you need a much deeper level of planning.

Why High Income Families Should Still File FAFSA

This is one of the biggest mistakes high earning families make. Even if you believe you will not qualify for need based aid you should still file because

• Merit scholarships often require a completed FAFSA
• Your financial situation may change unexpectedly
• Schools may not allow you to request aid later if you skip filing freshman year

Completing FAFSA every year keeps all future aid options open. Period.

The Bottom Line

FAFSA is not just a form and it is not something to dread. It is a planning tool and your tax return is the key driver. Income matters. Asset positioning matters. Timing matters. Families who prepare early almost always end up in a better position.

If you have a sophomore or junior in your household now is the time to get serious. Do not wait until the forms open. Planning now can save your family real money later.

Here is to staying proactive staying informed and making smart tax driven decisions for your family.