Two-Year-Old Tax Returns Could Expedite Your Student Loan

NEW YORK (MainStreet) — When it comes to student loans, knowing how much to apply for and where to get the best deal is all-important. But knowing when to apply in time to meet application deadlines can spell the difference between whether or not aid is available at the start of a semester.

A report on the matter, "A Tale of Two Income Years," was released last week by Washington, D.C.-based NASFAA--the National Association of Student Financial Aid Administrators. It recommends a change in the way tax returns are used to support student aid applications that would give borrowers a leg up on beating these deadlines. The report was written by Gigi Jones, NASFAA's research director, and Robert Kelchen, assistant professor of higher education at Seton Hall University, with the support of a grant from the Bill and Melinda Gates Foundation. The report was based on an analysis of 70,000 student records over the last five years.

Every year, students have to file a Free Application for Federal Student Aid (FAFSA) to be considered for federal grants, loans and work-study. Timing is critical when submitting the form--the FAFSA depends heavily on the latest income information submitted through tax returns. A delay in applying can cause the student loan supply chain to bog down—pushing back notification and reducing the amount of an award.

The hang-up for prospective borrowers is the paper chase that comes assembling the tax documents needed to apply. NASFAA recommends that borrowers be allowed what are called "prior prior year documents," also dubbed PPY.

Instead of using last year's returns, they could use the year before last—the prior prior year, which are more likely to be available when the application is being filled out. So if you're applying in 2014 for loans, grants or any kind of aid, you could use 2012 tax documents, which, NASFAA says, you'd be more likely to have than 2013 documents. What's more, you could apply a year earlier—and get an earlier decision.