FAFSA Made Simple: What Families Need to Know About FSA IDs, Custodial Parent Rules, and Prior-Prior Tax Years
When it comes to paying for college, one of the most important steps families can take is completing the FAFSA—the Free Application for Federal Student Aid. It’s the foundation for determining financial aid eligibility at colleges across the country.
On a recent episode of College, the Podcast, hosts Matt Carpenter and Peg Keough continued their FAFSA conversation, answering common questions and tackling some of the most confusing parts of the process. Whether you’re a parent of a high school senior, already have a student in college, or are planning ahead with younger kids, their advice offers clarity on what matters most.
Why Every Family Should Submit the FAFSA
Too often, families skip the FAFSA because they assume they won’t qualify for need-based aid. Peg strongly advises against that mindset. Submitting the FAFSA keeps your options open—both for federal aid and institutional aid from colleges.
- Access to student loans: Even families who don’t qualify for need-based aid unlock Federal Direct Student Loans, often the best loan option available.
- Appeals and changes in circumstance: Life happens. If your financial situation shifts, having the FAFSA on file ensures you’re eligible for reconsideration.
- Eligibility for merit-based aid: At many schools, merit scholarships require a FAFSA on file—even if your finances don’t indicate need.
As Matt summed it up: Don’t overthink it. Don’t get in your own way. Just do the FAFSA.
Step One: Creating Your FSA ID
Before you can complete the FAFSA, both the student and parent need to create an FSA ID at studentaid.gov.
- It’s the student’s FAFSA. Parents are considered “contributors” (a term that confuses many). The student starts the form, and parents add their information where required.
- Who needs an FSA ID?
- Students always do.
- For married parents filing jointly, one parent creates the ID.
- Divorced or separated families: only the custodial parent—the one who provides the most financial support—creates an ID.
- Married filing separately: both parents must create IDs since each consents to share tax information.
- Approval is now instant. Previously, approval could take days, but the Department of Education’s updated process makes this much smoother.
Pro Tip: Store your FSA ID securely. You’ll use it every year your student is in college.
Custodial Parent Rules for Divorced or Separated Families
One of the trickiest FAFSA scenarios involves families with divorced or separated parents. Many assume the parent who claims the student on their taxes is the one who files the FAFSA, but that’s not the case.
- The FAFSA looks at the parent who provides the most financial support—not necessarily where the student lives most of the time.
- Stepparents are treated as biological parents if they’ve remarried, even if they don’t directly contribute to college costs.
- Families should be strategic. If one parent has lower income and assets, it may make sense for that parent to be the “custodial” filer.
As Peg put it, this creates a planning opportunity that can save families significant money over four years of college.
Understanding the Prior-Prior Tax Year
Another source of confusion is which year’s income gets reported. The FAFSA uses what’s called the prior-prior tax year—a two-year lookback.
- A student entering college in fall 2026 will report income from tax year 2024.
- Assets, however, are reported in real time, based on the day you file the FAFSA.
This setup creates planning opportunities for families with younger high school students:
- Avoid unnecessary capital gains or early 401(k) withdrawals in your student’s sophomore and junior years of high school.
- Time big expenses—like replacing a car or renovating a kitchen—before filing, since cash on hand counts as an asset.
If your base year was unusually high due to a one-time event (like a bonus, severance, or sale of property), you can often appeal to colleges and show more recent tax returns to demonstrate your true financial picture.
What Happens After You Submit the FAFSA?
Once filed, the FAFSA generates a Student Aid Index (SAI)—a dollar figure representing what the government calculates your family can contribute.
- The SAI is the same across every college, but what schools do with it varies.
- Generous institutions like Tufts may cover nearly all of the gap between your SAI and the cost of attendance.
- Other schools may “gap,” offering less than your full need, often filling packages with loans or work-study.
This is why it’s crucial for families to research each college’s financial aid policies. Two schools with similar price tags may yield very different net costs after aid.
Assets to Report (and What to Leave Out) 🤫
A common mistake families make is overreporting assets. The FAFSA does not ask for everything.
Reportable assets include:
- Checking and savings accounts
- Non-retirement investments (stocks, bonds, CDs, mutual funds)
- Real estate that is not your primary home
Do NOT include:
- Retirement accounts (401k, IRA, Roth, pensions)
- The equity in your primary residence
Matt recalled a friend who mistakenly included home equity and drastically inflated his family’s SAI. Don’t make that mistake—read the fine print carefully.
Final Takeaways
The FAFSA may feel overwhelming, but breaking it down step by step makes it manageable. Here are the key reminders:
- Always submit the FAFSA—even if you think you won’t qualify for aid.
- Create FSA IDs early for both student and parent contributors.
- Be strategic about the custodial parent in divorced/separated households.
- Plan ahead for the prior-prior tax year to avoid inflating income.
- Know which assets to report—and which to exclude.
By approaching the FAFSA strategically, families can avoid costly mistakes and maximize opportunities for aid.
As Peg noted, financial aid is an area where a little planning can go a long way: “It’s a gray area, but it’s also a planning opportunity.”
