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The Obama administration is making it easier for students to apply for financial aid

President Obama at the University of California Irvine graduation. He'll announce the changes to FAFSA in Des Moines today.
President Obama at the University of California Irvine graduation. He'll announce the changes to FAFSA in Des Moines today.
Kevork Djansezian/Getty Images News

Applying for federal financial aid can often mean a serious time crunch. Students must file their taxes for the previous year in order to know how much help they'll get. But taxes aren't due until April 15 — and many colleges expect students to make a decision by May 1.

The Obama administration has decided to change the rules. President Obama will announce today that beginning in fall 2016, students can fill out the Free Application for Federal Student Aid, or FAFSA, using their families' tax data from two years earlier.

The form itself will also be made available earlier than it is now, in October 2016 rather than January 2017.

Together, those two changes mean students will find out earlier how much aid they'll get. It's a big change, one that could even encourage more students to apply to college in the first place.

How the financial aid application process works now

Education Secretary Arne Duncan at a Fafsa workshop

Education Secretary Arne Duncan at a FAFSA workshop in Virginia in 2014. (Alex Wong/Getty Images News)

Students start applying to college in the fall, and many selective colleges have December 31 or January 1 application deadlines. But the FAFSA isn't even available until January 1. Students don't have any idea how much federal financial aid they might get when they start applying to college.

And although the FAFSA is available January 1, it's almost impossible to submit it right away, because it asks for information from the prior year's taxes. If you were filling out the FAFSA in January 2016, you'd already need to have your 2015 taxes done. That means the earliest most people can submit the form is early March, long after college application deadlines have passed. And if a W-2 is lost in the mail or your family files for an extension, the FAFSA will have to wait even longer.

It's possible to fill out the FAFSA without having formally filed taxes. But you have to estimate your income and tax information and, if it's wrong, correct it later. And if you're estimating, you can't use a tool that makes the complicated form much simpler: automatically imported tax data from the IRS.

The government doesn't run out of Pell Grants or subsidized student loans. Even if students wait to file their FAFSA until taxes have been filed, they'll still get aid.

But some states and colleges hand out financial aid on a first-come, first-served basis, and many of them also require the FAFSA. There's a huge advantage for students who are able to fill out the forms as quickly as possible. Some states have deadlines for their financial aid program as early as February.

This also makes financial aid a black box for students and families. They might assume they can't afford to go to college and so don't end up applying, even though they'd qualify for aid.

The Obama administration is changing the rules — and student advocates are thrilled

Beginning in October 2016, students will be able to file the FAFSA with information from their 2015 taxes, a policy known as "prior-prior year" because you use tax information not from the previous year, but the year before that. They'll find out how much financial aid they're eligible for much earlier, perhaps before they even send in their college applications in the first place.

The change is likely to be the most helpful to the students who need the money most. A study from the National Association of Student Financial Aid Administrators found that students from the lowest-income families were the least likely to have their incomes change from year to year, meaning they'd benefit most from being able to use earlier income data. The amount most students receive in Pell Grants wouldn't change under the new policy.

Many groups, including the financial aid administrators' group and student advocates, have called for a shift to using earlier tax data. Sen. Lamar Alexander has said that change should be included when Congress rewrites the Higher Education Act.

The biggest effect, though, might not just be reducing FAFSA headaches — although since about 2 million students every year are eligible for financial aid that they never receive because they don't apply, that's a big deal.

More importantly, it could affect how many students apply to college in the first place. Research has found that when students know they'll get financial aid, they're more likely to apply to college. Knowing that a Pell Grant is on the way could make a big difference.