FAFSA stands for "Free Application for Federal Student Aid," and it is a form offered by the Department of Education. Filling out the FAFSA is a pre-requisite for need-based financial aid – and in some cases – merit-based aid at U.S. universities.
Parents and children both have to fill out the form, and can pull information from their tax return using the DoE's automated data retrieval tool.
The FAFSA opens for each academic year October 1 of the previous calendar year, and is based on the tax return for the year previous to that (i.e., the tax return for two years before you are applying for aid).
Students and parents have to fill out the FAFSA each year their children are in college.