Written by: Blake Pinyan | Anchor Bay Capital
The Consolidated Appropriations Act, passed on December 27, 2020, brought significant changes to various aspects of legislation. One noteworthy inclusion within this comprehensive bill was adjustments to the Free Application for Federal Student Aid (FAFSA), which had long been criticized for its complexity and lengthy process. Recognizing the need for reform, Congress introduced the FAFSA Simplification Act as part of the broader legislative package. The changes are aimed at streamlining the financial aid application process, with full implementation set to take effect for the 2024-2025 academic year.
This article aims to provide an overview of the FAFSA, its current structure, and the impending transformative changes resulting from the newly enacted legislation.
What is the FAFSA?
The FAFSA is a crucial form that incoming and current college students complete annually. It serves as a tool to determine a student's eligibility for various forms of financial assistance provided by the U.S. Department of Education. This aid encompasses Federal grants, work-study programs, and loans. Furthermore, the FAFSA plays a pivotal role for many state governments and educational institutions in evaluating and awarding financial aid packages to eligible students.
To initiate the process of applying for financial aid, students can access the FAFSA online at studentaid.gov before each academic year. This application must be resubmitted for each year assistance is sought. Even if a student believes they might not meet the criteria for aid, it is generally advisable to complete the application. This is particularly true for situations where universities require FAFSA completion for merit-based scholarships. By dedicating the time to submit the application, families could potentially benefit from university-based scholarships, regardless of Federal aid eligibility. It's important to note that submitting a FAFSA is a mandatory step to qualify for any Federal student loans, as these loans fall under the category of Federal student aid.
Currently, each FAFSA application period is 19 months – it opens on October 1st of the year prior to the upcoming academic year and closes June 30 of the aid award year. For instance, a high school senior set to graduate in the summer of 2024 and planning to commence college in the fall of 2024 would be encouraged to complete their FAFSA in the fall of 2023. Ideally, submitting the application within the first month of its availability is recommended, aiming for a submission before November 1st. By doing so, students convey their strong interest in attending the university and seeking available funds. Additionally, since financial aid allocations are finite and not guaranteed, submitting early places students at an advantageous position. Notably, some universities mandate submission before November 1st for consideration in merit-based scholarship awards.
What is the FAFSA currently based upon?
Federal student aid allocations through the FAFSA hinge on the assessment of financial need. This assessment revolves around questions about a family's economic circumstances. In particular, it delves into the household's assets and income. Asset valuations are to be reported as of the application's filing date, while income figures reflect the situation from two years prior. For instance, a college freshman in 2024 would provide family tax returns from 2022. It's strategically favorable if the student's family income is at its lowest level during his/her freshman year to secure an aid package for the entire academic tenure. From a planning standpoint, a family could employ tax reduction strategies to minimize their 2022 income, thereby optimizing their student's financial aid package for the 2024-2025 academic year.
However, this approach based on income from two years prior has a potential drawback. Financial situations can undergo substantial shifts from year to year. Unexpected events like job loss, divorce, or bereavement can significantly alter the financial landscape during a student's college tenure, rendering the aid calculation outdated. In scenarios where such qualifying events impact a student's ability to finance their education, it's essential to consider appealing to the university's financial aid office for reconsideration.
Upon answering the FAFSA's questions, the Federal formula generates an Expected Family Contribution (EFC) figure. This figure represents the expected financial contribution that the family is deemed capable of making towards college expenses, taking into account assets and income. EFC computation hinges on four key factors:
Parent Assets and Income
Student Assets and Income
The guiding principle here is Parents can be expected to allocate roughly:
5% of their accessible assets
20-25% of their household income.
On the other hand, students are expected to contribute around:
20% of his/her assets and
50% of his/her income.
Consequently, the common practice of holding assets in the parents' names rather than the students' is generally advised to optimize the aid awarded. For instance, for 2 popular savings accounts used for college, a UTMA account is considered a student asset, assessed at 20%, whereas a 529 plan, categorized as a parent asset, is assessed at 5%.
FAFSA considers only those assets that are considered "accessible" for funding education expenses. Accessible assets encompass:
Investments (such as bonds, stocks, mutual funds)
Educational savings accounts (like 529 plans, Coverdell ESAs, UTMAs)
Equity in rental real estate or vacation properties
Inaccessible assets include:
Retirement benefits (Traditional IRA, Roth IRA, annuities, 401(k), pension)
Cash value of life insurance
Primary residence home equity
Put simply, if an asset falls into the accessible category, the Federal government considers it viable for covering college costs, leading to an increase in the family's EFC figure and consequently, a reduction in the qualified aid amount. Conversely, inaccessible assets are not factored into Federal aid determinations and don't affect the EFC figure.
Household income plays another pivotal role in determining the level of financial aid a student qualifies for. Lower income results in a lower EFC figure, translating to potentially higher aid eligibility. Conversely, higher income results in a higher EFC figure, leading to a lower amount of aid.
With the EFC figure calculated, the formula for need-based aid determination is straightforward. Essentially, it's the total college cost (encompassing tuition, room and board, fees, etc.) minus the family's EFC, which yields the awarded financial aid amount. If the EFC equals or surpasses the total college cost for a given year, no need-based aid will be granted. If the EFC is less than the total college cost, some degree of need-based aid should be offered.
Before transitioning to the changes in the FAFSA, it's important to emphasize the nature of the EFC once again. The term "Expected Family Contribution" aptly describes the amount a family is expected to pay. Therefore, an EFC of $20,000 represents the collective contribution from the family and not solely an individual student. Therefore, if two siblings are attending college concurrently, each is deemed able to contribute $10,000, resulting in a family-wide sum of $20,000 for the year.
What’s the new FAFSA?
Significant changes are on the horizon for the FAFSA that will take effect in the 2024-2025 academic year. Unlike the customary October 1st application opening date, the new FAFSA is expected to be available in December 2023. The revamp introduces a mix of favorable and unfavorable changes compared to the current version. Here's a rundown of the major shifts and their potential impact on students and families.
Transition from EFC to SAI
The most notable change is the replacement of the EFC (Expected Family Contribution) with a new term, SAI (Student Aid Index). This shift signifies that applicants will now receive an estimate of their expected individual student financial contribution rather than a collective family contribution. Back to our earlier example, the $20,000 EFC number will now represent how much is expected to be paid per student rather than as a whole family. This may not pose an issue for those that have one child in college, but families with multiple children in school at the same time could be very negatively impacted. This is because the student aid index won't be divided among them, and each student will be expected to pay $20,000 each rather than the $10,000 each from our example. To sum it up. the current FAFSA has historically increased aid eligibility for households with multiple college-bound children. With the new approach, families with several students in higher education might receive less aid, necessitating higher contributions per student.
Streamlined and Clearer Questions
A significant enhancement comes in the form of reduced complexity. The application's question count will shrink from the current 108 to 36, and they will be more precise and straightforward, particularly in terms of financial information input. They will also be harmonized with Federal income tax returns, and data from the IRS will be able to be seamlessly transferred to the application. This streamlined process is a boon for students and families, leading to quicker completion, simplified procedures, and hopefully increased application rates.
Exclusion of Grandparent Contributions
Another significant positive change is the exclusion of grandparent assets and financial contributions from aid calculations. This extends to any non-parental contributors such as relatives and friends. As it stands now, students are required to report external gifts as untaxed student income, detrimentally affecting their aid eligibility. Notably, there's been a stark discrepancy between how grandparent-owned assets and parent-owned assets are treated. Parent assets impact aid by around 5%, whereas grandparent-owned assets are deemed untaxed income and could reduce aid by up to 50%. The new FAFSA ensures that grandparent and other relative support will not factor into the new SAI calculation, thereby improving students' chances of receiving aid.
A common example is a grandparent-owned 529 plan. These plans have been considered student assets subject to the 50% assessable rate. Under the new guidelines, 529 plans owned by grandparents or non-parental family members will no longer negatively impact students' financial aid award.
Broadened Access to Pell Grants
The Pell Grant, a key Federal award for those with significant financial need, is expected to expand its reach. Millions of students who are currently ineligible for the grant could become recipients under the new FAFSA due to a revised Federal Pell Grant formula. Additionally, those already eligible might see an increase in the amount they receive.
Thanks to the FAFSA Simplification Act, Pell Grants will be awarded based on Adjusted Gross Income (AGI) and the calculated SAI. This positive shift is projected to provide more students Pell Grants, which, unlike loans, are government aid not requiring repayment.
Changes for Divorced Parents
Under the current system, families with separated or divorced parents are directed to have the custodial parent complete the FAFSA. This typically corresponds to the parent with whom the student resided the most in the two years preceding the school year. In the new FAFSA, the parent providing the most financial support will be responsible for completing the application. This often aligns with the parent claiming the student as a dependent on their tax return.
Enhanced Income Protection Allowance (IPA)
The income protection allowance, the amount of income parents and students can earn without impacting financial aid, is set to be raised. It varies based on household size and number of college-bound children, and the new legislation will elevate the allowances both parents' and students' get. All types of households will benefit from this increase, with single parents receiving a higher IPA than two-parent families. This change is beneficial as it empowers students and parents to earn more income, with a smaller fraction affecting their financial aid eligibility.
The FAFSA Simplification Act encompasses a blend of positive and negative changes. While families with multiple children in college might face a decrease in aid, the revamped application offers benefits like simplification, the exclusion of grandparent assets, expanded Pell Grant eligibility, and a higher income protection allowance.
When it comes to education planning, it’s important for advisors to help their clients with services such as optimizing financial aid packages, creating effective college savings strategies, and crafting viable payment plans. Our job is to support clients through all facets of their educational journey!