Author: Kyle Labelle
On December 27th, 2020, the FAFSA Simplification Act was passed as a part of the larger Consolidated Appropriations Act. The new legislation included several changes to the financial aid process and the FAFSA form. Parents who have had to fill out the FAFSA form in the past understand how overwhelming it could be, as the old form had 108 different questions and was 8 pages in length. To help decrease the instances of families choosing to just skip filling out the FAFSA altogether, legislators worked to streamline the form and, in the process of doing so, made several other notable changes to federal student aid determination.
Changes to the FAFSA Form:
For those who do not know, the FAFSA must be filled out by college students and their parents each year to qualify for federal, state, and even some institutional aid packages. For the 2022-2023 school year, the FAFSA can be sent as early as October 1st, 2021. It is highly recommended to fill out the FAFSA as soon as possible because there are limited fund packages available. Certain components run out quickly, such as loans, grants, and qualifications for work-study programs. Applicants will not know what funds they get until they apply. It is even important for families with high incomes to fill out the FAFSA as a failure to do so can impact the capability of receiving merit-based aid.
The FAFSA Simplification Act streamlined the form, reducing the number of questions asked to a maximum of 36 per family. The exact questions that must be answered vary based on each family’s situation and are different from household to household. To further simplify things, most of the filers’ income information will come directly from the IRS. With this in place, there will be less information a parent or student needs to track down and input by hand. One of the hopes is that this change will reduce the instances of students and families failing to submit the FAFSA at all, forgoing all potential aid. With that said, it is still important to have a copy of your income information and tax returns handy to make sure all fields are accurately entered.
A Change from EFC to SAI:
The Expected Family Contribution (EFC) is a calculation used to determine how much aid a student qualifies for. Information from the FAFSA is used in conjunction with EFC formulas to spit out an amount of aid that a recipient can expect for a given academic year. There are three formulas used to determine aid, depending on the status of the student involved. One formula is for dependent students, another is for independent students without dependents, and a final one is for independent students with dependents. Depending on one’s qualifying status, the EFC includes different financial components and has varying weights for those items. With the passing of the FAFSA Simplification Act, the EFC is going to be replaced with the Student Aid Index (SAI).
The SAI will roll out for the 2024–2025 academic year and will rely on information entered on the prior year’s FAFSA form to calculate the new level of aid a student is awarded. One of the main driving forces for the switch from EFC to SAI was the misconceptions around what the EFC measured.
There had long been confusion around the Expected Family Contribution. The name implied that a family was “expected” to be able to afford a certain level of higher education funding, but the EFC formula did not function that way. Instead, it was essentially an “index” that ranked students based on their need for aid. Aware of this confusion, it became a priority of legislators to change the name to better reflect the functioning of the figure.
The SAI, like the EFC before it, will be used to calculate only a student’s need-based aid and not his or her merit-based aid. Although it does not determine the amount of merit-based aid awarded, failure to fill out the FAFSA may disqualify the applicant from receiving any merit-based aid. Because there is only so much aid available, the SAI will be used to help schools assess the overall financial well-being of students. Once the SAI is determined, schools use that number to determine where an individual ranks on a need-based scale. Clearly the number the EFC is portraying is not simply the amount a family is “expected” to contribute towards school costs.
Before the new legislation, the EFC functioned on a scale with a floor of $0. For those who had a $0 valuation, it meant that their families had no expected contribution and they qualified for the highest amount of federal aid. The downside to having the floor set at $0 was colleges had a challenging time differentiating students with the greatest level of need. This left the neediest students at a potential disadvantage. To try and solve for this problem, the SAI will have a scale that allows for a negative value of up to -$1,500. This improvement will enable schools to determine a student’s need for aid more accurately and eliminate a logjam of applicants at the prior floor. Even with this update, a study by the Hope Center for College, Community, and Justice found that the new floor of -$1,500 may not capture the full level of aid required for the neediest students. Even though there is progress being made for those most in need, there is still more refinement needed with the calculation and implementation of the index. Much of this is due to the Cost of Attendance (COA) calculation used by universities. The good news is that the COA also got a facelift with the passing of the FAFSA Simplification Act.
Changes to Cost of Attendance:
The COA is the price associated with going to a specific institution. You can think of this as the price tag for a year of school. Depending on which school you go to, the COA could vary greatly. It historically included tuition and fees, room and board, books, supplies, transportation, loan fees, and other miscellaneous expenses (such as a “reasonable amount for the documented cost of a personal computer”). The various allowances that make up the COA figure are used to reflect the overall price of attending a college or university. Several changes will phase into effect over the next few academic years:
- Colleges must include an allowance for transportation between home, school, and work in their assessment of the total COA.
- The room and board allotment can no longer be lumped together. Instead, there must be separate allowances for housing and meals, and the meal allowance must be based on three meals per day. This is meant to better equate each school’s cost by standardizing different reporting elements.
- The transition to requiring housing allowances to be calculated based on the greater of the average or median housing costs at the institution.
- The removal of an allowance for privately held student loan fees. There will, however, be a mandatory allowance for federal loan fees held by students and parents. Beforehand, this was a discretionary allowance that colleges could opt to include.
The biggest takeaway from the updates to the COA figure is that colleges will be required to more accurately reflect the actual costs associated with attendance. The room and board separation into housing and meals is notable as it provides added differentiation and comparison points for students, especially those considering commuting to campus. Tied to this is the new requirement that colleges include an allowance for housing costs specifically for students living with their parents and commuting to school. These additions can impact the final aid package by reflecting the actual costs of attendance and limiting the instances of overborrowing for costs that do not materialize. By adding the additional cost of living at home, commuting students living with their parents can begin using federal aid money to help pay for those expenses.
Changes to 529 Plans for FAFSA Reporting:
Beginning in the 2024–2025 school year, certain untaxed income sources, like cash support and money paid on a student’s behalf, will not be reported for aid determination. One of the biggest impacts of this change is how grandparent-owned 529 accounts impact the EFC/SAI aid calculation.
529 plans can be a fantastic way to save for college and especially if you follow several notable tips for funding college expenses. One of the more beneficial aspects of using a 529 account to pay for college just received an added boost. Under the prior FAFSA calculations, a family can save in a 529 under a grandparent’s name and have the account excluded from the asset portion of the EFC/SAI calculation. This, by default, could increase the amount of aid available to the student. The caveat was that when the funds did get used to pay for expenses, they were counted not as assets but instead as untaxed income to the student. For FAFSA purposes, untaxed student income had the highest weighting for needs-based calculations. It decreased the amount of aid available, with a 50-cent decrease for every dollar used to pay for expenses above a certain allowed exception. This meant that if a grandparent paid for a student’s freshman year of college, then the amount over that allowance decreased the amount of aid the student received. This overage would have a greater impact in the junior year than if the money had come from the parent’s account. The reason for this is because the FAFSA looks at the prior-prior year’s income when assessing need. (For example: For the 2022–2023 academic year, a college would look at 2020 tax information.) Whereas the amount of aid that would have been deducted, had the money came out of the parents’ 529, would be 5.64% of the value withdrawn above the allowance.
A common strategy to get around this was having parents fund the first two years with money from their 529 account, allowing the grandparents to use their 529 to pay for expenses in the student’s final two years of school. By doing this, the income from the grandparents’ 529 would not be factored into the EFC. The downside to this strategy was that it limited the amount a grandparent could help with the overall cost of college.
The FAFSA Simplification Act removed the assessment of money withdrawn from grandparent-held 529 plans from the EFC/SAI formula. With this development, it becomes an even better strategy to save in a grandparent’s name. By making the switch to a grandparent’s account, a family can make their college funding dollars stretch further than was previously possible. This can be an important planning tool, especially for middle-income families, as it helps combat some of the other changes occurring with higher education funding.
Other Notable Changes:
There has been a change to the way a family’s Income Protection Allowance (IPA) is calculated. Prior to the act, families received a benefit for having multiple students in college at the same time. The idea was that a family could only be expected to contribute a certain amount of money toward college regardless of how many children were enrolled at once. Because of this, families with multiple kids in college simultaneously had the parent’s portion of the EFC calculation reduced by the number of kids in school at the same time. Under those rules, if a family had an EFC of $30,000 but had three children in college at the same time, then the parent’s portion of the EFC of the family would be reduced to a third, or $10,000. That was a significant decrease and really helped make college more affordable for families.
Starting in the 2024–2025 school year, this benefit will disappear and instead be replaced by a general increase in the family’s IPA. The IPA shelters a portion of a student’s and parent’s income from the EFC/SAI formula. The allowance is set to increase for dependent students by 35% and 20% for parents. This will typically be an increased allowance of between $4,000 and $8,000 for most families. These allowances increase the potential aid that a student will receive by removing income from the EFC/SAI calculation, therefore reducing the ending figure. The lower the EFC/SAI figure, the more aid the student would potentially qualify for.
The takeaway from this change is that families with more children in school at the same time will have a higher SAI than they otherwise would have. This is even more pronounced for higher-income families with multiple kids in school simultaneously because the increase in the IPA will be lower, as a percentage of the higher-earning family’s income, than it would be for a lower-earning family. The reason for this is that the increase in the IPA will tend to be lower than the benefit of reducing the EFC/SAI by the number of children in school.
These changes also impact divorced families. Before the FAFSA Simplification Act, the parent with whom the student lived most during the year was the one who filled out the FAFSA form. Now, it will be the parent who provides the most monetary support to the child. This can switch the filing parent to the higher earner, and if that happens, then the family will have to increase their funding toward college.
The FAFSA Simplification Act is a step in the right direction. It is going to help simplify the federal aid process and, hopefully, encourage more students to file for aid. One of the biggest impacts of the new legislation will be seen by middle-income and high-earning families. Those that have higher incomes will likely need to save even more to cover their portion of college costs.
Kyle Labelle is a Planning Associate at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.