April 12, 2024

What’s New with the FAFSA?

According to the National Center for Education Statistics, more than 85 percent of U.S. college students receive financial aid. The Free Application for Federal Student Aid (FAFSA) Simplification Act introduced changes meant to “simplify” and streamline the application process including:

  • Fewer questions: now 50 instead of 100.
  • IRS data retrieval tool: with applicant consent, FAFSA can access IRS tax information.
  • Terminology changes including:
    • “EFC” (“Expected Family Contribution”) is now called “SAI” (“Student Aid Index”).
    • “Student Aid Report” is now called “FAFSA Submission Summary.”
    • The “contributor” is defined as the parents who fills out the FAFSA.
    • “Room and board” are now referred to as “housing and food.”
    • “Wealth” is analyzed more holistically, focusing on assets instead of cash.

529 Planning Opportunities

Distributions from grandparent-owned 529 plans are no longer countable in the FAFSA. But, remember, the grandparent who opens the 529 plan owns and controls the account and the money in it. Parents and grandparents must be aligned for this option to work. Also, note that some states require the grandparent spend any money in 529 accounts they own before applying for Medicaid. So, be sure educational and healthcare planning efforts don’t conflict.

Also, instead of counting 529 plans for all children in the family, only the value of 529s for the student completing the FAFSA will be counted. If you have multiple children, consider establishing separate accounts for each for maximum aid potential.

Divorce Categorized Differently

Previous rules for divorced parents focused on where the child lived most often. Now, the FAFSA should be completed by the parent who provided the most financial support.

For students already enrolled, this change may negatively impact aid if the lower-net-worth parent filled out the FAFSA previously.

Focusing on asset management strategies can help you better prepare. For example, increasing the amount of money directed to tax-deductible retirement plans will reduce the income used in aid calculations.

Benefits Changed for Multiple Children in College

Under FAFSA Simplification, there is no additional benefit for having multiple children in college at once.

The previous FAFSA analyzed two children with overlapping college attendance as a strain on household cash flow, thus providing more financial aid benefits.

The SAI formula focuses on household size. Middle- and upper-class households with more than one child in college may experience a net loss in total aid, whereas low-income families with multiple children may see the most benefits.

Calculations are Different

State and local taxes are not factored into SAI (formerly EFC) calculations so clients living in higher-taxed states will not benefit in the SAI.

By including household size in addition to assets and income, the SAI provides a more holistic view of need with a higher number indicating less need and lower or negative numbers indicating greater need.

Also, the Act no longer requires reporting of monetary gifts (i.e., untaxed income) given by a third party. This means grandma’s contribution to the student’s monthly spending money won’t adversely impact their eligibility for financial aid.

Be aware of changes in asset reporting. The following assets are now counted:

  • Net worth of all businesses (regardless of size)
  • The family farm (primary residence is still excluded)
  • Child support