The Free Application for Federal Student Aid, better known as the FAFSA, is the form that returning college students or high school seniors must complete to apply for federal financial aid. Many states, colleges, universities and scholarship organizations require the FAFSA to determine whether a student qualifies for their aid. Without the FAFSA, many students and their families eliminate their possible eligibility for need-based financial aid, as well as access to federal student or parent loans.
Unfortunately, despite its importance, many choose not to complete the FAFSA for a variety of reasons. They may have the perception that they will not qualify for financial aid, they feel they are not in need of financial assistance, they’re apprehensive about student loan debt, and/or they’re concerned about the length and complexity of the application, to name a few. Let’s briefly tackle each one below.
We Won’t Qualify for Financial Aid.
Many parents think that because they are high-income earners, for example, they won’t qualify for financial aid. However, what they don’t realize is that there’s no income cutoff limit. There are several factors used to determine a family’s Expected Family Contribution (EFC) (more on this below), and income is only one of them. Also, it’s important to remember that many schools and private organizations won’t consider a student’s application without the FAFSA.
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We Don’t Need Financial Aid.
While many families can afford to pay for college outright, financial circumstances can change. Take the pandemic, for example – many parents experienced layoffs, business closures, death of a primary breadwinner and/or saw a significant decrease in their income. While these examples may be extreme, the point is that anyone can experience an unexpected event that can wreak havoc on their finances. Therefore, it’s important to plan for the unexpected, and having a completed FAFSA on file is one way of doing so, among many.
We Want to Avoid Student Loans.
Understandably, many students and families don’t want to take on student loan debt. However, the Federal Direct Student Loans, in particular, are loans that can be beneficial to have in your “planning for the unexpected” arsenal. Federal loans are fixed-rate loans from the government, and they provide consumer benefits and protections that are often not available with private loans. If you want to be eligible for these loans, you must complete the FAFSA. Keep in mind that if they are offered in your financial aid package, you can always decline to accept them.
FAFSA Is Too Complex.
There have been several long-standing concerns about the length and complexity of the application. As a result, Congress passed legislation to simplify the application process for students and their families.
The FAFSA Simplification Act (FSA) passed by Congress as part of the Consolidated Appropriations Act of 2021 represents a significant overhaul of the underlying processes and methodologies for determining federal student aid eligibility.
The new provisions were slated to be implemented in the 2023-24 school year but were delayed. As a result, the Department of Education (ED) began implementing these changes via a phased approach with only a few of the mandated adjustments showing up on the October 1, 2022, FAFSA. The remaining provisions are set to go into effect for the upcoming 2024-25 award year.
However, there are rising concerns that there will be yet another delay due to a number of other major priorities that the Department of ED is managing, a main one being the Biden administration’s student loan debt cancellation plan. With that said, what follows are highlights of a few major aspects of the law and what to expect in the event that the final phase is implemented as planned, which impacts the October 1, 2023, FAFSA.
1. The FAFSA Will Be Much Shorter and More User-Friendly.
The FAFSA currently asks over 100 questions, but that is slated to decrease to about three dozen. In addition, the wording of the questions will be amended to make them more comprehensible, particularly as they pertain to investment assets.
2. Name Change: So Long, EFC. Welcome, SAI.
The term Expected Family Contribution (EFC) will now be known as the Student Aid Index (SAI). The EFC is an index number that colleges use to determine a family’s financial need relative to other applicants. The term has often been misleading and confusing to families, as it implies that it is either the amount of money a family will have to pay for college or the amount of aid they will receive. The hope is that the new term will help clarify that this number is not the amount that families should or must pay, but rather a number used to assess their financial need.
3. Pell Grant Eligibility Based on AGI and SAI.
The biggest source of financial aid comes from the federal government, and the vast majority of it is awarded through the Pell Grant Program. It is also the main federal grant that is geared toward students who have an exceptional financial need.
The FSA amendments will use the adjusted gross income (AGI) in addition to the SAI to determine eligibility for Pell Grant award amounts. Students will also be able to estimate their eligibility for the grant before they complete the FAFSA.
The maximum award is $7,395 for the 2023-24 award year, and award amounts can change yearly. Currently, the maximum EFC a student can have and still qualify for the full award is $6,656.
While the Pell Grant is a need-based grant, there is no income cutoff limit. Eligibility depends on the EFC (soon to be SAI), the college’s cost of attendance, enrollment status and whether the student plans to attend school for a full academic year or less.
Additional amendments include a reduction in the award amount for students who are not enrolled full time, meaning students enrolled less-than-half time will not be eligible to receive the grant, and the establishment of a minimum award amount for full-time enrollment, which is $750 for the 2023-24 award year.
4. Discount Eliminated for Multiple Children in College.
Currently, financial aid eligibility increases for families with more than one child enrolled in college at the same time. So, parents with twins/multiples or parents whose children are closer together in age have had the potential to benefit greatly. However, under the new legislation, the FAFSA will no longer provide this discount.
This change will reduce financial eligibility for families with more than one student enrolled in college at the same time. For example, prior to the change, a family with a calculated EFC of $40,000 could see that drop by as much as 50% if they had two students in college — that would be an EFC of $20,000 per student. Without this discount, the calculated EFC (SAI) would be $40,000 per student.
5. In Divorce or Separation, Which Parent Fills Out FASFA Changes.
Currently, in a two-parent household, either parent can complete the FAFSA. However, if the parents are divorced or separated, the custodial parent is required to fill out the FAFSA. The custodial parent is defined as the parent with whom the child lives for the majority of the 12-month period ending on the day the FAFSA is filed.
For example, if the FAFSA was filed on October 1, 2022, for the 2023-24 school year, the custodial parent is the one with whom the student lived with from that date back to October 1, 2021. A big advantage of this is that if the custodial parent is the lower wage earner, then only that parent’s income and assets will be counted for financial aid purposes.
The new legislation will require the parent who provided the most financial support in the “prior-prior” tax year to complete the FAFSA, instead of the custodial parent. The term “prior-prior” means that the financial aid system requires parents to submit their two-year tax returns instead of their most recent ones. For example, the class of 2023 (seniors) were required to submit their 2021 income tax information. Current juniors or rising seniors will use their 2022 tax return.
Thus, the parent who provided the most support in 2022 will be required to complete the FAFSA for the 2024-25 award year. This will typically but not always be the parent who claims the student on his or her tax return. In cases in which the support provided is 50/50, it may default to the parent or household with the highest AGI.
6. No Financial Consequences for Contributions Made by Others.
Currently, families are supposed to report “money received or paid” from others on the student’s behalf on the FAFSA. This means that if grandparents, other relatives, friends or others outside the immediate family provided financial support to help pay for college costs, it should be reported. This type of assistance is considered the students’ untaxed income, which increases their total income and subsequently their EFC.
Let’s take a look at an example: A grandparent contributed $20,000 from a 529 plan they owned toward college tuition in 2022. That lovely gesture would have been treated as the student’s untaxed income and assessed at 50%, which would have resulted in an increased EFC by up to $10,000.
Under the FSA, if that same contribution is made in 2023, it will not face any financial consequences, meaning this form of untaxed income will no longer be considered in the EFC (SAI). In short, outside financial support to help pay college costs will no longer jeopardize a student’s chances for need-based financial aid.
However, it’s important to keep in mind that this is only the case if the amendments go into effect for the October 2023 FAFSA. If another delay in implementation occurs, any non-parent contributions toward college costs will continue to be assessed as the student’s untaxed income.
7. Income Protection Allowance Goes Up.
The FAFSA income protection allowance is an amount of income that is excluded from the financial aid eligibility formula. The parent allowance is for the basic living expenses of a family and currently varies according to household size and the number in college. Students also have an income allowance protection.
The new legislation raises both the parent’s and student’s income protection allowance. However, the number in college will no longer be factored into the formula for the parent allowance. Here’s an example: The parent allowance for a two-person family with one dependent will be $23,330 (currently $19,080) and $29,040 for a family of three (currently 23,760).
The income allowance for students for the 2023-24 school year is $7,040 for dependent students, and the FSA will increase it to $9,410. This means that a student can earn up to this amount and not jeopardize aid eligibility. Said another way, the amount that student will be expected to contribute toward their college expenses will be reduced, and their financial aid eligibility will increase.
Summary
The changes required by the FAFSA Simplification Act are by and large positive. They include a decrease in the complexity and number of questions asked, the increase in the income protection allowance, expansion of Pell Grant eligibility and outside contributions no longer being treated as the student’s untaxed income, to name a few. However, some of the changes will have an adverse effect on families and may reduce aid eligibility, such as the elimination of the discount for multiple students in college at the same time.
Another change that will likely create a great deal of havoc and confusion for divorced and separated parents, in particular, is who will be considered the custodial parent.
It is important for current and prospective college students and their families to understand how these changes will impact their aid eligibility and plan accordingly. Choose to be proactive rather than reactive by seeking guidance from high school counselors, financial aid offices, independent educational consultants and other professionals who specialize in college planning and funding.
This article is for informational purposes only. Nothing herein constitutes tax or investment advice. The information provided is as of the date produced, and over time may become inaccurate due to changing laws and regulations. Urban Wealth Management Group LLC is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Urban Wealth Management Group LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered unless a client service agreement is in place. Urban Wealth Management Group provides links for your convenience to websites produced by third-party providers. Clicking hyperlinks will take you to their website that is not affiliated with Urban Wealth Management Group. Urban Wealth Management Group is not responsible for errors or omissions in the material on third-party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third-party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites.
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