The Free Application for Federal Student Aid (FAFSA) is being simplified. The result of the Higher Education Act of 1965, FAFSA is an application to determine eligibility for federal aid, some state financial aid, and parent loans for students at U.S. colleges and universities. More recently, the FAFSA Simplification Act was passed on December 27, 2020, as part of the Consolidated Appropriations Act, 2021. Many changes will affect most students and their families because of these two acts. Below we examine some of the most important changes and what impact they will likely have on college students and their families when the 2024-25 FAFSA launches by December 31, 2023.

The number of questions

The National Center for Education Statistics reports that over 85% of students receive some sort of financial aid.¹ Colleges and universities use information from the FAFSA to help make decisions on how much institutional need-based aid to award. In addition, the FAFSA is often required for applicants to file for merit-based scholarships offered by many colleges and universities. With that in mind, it can make sense for high-income earners to complete the FAFSA. Until now, the FAFSA has been a very long application process. For many, the 118-question document can pack an intimidation level approaching completing a tax return. The new, slimmed down version of the FAFSA will be only 36 questions, which might translate into more families and students filling out the FAFSA and gaining access to financial aid.

In addition to the FAFSA being shorter, it has also been simplified. One change is that tax information is now directly imported from the IRS, using the IRS Data Retrieval Tool (DRT) rather than families having to manually enter data from their tax returns. This change was implemented in May of 2022 due to both the FAFSA Simplification Act and the Fostering Undergraduate Talent by Unlocking Resources for Education Act or FUTURE Act) and has resulted in a decrease in the number of verifications that higher education institutions carry out. Specially, verification is now focusing only on identity theft and fraud rather than on financials.²

Expected Family Contribution (EFC) is now the Student Aid Index (SAI)

Under the old FAFSA, EFC was a number calculated by separately assessing the parent’s and the student’s expected contribution and then adding them together to come up with the EFC. The term EFC created some confusion because it gave the impression that it was the amount that students and their families were expected to contribute towards their education. However, that was not exactly the case. Instead, EFC was more of a tool that schools used to place students on a spectrum when deciding how much aid to allocate. The result was that the EFC was not always what students and their families ended up paying.

EFC has been renamed to the Student Aid Index (SAI). The name better reflects how colleges use the number to determine a student’s financial aid needs. The basic formula to compute need or eligibility is Cost of Attendance (COA) – SAI = Demonstrated Need. The first part of the formula, the COA, is sometimes referred to as the sticker price. It’s the all-in price, including not only room and board, but transportation, books, lab fees, and other expenses.  Let’s look at an example.  If a student wants to attend a college with a COA of $40,000 and their SAI is $50,000, their Demonstrated need is $0, because their SAI exceeds the COA.  However, if the same student wanted to attend a college with a COA of $60,000 and their SAI was $50,000, then their Demonstrated Need would be $10,000.  Therefore, as a general rule, you can expect more need-based aid if you attend a school where the COA is higher than your SAI.

With the changes, it will now be possible to receive a negative SAI, as low as negative $1,500. This will happen if either a dependent student’s parents or an independent student (and spouse) are not required to file a tax return.³ Additionally, it will be possible for a parent’s and student’s negative SAI scores to be combined, resulting in an overall lower score and qualifying for more aid. If a student’s SAI is between negative $1,500 and zero, they will qualify for the maximum Pell Grant, which is financial aid from the federal government. However, on the institutional side, colleges will be able to look at negative numbers and use those numbers when deciding how much aid to extend to students.⁴

Income protection allowance

The way the SAI is calculated will also see some changes that will likely impact families. Specifically, there will be increases in the income protection allowance (IPA), which is the amount of income that is not counted when applying for financial aid. IPA will increase from $30,190 to $35,870 for parents and from $7,040 to $9,410 for students. Most families can benefit from changes to the IPA. For example, a family of four with one child in college will be eligible for about $3,000 more in financial aid.

The sibling discount

One of the biggest changes affecting some families is the elimination of the sibling discount. Until now, students with more than one child in college at the same time have enjoyed EFC discounts of about 50% for each child. That sibling discount will now go away. Having more than one child in college at a time will no longer result in a lower SAI. Due to changes in how the FAFSA is calculated, this won’t have a big impact on families with low incomes, but those with middle to high incomes and two or more children in college at the same time can see a major impact since they’ll be losing that multi-child discount. However, many institutions offer additional aid for students whose families have higher incomes.  Over the next year or so, as colleges and universities transition to the new FAFSA, some institutions may offer some institutional aid to retain students where losing the multi-student discount may jeopardize students remaining in school.

The needs analysis

The revised FAFSA formula is expected to have minimal impact on higher-income households that are not eligible for need-based financial assistance. Conversely, the most disadvantaged households will still be eligible for grants, work-study opportunities, and low-interest loans. The most significant repercussions of the updated FAFSA formula are likely to be felt by middle-income families with college-bound children of similar ages.

One group seeing a negative impact from the FAFSA changes is families who own businesses with fewer than 100 employees. Those family-owned businesses were formerly not required to be counted as assets on the FAFSA form. Now, however, the businesses must be counted. Families who live on and materially participate in a farm will likely be negatively impacted because family-owned farms must now be reported as assets.

Families with incomes of $70,000 or higher will also be impacted by changes to the FAFSA in a way that will generally cost them more money. However, colleges will not want to eliminate potential students because of affordability concerns.⁵ In the short term, if you come from a family with a high income that loses financial aid due to changes in the FAFSA, it might be worth making an appeal. During this period of transition, many colleges may be willing to do what they are financially able to do to retain students.

Who completes the FAFSA?

Changes will also impact families with divorced or separated parents. Previously, the parent that the student lived with most of the time completed the FAFSA, but now the parent who provides most of the financial support for the child will complete the form. Additionally, if the parent providing most of the financial support has remarried when the FAFSA is filed, the stepparent’s income, assets, and dependents must be reported. Also, the definition of family size has been simplified to include the student, the parent, and any dependents from the tax return.   Previously, the definition of family size stated that a family was a student, a parent, and other children or people living in the household (where over half of support was provided).

Reportable income

Reportable income on the FAFSA is seeing changes as well. Different types of untaxed income, such as veteran’s education benefits and workman’s compensation, will no longer be reported. Child support received will count as an asset instead of income. Similarly, gifts that students receive will no longer be reported as untaxed income. One change that’s getting a lot of attention is the fact that qualified distributions from 529 plans from relatives (aunt, uncle, or grandparent) will no longer impact financial aid eligibility. Now those 529 plans can be even more appreciated!

The new FAFSA launches this month

Some of the above changes have started phasing in over the last couple years, but the biggest changes are coming with the upcoming FAFSA form. The 2024-25 FAFSA will go live by December 31, 2023. It’s recommended that families fill out the application as soon as possible because some scholarships and grants are awarded early in the FAFSA cycle. If you have any questions as we enter the FAFSA season, as always, please don’t hesitate to reach out to your financial advisor.