How will your family be impacted?
KEY TAKEAWAYS
Changes to the FAFSA application will allow students to apply for financial aid in a more time efficient manner.
The financial benefits to having multiple students in college at the same time will soon disappear.
FAFSA adds new requirements for divorced and separated parents.
Individuals other than guardians will soon be able to contribute to college costs without affecting a student's eligibility for financial aid.
Parents with children approaching or already in college are likely familiar with the FAFSA – Free Application for Federal Student Aid. It’s the application completed each year by incoming and current college students that determines their eligibility for financial aid.
Included in the Coronavirus Aid, Relief, and Economic Securities (CARES) Act passed in 2020 were significant changes to the FAFSA, both in rules and the application itself. While some of these changes will be celebrated, single parents and those with multiple kids in college may not be as happy.
Here's what you need to know.
Simplifying the application
The FAFSA drives a student’s eligibility for federal grants, loans, and work study programs. And, for most universities, if you don’t complete an application, you will not be eligible for any need-based aid. Sounds pretty important, right? Yet, the FAFSA has a historically poor completion record, and that record got even worse during the pandemic. As of January 2021, 32.3% of high school seniors had completed the FAFSA – down from 42.9% in 2020.
Part of the problem is the length of the application. It currently consists of 213 questions across six pages. In an effort to encourage more students and parents to complete the application, the Consolidated Appropriations Act was passed to meaningfully streamline the application process. The new application will only have 36 questions across two pages. And, to make the application even more user-friendly and reduce possible mistakes, taxed and untaxed income can be automatically transferred to the FAFSA instead of applicants having to manually enter figures.
Even if you don’t think you will receive any aid, make the time to fill out the application every year. Especially with the new simplified process, you might be surprised to find out you are eligible for some financial aid – and something is better than nothing!
Changes to EFC
The Expected Family Contribution (EFC) is a gauge for a student’s need-based aid. A family’s EFC is based on several factors including income, non-retirement assets, and education savings accounts to name a few.
Currently, if a family has more than one student in college at the same time, the EFC for each student can drop by as much as 50%, increasing their eligibility for need-based aid. With the new FAFSA rules, the benefit of a reduced EFC will go away, hurting families with more than one child in college.
Here’s an example of how the EFC works:
Let’s assume that a family’s EFC is $40,000 and a school’s Cost of Attendance (COA) is $65,000. That would make a student’s financial need $25,000. If said school extends financial aid of $15,000, then the family’s expected out-of-pocket cost will be $50,000 - their EFC ($40,000) plus the financial aid shortfall ($10,000).
Going forward that EFC calculation will not be reduced by 50% if you have more than one student in college at the same time.
Divorce/Separation Planning
Let’s start by taking a quick look at the current FAFSA rules.
What most parents don’t realize is that the current rules don’t care which parent provides the most financial assistance or claims the child on their tax return. Right now, the rules focus on where the student lives most of the year – at least 50% of the time plus one day. The parent who meets that threshold will complete the FAFSA, which allows for savvy parents to have this fall under the parent with lower income and fewer assets.
That’s going to change, and because FAFSA looks back two-years on financials, planning for this rule starts in 2021. Effective for the 2023-2024 school year, the focus will shift from where the student physically lives to which parent provides the most financial support. This is usually, but not always, the parent with higher income, greater assets, and who claims the student on their tax return. If support is split 50/50, then the parent with the highest adjusted gross income (AGI) will be required to complete the application.
There may be a gray area for divorced couples who have a multiple support agreement. This is an agreement that spells out who is considered to provide financial support to the student. It could be that parents rotate providing support or specify which parent claims the student as a dependent regardless of who provides more financial support. If this applies, we may see parents appealing who should be considered as the custodial parent.
Grandparent Giving
Well, it couldn’t be all negative news! One positive change FAFSA will be enacting is making it easier for grandparents, other family members, and friends to help with college costs. The best part – their contributions won’t hurt a students’ eligibility for financial aid.
With the current FAFSA rules, money provided by anyone outside of the immediately family is to be reported and considered as the student’s income. This would include grandparents who have funded 529 Plans and are now taking distributions to help the student cover their expenses. That income would then be used to calculate the family’s EFC and possibly reduce or eliminate a student’s eligibility for aid.
Starting with the application for the 2023-2024 school year, FAFSA will no longer consider these financial resources as income to the student.
Conclusion
College is a massive financial commitment that requires staying on top of rules and an evolving landscape. While this bill simplifies some aspects of the financial aid process, it has made other aspects more complicated. Use this time to understand the rule changes and determine if and how your strategy to pay for college needs to change.
Frank Iozzo, CPWA®
President, Private Wealth Advisor