New FAFSA Changes – Winners and Losers

The Free Application for Federal Student Aid will be undergoing significant changes soon and families, who hope to obtain financial aid, need to prepare for the FAFSA changes.

Tucked into federal pandemic relief legislation that Congress passed during the Christmas holidays, was a dramatic overhaul to the FAFSA and financial aid rules.

Last week, I talked to Mark Kantrowitz, a nationally prominent financial aid expert, who has an encyclopedic knowledge of the federal financial aid system.

I’d urge you to listen to my conversation with Mark, who knows more about the upcoming FAFSA changes than just about anybody in the nation.

The changes will kick in for the 2023-2024 school year. This means parents filling out the FAFSA as early as Oct. 1, 2022 will be impacted by the changes.

You’ll learn more by watching the 42-minute video, but here are highlights of some FAFSA changes:

FAFSA simplification

One of the changes that has attracted the most attention initially is the simplification of the FASFA.

The current FAFSA has a maximum of 108 questions and that’s being shrunk down to roughly three dozen. That will reduce the FAFSA from the equivalent of six pages down to two pages.

Among the questions that will be eliminated are those that less than one percent of filers answered. One of the eliminated questions, which I’ll address shortly, will impact grandparents and others outside the nuclear family who want to help a student with college costs without hurting financial aid chances.

The aim was to simplify the FAFSA by aligning it more closely with the Internal Revenue Service’s income tax regulations. More answers will be able to be pulled from household income tax returns, which can make it easier for a family to complete the financial aid application.

When filling out the FAFSA, many parents are already using the federal Data Retrieval Tool that is embedded into the online FAFSA. Families use the DRT to access their tax return information on the IRS site and automatically transfer the relevant IRS information onto their FAFSA. With the FAFSA changes, the DRT will be able to populate more questions automatically.

Is the new FAFSA really going to be simpler?

Unfortunately, aligning the FAFSA with IRS tax rules will also make the application more complicated for millions of families. Because the FAFSA will now have to align with IRS rules and abandon some of their own federal formula rules, there will be winners and losers for these changes.

FAFSA changes:  divorce and separation

This is an area that will experience a great deal of upheaval. “In attempting to simplify the FAFSA,” Kantrowitz said, “Congress made parenthood on the FAFSA more complicated. “

For instance, one of the FAFSA’s rather quirky rules about who fills out the FAFSA will be upended for the 2023-2024 FAFSA.

Example:

Currently, who files the FAFSA as the custodial parent in cases of divorce and separation depends on where the student has lived during the majority of the year ending on the day the FAFSA is filed. So if the FAFSA is to be filed on Oct. 1, 2021 for the 2022-2023 school year, you’d look back and see where the child lived from that date back to Oct. 1 2020. If financial aid is a possibility, it makes sense that the parent who makes the least amount of money would be the custodial parent.

FAFSA change: who will be the custodial parent

However, when the new FAFSA rules kick in, where the child has lived will be irrelevant. What will matter is who claims the child on the tax return, which is currently irrelevant.

Under the new rules, the parent who provides the most financial support to the child in the prior-prior tax year is the one who should file the FAFSA. If this isn’t definitive, Kantrowitz thinks that the U.S. Department of Education will issue guidance basing the determination of the custodial parent on whichever parent has the greater adjusted gross income (AGI).

At this point, the new rules regarding separated couples are not clear. Separated couples currently follow the same rules as divorced couples regarding who completes the FAFSA, but with the legislative changes an important question remains to be answered definitely.

It is unclear right now whether parents need to be legally separated, as opposed to having an informal separation, to continue the practice of having only one parent share financial information on the FAFSA. If a legal separation is required (and it’s not even available in some states), parents no longer living together would both still have to share their financial information on the FAFSA.

FAFSA change: Ditching Expected Family Contribution

The new FAFSA rules will also eliminate the term Expected Family Contribution from the financial aid application. This represents what the federal formula determines a household should be expected to pay, at a minimum, for one year of college. The new law will replace the EFC with a new term – Student Aid Index.

A school will subtract a household’s Student Aid Index from the cost of attending its institution to figure out how much financial aid a student would be eligible for. This is what institutions do now with the Expected Family Contribution figure.

Two takes on EFC elimination

Ron Lieber, a personal finance columnist at The New York Times, celebrated the eventual banishment of the term Expected Family Contribution in a column on Dec. 30. Among Lieber’s arguments was that the term EFC shamed parents who wouldn’t be able to come up with that amount of money to pay for college. He also argued that the term EFC was confusing.

I suspect that most people don’t even know that the term EFC exists, which is an indictment of the federal government, colleges and universities and high school counselors who fail to explain what the EFC is and why it’s so important. This isn’t going to change when the term is replaced with another one.

So now we will be replacing the EFC with the SAI and we will see if that makes parents, who rarely are able to save enough for college, feel any better.  I have serious doubts.

FAFSA change: grandparent giving

Making sure grandparent generosity doesn’t impact financial aid has always been tricky. Do it wrong and it can hurt a household’s chances for need-based financial aid.

The FAFSA overhaul will make it easy for grandparents or others outside the nuclear family to pay for college costs without jeopardizing aid. The FAFSA overhaul will ignore whether grandparents or other well-wishers have given money to a child to pay for college costs. The FAFSA will no longer ask this question.

When grandparents, aunts and uncles, friends or others outside the immediate family help with college costs currently, this money is treated as the child’s untaxed income which is assessed at up to 50% by the FAFSA formula. That is an outrageous penalty to pay.

This FAFSA change will be big deal for many generous grandparents!

FAFSA change: multiple child benefit disappearing

While this has nothing to do with aligning the IRS with the FAFSA formula, the new FAFSA will no longer give households with multiple children in college simultaneously a significant break on their financial aid eligibility.

Parents who have more than one child in college at the same time have traditionally enjoyed a break from the FAFSA formula. For families with multiple college students, the Expected Family Contribution declines significantly for each child. As mentioned earlier, the EFC represents a dollar figure indicating what a family should expect to pay, at a minimum, for one year of a child’s college education.

EFC Example:

Let’s say a household’s EFC when only one child is attending college is $30,000. The next year, a second child enters college and the EFC for each child will drop 50%. So each child will have an EFC of $15,000. With the lower EFCs, the children would be eligible for more need-based aid.

If parents have three children in college at once, the federal EFC drops by 66%. With four children attending college, the EFC drops by 75%.

According to Kantrowitz, the new provision was inserted into the legislation due to retiring U.S. Senator Lamar Alexander (R-TN), who felt strongly that parents who spaced their children closer together should not get a significant EFC break versus other families.

FAFSA changes and CSS Profile

Many of the schools that offer the best financial aid use the CSS Profile to determine who gets their own institutional need-based aid. The Profile schools, which include nearly all of the most prestigious ones, only use the FAFSA to determine who is eligible for federal and state aid. In contrast, nearly all state schools and many private colleges use the FAFSA to determine eligibility for federal, state and institutional aid.

I reached out last week to the College Board, which created the CSS Profile, to ask what changes, if any, it anticipates based on the future FAFSA changes. The organization released a statement that said the College Board is “closely monitoring” the legislation and the potential impacts of the financial aid application process.

The College Board anticipates receiving federal student aid implementation guidance from the Department of Education in coming weeks and months. The College Board said it doesn’t have a time table on what if anything it will do in reaction to the FAFSA changes.

Learn more:

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