For many parents with children in or about to start college and adults going back to school, filling out the FAFSA application for each school year is a commonplace event every fall or spring. This normally takes a few hours with having to answer 108 questions while digging around for tax returns and account statements.
However, starting in July 2023, changes are coming to the application and the formula for the amount of aid a particular student may need.
What’s Changing About These Financial Aid Calculations and Why
Included in one of the COVID stimulus relief bills passed in 2020 was the FAFSA Simplification Act. This is meant to streamline the FAFSA application process and update the formula used to determine the amount of aid a student is eligible for.
Some of the immediate changes parents and their children may notice are:
- The reduction in questions down to just 36
- The Expected Family Contribution (EFC) will now be called the Student Aid Index (SAI)
- The formula for need-based financial aid itself changing
The reason for this name change was due in part to the EFC being somewhat misleading, making families think the number generated is what they would have to pay for a particular year of college vs. how much aid their child would be eligible for at the college or university.
The two formulas are broken down here:
EFC (Old) = Cost of Attendance – [22% to 47% of parent income + 5.64% of parent assets] + [50% of student income + 20% of student assets]
SAI (New) = Cost of Attendance – [25% of parent gross income + 6% of parent assets] + [50% of student income + 20% of student assets]
On the surface, there is not much of a difference until you get more into the details of the SAI formula. For instance, the gross income for the EFC is based on modified adjusted gross income (MAGI), while SAI uses gross income adding back in 401k/403b, HSA, IRA, and pension contributions.
For the SAI, cost of attendance (COA) has been expanded to include certain costs such as laptops, transportation costs, etc., that schools did not disclose prior on top of the normal tuition, housing, and meal plans.
Parent asset inclusion still only applies to bank accounts, brokerages, real estate that is not their primary residence, and 529 accounts for the child’s benefit while keeping retirement accounts, annuities, and cash value life policies excluded. The Income Protection Allowance is still in place to reduce parent and student income included for both formulas and the amounts are updated every one to two years. The two-year income lookback still applies.
Student asset inclusion remains the same, only accounting for UTMA/UGMA accounts, custodial Roth IRAs, and any bank accounts in the child’s name. As the EFC/SAI goes higher, it reduces the available aid the student could qualify for.
The biggest changes in the formula calculation are the question regarding the number of children enrolled in college at the same time and that the withdrawal inclusion from a grandparent or other relative’s 529 accounts set up for a child’s benefit disappears with the SAI.
Under the EFC, if a household had multiple children in college simultaneously, the final EFC number would be divided by the number of children enrolled for that year, but as mentioned this will now go away. This ultimately affects middle- to high-income earners’ ability to save going forward.
With the EFC, any 529 accounts that other relatives (normally grandparents) had for a child’s benefit were not included under parent or student assets. However, any distributions from those accounts would be included as untaxed income to the child at the 50% inclusion rate for the two years following any distribution.
With the SAI, those withdrawals are not included at all going forward. Previously, the common strategy was to wait until their junior and senior years of college for a student to use a grandparent’s 529 funds to avoid the two-year look back/inclusion of them since it would raise the EFC.
Other Notable Changes
- Family farms and small businesses that were excluded under the EFC are included for the SAI calculation.
- If a child’s parents are separated or divorced, only the income and assets of the parent who the child either lives with the most or provides the most in support is used in the formula under SAI.
- The lowest the EFC could go was $0, while the SAI can go to negative $1,500 depending on the student’s situation.
- Selective Service status and convictions pertaining to drug charges will no longer determine financial aid eligibility.
- Child support will be classified as an ‘asset’ instead of ‘untaxed income’ going forward.
If you are wondering about how you can save for your child’s college amid soaring tuition costs, want to know more about potential education tax credits, or want to learn about ways to increase your child’s chances for financial aid, we are here for you. Feel free to reach out to one of our advisors here at Financial Symmetry to learn more.
