One of the lesser-known impacts of the Consolidated Appropriations Act of 2021 (the act that brought us the second round of COVID-related stimulus payments) is a series of changes to the Free Application for Federal Student Aid (FAFSA) and the college financial aid landscape.
While we’re waiting on guidance from the Department of Education and form updates not expected until October 2022, there are some changes we can share now that can assist in college planning moving forward.
First, the term “Expected Family Contribution” (EFC) will be replaced by “Student Aid Index” (SAI). This will hopefully add clarity around exactly what is determined by completing the FAFSA application. While there are some changes to the calculation, SAI is simply a new term for EFC.
Changes to Income
Probably the most significant change to the FAFSA application is that certain types of untaxed income (cash support, money paid on student’s behalf, etc.) will no longer need to be reported. This is good news for grandparents or other family/friends who wanted to pay for college expenses directly or fund a 529 on their student’s behalf, but were concerned about the impact it might have on financial aid eligibility.
Again, FAFSA changes will not be effective until October 2022. Since the FAFSA is completed with prior-prior tax year info, non-immediate family members can take advantage of the upcoming change starting in this year. Put another way, distributions starting in 2021 should not have any potential financial aid impact, as they would be reported after the FAFSA changes become effective.
It’s important to note that while certain types of untaxed income are not reported on the FAFSA, they are still reported on the College Scholarship Service (CSS) Profile. It’s uncertain if more schools will adopt the CSS profile or their own application as a result of these changes.
Number of Children in College
The current FAFSA focuses more on cash flow than wealth. That will be changing. The Income Protection Allowance (IPA) shelters a portion of parental income for aid calculation purposes. If more than one child is in college at the same time, the IPA is reduced. The new FAFSA will no longer reduce the IPA for two or more children enrolled simultaneously, which is a positive for qualifying for more aid. In a move that could potentially balance out some of the impact of the IPA change, the new FAFSA will no longer divide the parental contribution by the number of children in college, which is expected to impact middle-and high-income families more significantly.
Divorced or Separated Parents
Parents who have an informal separation will still be considered married for purposes of the FAFSA. In the case of a formal separation or divorce, the parent responsible for filing the FAFSA will be based on whichever parent provides more financial support to the student vs. with whom the student resides. Keep in mind that this parental funding will be based on financial support during the prior-prior tax year, which means that planning can take place now to help maximize financial aid in the coming years.
While this is not an exhaustive list of the upcoming changes and some details need to be ironed out, ultimately, the FAFSA form is going to be noticeably shorter, and broaden some of the planning opportunities surrounding one of the larger financial investments for a family.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. For individualized tax advice, please consult a qualified tax advisor.