student loans

FAFSA Application Changes Are Coming – What They Mean for Middle- and High-Income Families

Applying for college financial aid will soon get easier, but some single parents and those with multiple kids in college may not be happy about other changes on the way.

College students and their parents should mark their calendar because July 1, 2023, will be a big day. It’s the day that many new financial aid rules go into effect thanks to a funding bill signed into law at the end of December to avoid a government shutdown and provide pandemic relief. 

The Consolidated Appropriations Act (CAA), 2021 contains provisions that expand those provided by the Coronavirus Aid, Relief, and Economic Security (CARES Act), as well as important policy changes to higher education. One of the biggest results of the CAA includes changes to the Free Application for Federal Student Aid (FAFSA), which is completed by prospective and current college students each academic year to determine their financial aid eligibility. The new provisions will show up on the 2022 FAFSA and take effect for the 2023-2024 academic year, which gives the U.S. Department of Education time to implement the changes.

Below are a few highlights of the legislation and how they impact middle- and high-income families.

Name Change: So Long EFC, Welcome SAI

Revision

The term “Expected Family Contribution (EFC)” will now be known as the “Student Aid Index (SAI).” The EFC is an index number that colleges use to determine a family’s eligibility for financial aid. The term has often been misleading and confusing to families, as it implies that it is either the amount of money a family will have to pay for college or the amount of aid they will receive.

Impact

The name change does nothing more than acknowledge that the term doesn't properly characterize what it is —that it is an eligibility index for distributing funds, not a reflection of what a family can or will pay for college expenses, according to the National Association of Student Financial Aid Administrators (NASFAA).

The EFC (soon to be SAI) is based on several factors, including income, non-retirement assets, education savings account(s), household size and marital status to name a few. Many middle- and high-income-income families pay more than the EFC because schools rarely provide an aid package that meets 100% of financial need.

For example, if a family’s EFC is $45,000 and the school’s Cost of Attendance (COA) is $75,000, the student’s demonstrated financial need is $30,000. If a school provides a financial aid award package covering only $20,000, the family is then responsible for the $45,000 EFC amount plus the financial aid shortfall of $10,000, thereby bringing their total out-of-pocket costs to $55,000. However, the good news is that there are several strategies that middle- and high-income families may be able to employ to cut expenses and maximize financial aid.

The FAFSA Application Will be Much Shorter and More User Friendly

Revision

In the midst of the pandemic, we’ve seen a disturbing trend in higher education — a decrease in the number of families completing the FAFSA, which is the universal first step to applying for financial aid. According to The National College Attainment Network, the number of high school students completing the application as of Jan. 15, 2021, is down by 10.1% from last year. There are several reasons for the decline, one being the sheer number of questions that families are required to answer.

The bill’s student-aid provisions will eliminate dozens of questions, including many that didn’t apply to more than 99% of filers. More specifically, lawmakers agreed to reduce the number of questions from over 100 to approximately 36. The bill also allows more applicants to have both their taxed and untaxed income automatically transferred into the FAFSA, rather than having to self-report or manually enter it. 

Impact

One of the biggest myths that middle- and high-income families face is that they won’t qualify for financial aid because their income is too high. This may or may not be true. As a result, they choose not to complete the FAFSA. But remember, I said that there are several factors that go into determining a family’s eligibility for financial aid, and income is one only of them. It’s also important to note there is no income cutoff limit when it comes to the FAFSA. These are just some of the reasons why families should not make assumptions about financial aid.

If funding is an issue, which is often the case even for middle- and high-income families, then determining whether they qualify for need-based aid is a crucial first step, which underscores the importance of completing the FAFSA. Thus, the hope is that fewer questions will lead to an increase in the number of applicants by making the application less tedious and daunting, especially since it must be completed every year until the student graduates. 

Who Completes the FAFSA Application Will Change for Some Single Parents 

Revision

Currently, in a two-parent household, either parent can complete the FAFSA. However, if the parents are divorced or separated, the custodial parent is required to fill out the FAFSA. The custodial parent is defined as the parent with whom the child lives for the majority of the 12-month period ending on the day the FAFSA is filed. A big advantage of this is that if the custodial parent is the lower wage earner, then only that parent’s income and assets will be counted for financial aid purposes.

The new legislation will require the parent who provides the most financial support to complete the FAFSA, instead of the custodial parent. In cases in which the support provided is 50/50, it defaults to the parent or household with the highest adjusted gross income (AGI).

Impact

For two-parent households, this revision won’t make much of a difference, as both parents are required to provide their financial information. However, for divorced or separated parents, the impact is greater because it could result in lesser financial aid eligibility if there is a significant difference in income between the parents. 

Discount for Multiple Children in College Eliminated

Revision

Currently, financial aid eligibility increases for families with more than one child enrolled in college at the same time. So, parents with twins/multiples or parents whose children are spaced closer together have had the potential to benefit greatly. However, under the new legislation, the FAFSA will no longer provide this discount.  

Impact

This change will reduce financial eligibility for families with more than one child enrolled in college at the same time. For example, prior to the change, a family with a calculated EFC of $40,000 could see that drop by as much as 50% if they had two children in college — that would mean an EFC of $20,000 per child. Without this discount, the calculated EFC would be $40,000 per child.

One Thing That Remains the Same: The Asset Protection Allowance

The FAFSA excludes a portion of your non-retirement assets, such as checking account balances, stocks, bonds, etc., from the financial aid eligibility formula. How much is shielded depends on the age of the oldest parent as of Dec. 31 of the year the FAFSA has been filed. For example, if the oldest parent of a married couple is 48 years of age for 2020, the couple could shield $6,000 ($2,000 for a single parent). With the new legislation, there is no change to the amount of non-retirement assets that can be sheltered by the asset protection allowance.

Impact

Unfortunately, the asset allowance protection amount has plummeted over the last decade (i.e., it was $52,400 in 2010 for a 48-year-old married parent, $21,900 for a single parent) and if this trend continues, it is projected to disappear entirely very soon. The decreasing protection has had the most impact on middle-income families and some high-income families, as it makes college less affordable. It reduces aid eligibility by thousands of dollars. Single parents are disproportionately impacted, given that the amount shielded is nearly two-thirds less than for two-parent households, as shown in the example above of the 48-year-old parent. Younger parents also have a lower asset protection than older parents. For example, a 65-year-old parent in 2020 could shield $9,400 ($3,000 for single parent) as compared to the 48-year-old parent. 

Simplified Pell Grant Eligibility

Revision

The biggest source of financial aid comes from the federal government, and the vast majority of it is awarded through the Pell Grant Program. It is also the main federal grant available to low- and middle-income families. The new legislation simplifies Pell Grant eligibility by ensuring that families that make less the 175% of the federal poverty level will receive the maximum award, which is $6,345 for the 2021-22 school year. The bill also increases the maximum amounts by $150, thereby bringing the maximum award to $6,495.

Impact

Legislators project that this change will enable 1.7 million more students to qualify for the award each year and make thousands more eligible for partial awards. However, the new criteria for Pell Grant eligibility will have little impact on middle-income families and no impact on high-income families, as these grants are typically awarded to those earning less than $60,000 per year.

Student Loans

Revision

Under the CARES Act, interest and payments on federal student loans have been waived until Jan. 31, 2021. However, the bill did not extend the interest and repayment waivers, nor does it contain any student loan forgiveness provisions, as many advocates and borrowers had hoped. Another notable change, which is an extension of the CARES Act provision, is that employers can continue to make tax-free payments toward their employees’ student debt, up to $5,250 through Jan. 1, 2026.

Impact

This provision allowing employers to make payments on their employees’ student loans can benefit parents who are trying to pay for college while repaying their own student loan debt, which is common for many middle- and high-income families. Also of note, the new administration has now extended the waivers for another nine months, until Sept. 30, 2021, and is expected to call on Congress to consider across-the-board student loan debt forgiveness.

In sum, families seeking financial aid will need to complete the FAFSA to qualify for federal grants and loans — and many institutional grants and scholarships as well. The new legislation changes some of the landscape around this crucial piece of the financial aid process. While the bill simplifies some aspects of the FAFSA, it has made other aspects more complicated. This is why it is more important than ever to understand the provisions and how they impact a family’s ability to pay for college.  

Contributors

Derenda King, CFP®, CDFA®

Financial Adviser, Urban Wealth Management

Derenda King is a CERTIFIED FINANCIAL PLANNER™ professional and financial adviser with Urban Wealth Management. Prior to becoming an adviser, Derenda worked in higher education and held various positions at local colleges and universities. Although she is no longer in a formal educational setting, she is still an educator at heart. She provides comprehensive, holistic financial planning services, with an added focus on late-stage college planning, and is passionate about educating, empowering and equipping individuals with the knowledge to make more informed decisions about their money.

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