Now is the time to prepare for upcoming changes to FAFSA

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Congress recently passed the Consolidated Appropriations Act, known by most for providing those who qualified with an additional stimulus check worth $600. What most may not know is this 5,593-page bill also included 167 pages detailing changes to the Free Application for Federal Student Aid (FAFSA) with intentions to simplify the application.

These changes will be effective starting July 1, 2023, for the 2023-2024 academic year. While the form itself will be shortened, the language in the bill may add more complexity to certain families’ situations. Here are a few of the most important changes.

Semantics

When families submit the FAFSA, they receive their Student Aid Report (SAR), which details the output of their application. An important calculation on the SAR is the family’s Expected Family Contribution, or EFC. This number is calculated based on numerous factors including the family’s income, assets and family size. The EFC is basically the amount of money a university would expect the family to contribute toward the education each year.

This has caused some confusion in the past as families understood their EFC to be the amount they’d have to pay for the education. That is not the case, though. If the tuition for a given university is higher than a family’s EFC, that family still may have to pay more than their EFC indicates depending on how much need-based or merit-based aid the university offers. In an attempt to mitigate the confusion, the Expected Family Contribution will be replaced with the Student Aid Index (SAI). This may not make the process any simpler, but will hopefully reduce the misperception about the amount a family is expected to pay.

The more, the not merrier

Under the current law, a family’s EFC is adjusted based on how many students they have attending college. For example, if a family’s EFC was $40,000 with one student attending college, $40,000 would be used as the index for that student’s financial aid awards. If that family has another student attending college the next year, the EFC would be adjusted for each student, meaning each student would have $20,000 used as the index for financial aid awards.

This offers a planning opportunity for a student to take a gap-year if they’d have a sibling attending college that following year. By waiting one year to attend college, the same EFC would be split between the two students, potentially increasing the amount of aid the older student would receive compared to the aid received if they did not take a gap year. Once these new changes are implemented, each student will have the full index.

In the example described above, the EFC (or SAI at that time) will be $40,000 for each student, not $20,000. This effectively doubles the family’s EFC when more than one student attends college. This will have a huge impact on those families that would receive need-based aid with more than one student in college. It also eliminates the planning opportunity of a gap year.

Me or you?

Under current guidance, if a student’s parents are divorced or separated and not remarried, the “custodial” parent completes the FAFSA. For FAFSA purposes, custodial has a different meaning than one might think. It is separate from which parent has custodial rights. For the FAFSA, the custodial parent is the parent the student spends the most days with throughout the year. For instance, if a student spends 182 days with Parent 1 and 183 days with Parent 2, Parent 2 would complete the FAFSA.

This does not take the financial situation of the parents into account. With the new changes, the parent that will complete the FAFSA is now the parent that provides the most financial support. If both parents provide equal financial support, the parent with greater income will be required to complete the FAFSA. In most (but not all) cases, this means the parent that would have the higher EFC will be required to complete the FAFSA, which may increase the cost of college for some families.

Overall, the FAFSA will be shortened from 108 questions to 36 questions. The high number of questions on the form was a huge barrier for families to complete the application. Hopefully, this will encourage more families to submit the form and have the potential to receive aid.

While the reduction of questions on the form may be a win, some families may lose with the new changes as described above. The implementation of these changes may seem far away, but keep in mind FAFSA uses the prior, prior year tax returns. So, in 2023, you will use your 2021 tax return to complete the application. In this ever-changing college funding landscape, it is important control what you can control.

Here are a few quick tips:

  1. Determine your family’s budget before shopping for/visiting schools.
  2. File the FAFSA as early as possible.
  3. Review your Student Aid Reports in detail and understand the source of all types of aid offered on the reports.

Matt Smartt is a Certified Financial Planner and Certified College Funding Specialist at Henrickson Nauta Wealth Advisors in Belmont. He helps families navigate and make the most out of the late-stage college planning process.

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