How FAFSA Simplification is Changing Financial Aid Eligibility

November 15, 2023

The Consolidated Appropriations Act of 2021 enacted changes in the Free Application for Federal Student Aid, or FAFSA, to simplify the form. FAFSA simplification will not only make the form easier to fill out by eliminating two-thirds of the questions, but it will also affect the determination of financial need for low-, middle- and high-income students.

After some delays in implementation, the simplified FAFSA will be the standard beginning with the 2024-2025 FAFSA, and will be available for applicants by December 31, 2023. If you’ll be filing the 2024-2025 FAFSA, this article can help you prepare and understand what has changed compared to the previous version of the FAFSA.

FAFSA Start Date

The start date for the 2024-2025 FAFSA will be delayed due to the complexity of simplifying the FAFSA. The 2024-2025 FAFSA will become available for students and families to complete and submit online by December 31, 2023, instead of on October 1, 2023.

The FAFSA is expected to return to an October 1 start date with the 2025-2026 FAFSA.

Fewer Questions on the FAFSA

The number of questions on the FAFSA is decreasing from 108 to 46, cutting the length of the form by almost two-thirds. Some applicants will need to answer even fewer questions due to intelligent skip logic and better alignment of the form with federal income tax returns.

The IRS Data Retrieval Tool (DRT) will be replaced with IRS Direct Data Exchange (DDX), which will be mandatory. By filing the FAFSA, applicants and their spouse/parents will consent to the IRS transferring federal tax information to the FAFSA, as authorized by the Future Act.

Because of this, an FSA ID will be required for all applicants, spouses and parents. Parents who are not U.S. Citizens or permanent residents will be able to get an FSA ID even though they do not have a Social Security Number.

Fewer FAFSAs will be selected for verification because of a reduction in the number of questions and because more data will be transferred from the IRS.

More Colleges Can Be Listed on the FAFSA

The new FAFSA will allow students to list as many as 20 colleges, up from 10 colleges previously.

Students who need to list more than 20 colleges can do so by waiting until they receive the FAFSA Submission Summary (the new name for the Student Aid Report, or SAR) to delete colleges from their FAFSA and replace them with new colleges.

Number of Children in College

There are two important changes relating to the number of children in college (NIC). One increases aid eligibility while the other decreases it when there are two or more children in college at the same time.

The previous FAFSA focused on cash flow more than wealth, reasoning that parents who have two children in college at the same time do not have twice as much money available to pay for college. The simplified FAFSA changes this, no longer providing families with any benefit from having children overlap in college.

More than half of families will be affected by this change. About a fifth of families have one year of overlap, about a quarter have two years of overlap, and 14% have three or four years of overlap.

On the previous FAFSA, the Income Protection Allowance (IPA), which shelters a portion of parent income, was reduced by a factor based on the number of children in college at the same time. For example, the IPA was reduced by $3,610 per child in college on the 2023-2024 FAFSA. Using the simplified FAFSA, the IPA will no longer be reduced when two or more children are enrolled in college simultaneously. This will yield a higher IPA, sheltering more parent income from need analysis.

However, the simplified FAFSA will also no longer divide the parent contribution portion of the Student Aid Index (previously, Expected Family Contribution or EFC) by the number of children in college. This will yield a higher Student Aid Index when there are two or more children in college at the same time.

This change will not yield much of a difference in the student aid index for low-income students, because half of zero is still zero. But it will decrease aid eligibility for middle- and high-income students when there are multiple children in college.

Income Protection Allowance

The parent income protection allowance will increase by 20%, while the student income protection allowance will be 35% higher, except for students who are single parents, who will benefit from a 60% increase in the income protection allowance.

This change increases the parent income protection allowance by about $4,000 to $8,000 for most families.

It increases the income protection allowance for dependent students by about $2,400, for independent students by about $3,800 to $6,100, and for single parent students by about $6,500.

This change reduces the student aid index by up to about $5,000 for dependent students and up to about $3,000 for independent students.

Changes to Income Reported on FAFSA

Certain types of untaxed income, such as cash support and money paid on the student’s behalf, will no longer be reported on the FAFSA. Cash support can occur, for example, when a grandparent gives a gift to their grandchild to help them pay for college or when the family takes a qualified distribution from a grandparent-owned 529 college savings plan.

Other types of income that will no longer be reported on the FAFSA include workman’s compensation and veterans’ education benefits.

Child support received will be reported as an asset on the FAFSA, instead of as untaxed income. This yields a more favorable treatment.

The student aid index will be allowed to go negative by as much as -$1,500. If a dependent student’s parent is not required to file a federal income tax return, the student aid index will be automatically set at negative $1,500. This does not affect eligibility for federal student aid. Student aid will still be capped at the college’s cost of attendance.

Federal Pell Grant Eligibility

The U.S. Department of Education has announced that the updates to the student aid calculations will expand available aid for many low income students. In fact, they estimate that 610,000 more students from low income backgrounds will receive Pell Grants under the new FAFSA rules, and that nearly 1.5 million more students will receive the maximum Pell Grant.

Normally, a student will be eligible for the Pell Grant if their student aid index is less than or equal to 90% of the maximum Pell Grant. The student’s Pell Grant will be equal to the difference between the maximum Pell Grant and the student aid index.

However, there is a second set of formulas based on a comparison of adjusted gross income (AGI) with a multiple of the poverty line based on the state of residence and family size.

A student is eligible for the maximum Federal Pell Grant if:

The student’s parents (if the student is a dependent student) or the student and the student’s spouse (if the student is an independent student) were not required to file a federal income tax return.
AGI is less than or equal to 225% of the poverty line for single parents, 175% of the poverty line otherwise.

The student aid index is automatically set to zero if the student is eligible for the maximum Pell Grant.

If the student is not eligible for a Pell Grant under these rules, then the student will be eligible for a minimum Pell Grant (10% of the maximum Pell Grant) if:

If the student is a dependent student, parent AGI is less than or equal to 325% of the poverty line for single parents, 275% of the poverty line otherwise.
If the student is an independent student, student AGI is less than or equal to 400% of the poverty line for students who are single parents, 350% of the poverty line for students who are parents but not a single parent, and 275% of the poverty line for students who are not parents.

Incarcerated students will once again be eligible for the Federal Pell Grant.

Using 2023 poverty lines for the continental U.S., a dependent student whose parent is a single parent will be eligible for the maximum Pell Grant if AGI is less than or equal to $44,370 if the student is an only child, with an additional $11,565 allowed in AGI for each sibling.

A dependent student whose parent is not a single parent will be eligible for the maximum Pell Grant if AGI is less than or equal to $43,505 if the student is an only child, with an additional $8,995 allowed in AGI for each sibling.

The AGI cutoff on eligibility for the Pell Grant is $64,090 for dependent students with single parents, plus $16,705 per sibling. For dependent students with two parents, the AGI cutoff is $68,365 plus $14,135 per sibling.

Divorced or Separated Parents

There are several changes to the treatment of dependent students whose parents are divorced or separated, to better align the FAFSA with federal income tax returns.

The parent responsible for filing the FAFSA will be based on whichever parent provides more financial support to the student, not the parent with whom the student resides. It is not clear whether this will be based on financial support provided during the prior-prior tax year or, the 12 months ending on the date the FAFSA is filed.

Family size will include the student and parent. However, children and other people will be counted in family size only if they are dependents according to IRS rules.

Determining whether a child is counted as a dependent is not just based on financial support; children must live with the parent for more than half the tax year. For example, if the custodial parent has remarried, the stepparent’s children from previous marriages will not count, even if the parents provide more than half of their support, unless they live with the stepparent.
In addition, the children must be under age 19 (age 24 if a full-time student). Age is measured against December 31 of the tax year, not the award year.
There is no requirement that the financial support or residence continue during the award year.
Financial aid received by the student will no longer count as part of that student’s own support.
Multiple support agreements may complicate the determination of whether a child is considered to be a dependent, with special rules to be determined by the U.S. Department of Education.

Changes to Financial Aid Appeals

There are several changes to financial aid appeals, also known as a professional judgment review. The most significant changes are:

Colleges can no longer have a policy of denying all financial aid appeals. Every appeal must be considered on a case-by-case basis.
Special circumstances can include unusual business, investment and real estate losses, as well as severe disability of the student, parent or spouse.
Dependency overrides are assumed to continue for the duration of the student’s enrollment, unless there is information to the contrary. Colleges must also consider a request for a dependency override within 60 days of the start of the student’s enrollment.
Income earned from work can be set to zero if the student or parent receives or applies for unemployment benefits within the last 90 days. Colleges may use older documentation when there is no conflicting information.
Determinations of homelessness must be made without regard to the reasons why the student is unaccompanied and/or homeless.
If the parents refuse to complete the FAFSA, the student can get unsubsidized Federal Direct Stafford Loans even if the parents do not cut off financial support to the student. However, the student will not be eligible for any other federal student aid.

Changes to the Cost of Attendance

There are several changes to the definition of the cost of attendance.

The U.S. Department of Education will be able to regulate the cost of attendance for the first time, except for tuition and fees.
Room and board will now be known as housing and food.
Colleges can no longer set the housing allowance of the cost of attendance to zero if the student lives at home with their parents.
The food allowance must be based on at least three meals per day, not two.
Transportation costs must now include travel between home, school and work, not just home and school. Colleges can choose to include other transportation costs, such as conferences, field trips and medical residency reviews, if they are part of the student’s program of study.
The cost of attendance must include actual loan fees for federal loans, but cannot include loan fees for private student loans.
The cost of attendance may include the cost of the rental or purchase of a personal computer, even if the student is not enrolled on at least a half-time basis.

Applicants Exempt from Asset Reporting

The income threshold for determining whether an applicant is exempt from asset reporting has increased from $50,000 to $60,000.

Instead of basing eligibility on Schedule 1, the type of tax return test will consider whether Schedules A (itemized deductions), B (interest or dividend income), C (business income or loss greater than $10,000), D (capital gains and losses), E (income or loss from rental real estate, royalties, partnerships, S corporations or estates and trusts), F (farm income or loss) or H (household employment expenses) were required.

Unfortunately, the simplified FAFSA does not fix the disappearing asset protection allowance problem. According to the latest information from the Department of Education, the asset protection allowance for a two-parent household where the older parent is 48 years of age is $6,600 for 2024-2025. This amount can be higher or lower depending on the age of the older parent.

Other Significant Changes to the Simplified FAFSA

Other key changes include:

Emergency financial aid funds for a component of the cost of attendance will no longer reduce the student’s financial need.
The allowance for state and other taxes has been dropped.
The FAFSA will have a new question about the student’s race/ethnicity. This question will not affect eligibility for need-based financial aid.
The question about student gender does not affect eligibility for need-based financial aid. Like the question about race/ethnicity, it is used solely for aggregate demographic analysis purposes.
The new FAFSA bans charging a fee to complete the FAFSA. Paid preparers will no longer be allowed.
The Selective Service registration requirement has been repealed.
The suspension of aid eligibility for students who have been convicted for the sale or possession of controlled substances while receiving federal student aid has been repealed.