How FAFSA Simplification Will Change Financial Aid Eligibility

The Consolidated Appropriations Act of 2021 enacted changes in the Free Application for Federal Student Aid, or FAFSA, to simplify the form. This 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. The FAFSA simplification changes were scheduled to be effective starting with the 2023-2024 FAFSA, but were delayed in June 2021. The changes are expected to now be effective beginning with the 2024-2025 FAFSA.

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 current FAFSA focuses 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 new FAFSA changes this, no longer providing families with any benefit from having children overlap in college.

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

The Income Protection Allowance (IPA), which shelters a portion of parent income, is currently reduced by a factor based on the number of children in college at the same time. For example, the IPA is reduced by $3,310 per child in college on the 2021-2022 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, 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

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. 

Federal Pell Grants

Normally, a student will be eligible for the Federal Pell Grant if their student aid index is less than or equal to 90% of the maximum Pell Grant.  The student’s Federal 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 2020 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 $38,790 if the student is an only child, with an additional $10,080 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 $38,010 if the student is an only child, with an additional $7,840 allowed in AGI for each sibling.

The AGI cutoff on eligibility for the Pell Grant is $56,030 for dependent students with single parents, plus $14,560 per sibling. For dependent students with two parents, the AGI cutoff $59,730 plus $12,320 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. 

If the parents have an informal separation, they will be considered to still be married, following IRS rules. 

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. This will be based on financial support provided during the prior-prior tax year, not 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. 

• This means children must live with the parent for more that half the tax year, not just based on financial support. In particular, if the custodial parent has remarried, the stepparent’s children from previous marriages will not count, even if they 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.

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.
• 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.
• 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. 
• 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.

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.

Other Significant Changes

Other key changes include:

• Colleges will no longer be able to set the room and board component of the cost of attendance to zero if the student lives at home with their parents.
• The U.S. Department of Education will be able to regulate the cost of attendance for the first time, except for tuition and fees.
• 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 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.

Unfortunately, the simplified FAFSA does not fix the disappearing asset protection allowance problem.