Sneak Peek: Federal Student Aid Application Changes

October is right around the corner and for the past several years that meant the Free Application for Federal Student Aid (FAFSA) was available to complete. However, this year, the 2024-2025 FAFSA will not be available until December 1, 2023 due to the “complexity of simplifying” the form. Does anyone else see the humor in the phrase complexity of simplifying? The October 1 start date is expected to return with the 2025-2026 FAFSA.

Here are some of the changes coming to the new, “simplified” 2024-2025 FAFSA form. As you will see, some are just changes in semantics; some will have a significant impact on the financial aid results.

Changes to the FAFSA Application

• The number of questions will decrease from 108 to 46.

• The IRS Data Retrieval Tool (DRT) will be replaced with the IRS Direct Data Exchange (DDX) and its use will be mandatory!

• A Federal Student Aid (FSA) ID will be required for all applicants, spouses, and parents.

• Up to 20 colleges can be listed.

Changes to Policies and Requirements

Eligibility based on number of family members in college
The prior FAFSA gave a benefit to families with two or more children in college, with the focus on cash flow, reasoning that parents who have two children in college didn’t have twice as much money to pay for college. The new simplified FAFSA changes this and no longer provides the same benefit for having multiple children in college at the same time.

Calculation of the Student Aid Index
The Student Aid Index (SAI) (formerly the Expected Family Contribution or EFC) will no longer divide the parent contribution by the number of children in college; this will result in a higher SAI. The SAI will also be allowed to be negative by as much as -$1500.

Income Protection Allowance no longer reduced
The Income Protection Allowance (IPA), a portion of parent income which is sheltered, was reduced by a factor based on the number of children in college at the same time. (Federal student aid is probably not the first thing that comes to mind when thinking of IPA, but you may want an IPA when reading these changes.) With the new FAFSA, the IPA will no longer be reduced; this will result in more parental income being sheltered. However, the parent IPA will be a higher percentage than in the past.

How these three changes will overall affect that bottom line will take some analysis.

Changes to Income Reporting

Certain types of income will no longer need to be reported on the FAFSA. Qualified distributions from a grandparent-owned 529 plan will no longer need to be reported. This is a substantial change and will make reviewing the ownership of 529 plans and the impact on the FAFSA a major consideration in college planning.

Per the Federal Department of Student Aid, “A significant change will be the reduction of untaxed income items included in the need analysis, which will include only the following:

1. Deductions and payments to self-employed SEP, SIMPLE, Keogh, and other qualified individual retirement accounts excluded from income for federal tax purposes, but excluding payments made to tax-deferred pension and retirement plans, paid directly, or withheld from earnings, which are not on the federal tax return.

2. Tax-exempt interest income.

3. The untaxed portion of individual retirement account distributions (excluding rollovers).

4. The untaxed portion of pensions (excluding rollovers).

5. The foreign earned income exclusion.

Other types of untaxed income have been eliminated from the need analysis, including housing, food, and living allowances paid to members of the military and clergy; veterans non-education benefits; and the general categories of “other untaxed income” and “money received by or paid on behalf of the student.””

Changes to Assets Reporting

There are significant changes to the assets reported and used in the SAI calculation, which unfortunately are not favorable to business or farm owners.

Per the Federal Department of Student Aid:

• Assets now include the annual amount of child support received (previously included as income in the EFC formula). The recipient of the child support will be asked to report the amount received in the last complete calendar year.

• The net worth of a business is no longer limited to those with more than 100 full-time employees. Applicants will be asked to report the net worth of all businesses, regardless of the size of the business.

• The net worth of a farm now includes the value of a family farm. However, the value of a family’s primary residence is still excluded. The net worth of a farm may include the fair market value of land, buildings, livestock, unharvested crops, and machinery actively used in investment farms or agricultural or commercial activities, minus any debts held against those assets.

• For dependent students, education savings accounts will only be counted as a parental asset if the account is designated for the student. Previously, if a parent had education savings accounts for their other children, the value of those was also required to be counted.

The law specifically highlights certain changes to assets or income as items that the financial aid administrator can adjust using professional judgment. These include:

Excluding and Adjusting Assets
• Excluding from family income or assets any proceeds or losses from a sale of farm or business assets of a family resulting from a foreclosure, forfeiture, bankruptcy, or liquidation;
• Adjusting assets to consider additional costs incurred by the student because of a disability of the student, their dependent or spouse, or their parent or guardian.

Divorced or Separated Parents
The parent responsible for filing the FAFSA is not necessarily the parent with whom the student resides but will be based on whichever parent provides more financial support to the student.

Family Size
The family size will include the parent and child. Other children and family members will only be counted if they are dependents according to IRS rules.

Cost of Attendance
The US Department of Education will be able to regulate the cost of attendance, except for tuition and fees. Room and board will now be known as housing and food.

What You Should Do Next

The Federal Student Aid website is where to begin completing the FAFSA when the new version is available December 1, 2023. Do not use any other websites or pay any fees to complete the form. The new FAFSA bans charging a fee to complete the FAFSA. Paid preparers are no longer allowed.

The draft FAFSA form and instructions are not yet available for review. Once the final form and instructions are released, it may be wise to meet with a financial planner, especially if you have children in high school or younger, to review how certain assets are held and their impact on financial aid. In addition, since the FAFSA is always based on a tax return two years prior (i.e., the 2024-2025 FAFSA will be based on the 2022 tax return), it is wise to meet with a financial planner, especially in the student’s freshman or sophomore year of high school, to discuss financial aid strategies.

The information contained in this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional for your specific situation.

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Profile photo of Penny Wasem, CPA, CFP, PFS, owner of Lifetime Financial Planning Solutions in Lancaster, Ohio.

By Penny Wasem, CPA, CFP, PFS

Penny L. Wasem is the owner of Lifetime Financial Planning Solutions, LLC. A summa cum laude graduate of Ohio University, Penny earned a Bachelor of Business Administration with focus in accounting and mathematics. She serves on the board of The Fairfield Medical Center Foundation, is a member of the Investment Committee of The Fairfield County Foundation and has been active on many non-profit boards in the community. Penny lives in Lancaster with her husband Eric Hubbard and is parent to Clark and Olivia Hubbard.