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The Fafsa gets an Overhaul

The Department of Education is calling it the “most ambitious and significant redesign of the federal student aid application in decades.” Lynn O'Shaughnessy | May 01, 2023

Parents will have to wait longer this year to fill out the Free Application for Federal Student Aid. Traditionally, the FAFSA, which millions of families complete each year, is released Oct. 1. The U.S. Department of Education, however, recently announced that the FAFSA for the 2024–2025 school year won’t be available until sometime in December. Related: Most Colleges Don't Tell Students the True Cost of an Education The delay is being blamed on the significant overhaul of the FAFSA, which the Department of Education has characterized as the “most ambitious and significant redesign of the federal student aid application in decades.” Before the new FAFSA is available, the Department of Education has promised it will release information to all interested parties, which would include financial aid administrators, families, high school counselors, college consultants and financial advisors. The department made that announcement in a document that it published in March, entitled 2024–2025 FAFSA Roadmap. Related: I Bonds Hold Value for College Savings Even as Golden Era Fades Also in March, the department released a draft version of the new FAFSA and is soliciting comments on it. After the comment period ends on May 23, it will finalize the new version. One of the main goals of the FAFSA overhaul was to make it simpler to complete. The draft paper version of the FAFSA asks 46 questions, although some include multiple parts. The current FAFSA has 108 questions. Highlights of the Remodeled FAFSA Here are some highlights of the new FAFSA, which will generally be favorable for lower-income students and bad news for families with multiple children in college, small businesses and households with divorce. Change No. 1 The term Expected Family Contribution, which refers to how much the federal aid formula believes a household can pay for college, is being changed to Student Aid Index. In reality, most colleges charge families more than what their EFC would suggest is doable. I think the name change was unnecessary, but some people pushed for the change, saying that the term EFC caused some parents to feel badly since their EFC didn’t match what they could afford or that they assumed that they wouldn’t have to pay any more than their EFC. I don’t see how changing the name will help. Change No. 2 The FAFSA overhaul will be a financial hardship for families with more than one child in college. Traditionally, parents captured a 50% break on their EFC with two children in college and the discount increased to 66% with three. Here’s an example of how this has worked. Let’s say a household’s EFC is $40,000 when one child is in college. When a sibling starts college the next year, the EFC for each child would be $20,000. The unfortunate elimination of the multiple-child discount was made to honor retired U.S. Sen. Lamar Alexander (R-TN), who felt the discount wasn’t fair to parents with one child in college or who spaced their children farther apart. Change No. 3 The new FAFSA didn’t do any favors for small-business owners and family farms. In the past, these folks enjoyed the ability to exclude their business and farm assets from the FAFSA as long as they did not employ more than 100 full-time or full-time equivalent workers. That exemption will no longer exist. How those assets would impact a household’s Student Aid Index will depend on a family’s adjusted gross income as well as the value of the business or farm. The Iowa College Student Aid Commission recently released a study showing how financially punitive this change will be for some of those impacted. Change No. 4 The changes will also represent a hardship for some divorced parents since the traditional formula has made it easy for the custodial parent to be the one who has the lowest income and assets. Traditionally, the custodial parent, who completes the FASFA, has been the one where the student has lived the majority of a 12-month period ending on the day the FAFSA is filed. With the new formula, it’s the parent who has spent the most money on the child who will be the one completing the FAFSA, and that will often be the parent who is better off financially. Meanwhile, child support will be reported as an asset rather than as income. This change will reduce the impact on a student’s financial aid eligibility, since assets are assessed less harshly than income. Change No. 5 The FAFSA changes represent good news for grandparents and other generous souls who want to help with a child’s college costs. Starting with the 2024–2025 school year, qualified distributions that are made by grandparents, aunts, uncles and others will no longer be taxed as a child’s untaxed income, which traditionally has been assessed at 50%. Change No. 6 The federal financial aid formula will become more generous to lower-income students. The changes will allow an additional 1.7 million students to qualify for the maximum Pell Grant, which is the federal program for low- and middle-income students. The change in the formula will make an extra 555,000 students newly eligible for this federal grant, which is worth $7,395 for the 2023–2024 school year.


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