The pandemic relief law the federal government passed last December included some significant changes to the college financial aid application process.
Here is a summary of some of the key provisions, together with some implications for families with children or grandchildren approaching college age. Most go into effect July 1, 2023, but the new Free Application for Federal Student Aid (FAFSA) form will be available Oct. 1 of this year.
• The maximum number of questions on the new FAFSA form has been reduced from 108 to 36. This had been one of the biggest barriers to students completing the form and will surely be welcomed by anyone who has gone through the exercise.
• The Expected Family Contribution (EFC) calculation has been renamed the Student Aid Index (SAI) and now applies to each student rather than a family. The calculation remains almost the same, but the name change is meant to indicate eligibility rather than affordability. The SAI can now be as low as -$1,500 (as compared to $0 for the EFC), reflecting the focus on providing extra help for lower-income students.
• Distributions from grandparent-owned 529 accounts will no longer add to the student’s income for SAI calculations.
• Pell Grant eligibility will be expanded and based on income and family size. Students will be able to find out in advance whether they are eligible before even having to apply.
• Colleges now will be required to list all costs of attendance on their websites instead of only tuition and fees, making it easier for students to plan for the true full cost of attending college.
The change from family EFC to individual SAI will have a deleterious effect on families with multiple children in college at the same time. For example, if Aaron is starting his junior year in college in 2023, when his sister Brenda becomes a freshman, the family will be responsible for both his and her SAIs that year. Under the old rules, the EFC would be divided by the number of overlapping students (in this case two). That means the family would be eligible for much less aid than it would have been.
Ironically the CSS Profile – used in place of the FAFSA by many private universities – uses the same rule as the old EFC. This could make private schools cheaper than state schools for parents in this situation. It’s not clear why this change was implemented; it might have been an oversight. But for now, parents with multiple college-age children need to be aware of it.
On the positive side, the elimination of income from 529 plans owned by grandparents makes them even more valuable than parent-owned 529 plans for maximizing financial aid. This change also necessitates a change in 529 distribution strategy. Previously the optimum approach was to use the parents’ 529 for the first two years of college and the grandparents’ 529 for the last two years. Starting in 2023, it will be better to deplete the grandparents’ 529 before taking any distributions from the parents’ plan.
Because higher-education costs continue to rise much faster than the long-term rate of inflation, college will continue to be unaffordable for many families, even with aid. Improving the amount of aid and the process for collecting it is beneficial. But more needs to be done to rein in the costs.
Los Altos resident Artie Green is a Certified Financial Planner and founder of Cognizant Wealth Advisors. For more information, visit cognizantwealth.com.
