Navigating the college application process is only made more complex by the financial aid system. Understanding how much financial aid you might receive is no easy task and for students entering college in the Fall of 2024, the situation will be further complicated by major changes to the financial aid system now being implemented by the FAFSA Simplification Act.
The amount of financial aid you are eligible for depends on a myriad of factors. Some aid is based on merit, like academic and athletic scholarships. Some aid is based on financial need, like grants from federal and state governments or grants from the schools themselves. The tricky part is determining the amount of your financial need.
Here is how it is calculated:
Cost of Attendance – sticker price of attendance including room, board, etc.
Minus
Student Aid Index – amount you can supposedly pay on your own, was the EFC
Equals
Financial Need – amount of need-based aid like grants or loans you may receive
The part of this formula affected by the FAFSA Simplification Act is the Student Aid Index (SAI), formerly referred to as the Expected Family Contribution (EFC). It modifies the way the government determines how much of the cost of attendance your family ‘should’ be able to pay.
Both the old EFC and new SAI are determined using the information provided on the FAFSA (Free Application for Federal Student Aid). On it, you must report certain income and assets of both the parents and student which are used to calculate your SAI.
The new law changes some of the assets and income that must be reported on the FAFSA when calculating your SAI. As a result, your SAI may be higher or lower than it would have been before, which directly affects how much need-based aid for which you will qualify.
The good news is that with some advanced planning, you can work to minimize the assets and income reported on the FAFSA, thus increasing your potential for need-based aid. Here are some techniques to help do just that:
File A FAFSA Every Year
It is worth filing a FAFSA each year your student will be in school even if you are skeptical that you will qualify for financial aid. To qualify for low-interest federal loans like the Stafford loan, you must complete the FAFSA annually. Also, keep in mind that your financial need is determined by subtracting your SAI from the cost of attendance at the school.
For example, if the cost of attendance is $30k and your SAI is $50k, there is $0 calculated financial need but if the cost of attendance is $80k per year and your SAI is $50k, your financial need would be $30k. A high-priced school might be willing to grant your student help at covering their sticker price but only if you file the FAFSA first.
Know Your FAFSA Years
The FAFSA always refers to your income from two years earlier. So, for the 2024 academic school year, the FAFSA will be based on your 2022 income tax return. Identify the tax years that will be relevant to your family based on how many kids you have and the years they will be in school. Keep these years in mind when you make financial decisions that will impact your income. For example, you might avoid taking money out of a retirement plan, selling assets at a capital gain, or exercising stock options in these years because it will increase the taxable income you have to report on the FAFSA. Higher income means a higher SAI, and thus a lower financial need.
Consider What Assets Count
The SAI formula excludes certain income and assets so it is crucial to carefully complete your FAFSA so you don’t overreport assets. For example, retirement accounts like 401(k)s, IRAs, and Roth IRAs are excluded from financial aid calculations. Equity in your primary home and life insurance values are also excluded. You must report other things like money in bank accounts, taxable brokerage accounts, 529 plans, and equity in real estate other than your primary residence. Starting now, you are also required to report the value of a small business you own.
With this information, you might consider a strategy like transferring money in the bank (counted asset) into a Roth IRA (excluded asset) assuming you qualify to use a Roth. You might also open and fund a Roth IRA for your student if they have earned income.
Likewise, if you have student money set aside for a purchase like a computer or a car, you might proceed with making that purchase before you file the FAFSA to reduce the reportable assets.
New Technique: Increase Salary Deferrals
The old FAFSA rules required that parents include income listed on their tax returns plus any non-taxed income like money that was deferred into company retirement plans like a 401(k). Under the new rules, only income on the tax return is reportable so things like retirement contributions won’t get added back. This means that during your FAFSA years, increasing the amount of money going into tax-deductible retirement plans will reduce the income used in financial aid calculations.
New Technique: Choose Your 529 Owner Carefully
529 College Savings Plans are typically opened by a parent for the benefit of their child. These kinds of 529s get reported as parent assets in aid calculations. Under the new rules, a 529 plan owned by someone other than you or your student will not be reported on the FAFSA even if the money is being used for your student.
Consider asking a relative like a grandparent, aunt, uncle, or even a trusted friend to be the owner of your child’s 529 if you want to maximize financial aid. Of course, it is key that you trust the owner of the account to hold the money safely and use it only for your child. As the official owner of the account, they won’t be required to do that; they can take the money out and do anything they want with it so be sure to weigh this risk before titling college funds in someone else’s name.
Fortunately, you can still make contributions to the 529 for your child even if you aren’t the owner. If you want to claim a state tax deduction for the contributions, you’ll need to make sure your state allows that. Most states allow any contributor to take a state tax deduction but 10 states only allow it for account owners.
Conclusion
There are several other changes coming with the new rules.
For example, 50% of a student’s income was formerly counted in financial aid calculations but going forward only student income over $9,400 will be subject to the 50% assessment. The rules are changing on discounts for people with multiple kids in college. Pell Grant access is being expanded and the rules for low-income and asset households are changing as well.
To allow time to implement these changes, the FAFSA will not open on October 1st as usual this year. It is slated for release in December and to get the best chance at first-come, first-serve aid, you’ll want to get your FAFSA in as early in the new year as you can. Until then, consider these techniques for minimizing your Student Aid Index and maximizing your need-based financial aid.
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