Pandemic Relief Package Simplifies FAFSA
By Mark Kantrowitz
The COVID-19 relief legislation simplifies the Free Application for Federal Student Aid (FAFSA), reducing the form from 108 questions to about three dozen questions.
Even as Congress simplified some aspects of the financial aid form and formula, it made other aspects more complicated. Congress also didn't fix the disappearing asset protection allowance problem or provide a permanent fix to the FAFSA data sharing issue that affects private scholarship providers.
The FAFSA Simplification Act was included in the Consolidated Appropriations Act of 2021, taking up 167 pages of the 5,593-page bill. The changes will be effective starting on July 1, 2023 for the 2023-2024 academic year. This will give the U.S. Department of Education time to implement the changes.
The legislation replaces the Expected Family Contribution (EFC) with the Student Aid Index (SAI).
This name change does not actually simplify anything. But, it addresses a concern that the EFC is a bit of a misnomer, misleading families about the true cost of college. Some families think that the EFC is all they'll have to pay for college.
Most families pay more than the EFC since most colleges do not meet full financial need. Most colleges that claim to meet full need do so by including loans in the financial aid package. Of the six dozen colleges that replace loans with grants in financial aid packages, all substitute their own financial aid formulas for the federal financial aid formula and do not meet full need according to the federal formula.
Which Parent will be Responsible for Completing the FAFSA?
If a dependent student's parents are married, either parent can complete the FAFSA.
If a dependent student's parents are unmarried but lived together, they are treated the same as married parents.
If a dependent student's parents are divorced or separated, but not remarried, the parent who provides the greater portion of the student's financial support will be responsible for completing the FAFSA. This is a change from the current method, where the parent with whom the student lived the most is responsible for completing the FAFSA with ties broken by whichever parent provides more financial support.
Current guidance issued by the U.S. Department of Education indicates that the parent with greater income is responsible for completing the FAFSA when both parents provide equal financial support to the student. This guidance is likely to continue to apply.
Changes in the Definition of Cost of Attendance
There are several changes in the definition of the cost of attendance:
- The allowance for the rental or purchase of a personal computer will no longer require the student to be enrolled on at least a half-time basis.
- The allowance for transportation expenses is specified as including travel between home, school and work, but the actual allowance will remain subject to the discretion of the college financial aid administrator.
- The allowance for miscellaneous personal expenses will require at least half-time enrollment.
- The allowance for room and board will be split into a separate allowance for housing and a separate allowance for meals.
- Colleges may no longer set the housing allowance to zero for a dependent student living at home with their parents.
- The allowance for meal plans must be based on an assumption of three meals a day.
- There will be two new housing allowances, bringing the total to six.
- The housing allowances for students living in institutionally owned or operated housing must be based on the average or median housing charges, whichever is greater.
- The inclusion of an allowance for loan fees on federal student and parent loans will be mandatory and no longer at the option of the institution. It will be based on the actual cost of the loan fees and not an average cost or allowance.
- The allowance for loan fees for private student loans has been removed.
- The inclusion of the cost of obtaining professional licensing, certification or first professional credentials will be mandatory and no longer at the option of the institution.
- The U.S. Department of Education will be able to issue regulations concerning all aspects of the cost of attendance other than tuition and fees.
The six housing allowances include allowances:
- For students without dependents living in institutionally owned or operated housing
- For students with dependents living in institutionally owned or operated housing (new)
- For students living off campus and not in institutionally owned or operated housing (new)
- For dependent students living at home with their parents
- For students living in housing on a military base
- For all other students
The legislation adds language to Part D of the Higher Education Act of 1965 to explicitly cap the amount of financial aid at the cost of attendance. Part D of the Higher Education Act of 1965 authorizes the Direct Loan Program. However, the use of a negative student aid index may allow other types of financial aid to exceed the cost of attendance for students with extremely low income.
Colleges will be required to disclose all of the elements of the cost of attendance on their web site. In particular, this information must be disclosed wherever the college lists tuition and fees on its website. Previously, they were required to disclose a subset of the elements of the cost of attendance.
Changes in the Definition of Untaxed Income and Benefits
The definition of untaxed income and benefits has been streamlined, with several types of untaxed income omitted.
Untaxed income and benefits will include the following:
- Deductions and payments to retirement plans that are delineated on the federal income tax return.
- The untaxed portion of IRA and pension distributions.
- Tax-exempt interest income
- Foreign income that is exempt from U.S. federal income tax or for which a foreign tax credit is received.
Untaxed income and benefits will no longer include the following:
- Child support received
- Workman's compensation
- Veterans' education benefits
- Housing, food and other allowances for military and clergy
- Cash support and any money paid on the student's behalf
- Other untaxed income and benefits
However, the definition of assets will include the annual amount of child support received. This is a more favorable treatment of child support received, since income is assessed more harshly than assets.
Excludable income, which may be subtracted from income, will include:
- Federal Work-Study wages
- The American Opportunity Tax Credit (AOTC) and Lifetime Learning Tax Credit (LLTC)
- The taxable portion of a grant or scholarship that was included in adjusted gross income (AGI)
Changes in the Definition of Independent Student
In the criteria for independent student status, "married" has been replaced with "married and not separated."
The criteria for independent student status will include situations in which the student is unable to contact their parents or where contact with the parents poses a risk to the student, such as human trafficking, refugee or asylum status, parental abandonment or estrangement and student or parent incarceration.
Changes to the Income Protection Allowance
The income protection allowance (IPA) shelters a portion of income based on a basic living expense standard. There have been several changes to the IPA for parents and students.
- The IPA will no longer be reduced by a figure based on the number of children in college. This will yield a higher IPA, sheltering more income from the financial aid formula.
- For parents, the 2023-2024 IPA is set at 20% higher than the 2021-2022 IPA.
- For dependent students, the 2023-24 IPA is $9,410, a 35% increase over the 2021-2022 IPA of $6,970.
- For independent students without dependents other than a spouse, the IPA is $14,630 if single and $23,460 if married, an increase of 35%.
- For independent students with dependents other than a spouse, the IPA for married students is 35% greater and the IPA for single students is 60% greater.
The IPA will be adjusted for inflation based on CPI-U between April 2020 and April of the year prior to the beginning of the FAFSA's award year, and then rounded to the nearest multiple of $10.
Asset Protection Allowance Remains Unchanged
Congress didn't fix the problems with the asset protection allowance, which shelters a portion of parent assets.
The asset protection allowance (APA) remains unchanged, with the maximum APA set at $10,500 in 2023-2024, the same as the maximum APA in 2021-2022.
The asset protection allowance is gradually disappearing due to quirks in the formula. The maximum asset protection allowance has dropped from a peak of $84,000 in 2009-2010 to $10,500 in 2021-2022. It may disappear entirely in just a few more years.
The assessment of remaining assets after subtracting the asset protection allowance also remains unchanged.
- For dependent students, the assessment rate is a flat 20%
- For independent students without dependents other than a spouse, the assessment rate is 20%
- For independent students with dependents other than a spouse, the assessment rate is on a bracketed scale, with a top bracket of 3.29%.
- For parents, the assessment rate is on a bracketed scale, with a top bracket of 5.64%.
Big Change in the Treatment of Multiple Students Enrolled in College at the Same Time
Although the FAFSA will still collect information about the number of family members enrolled in college on at least a half-time basis at the same time as the applicant, the FAFSA will no longer divide the parent assessment by the number of family members in college.
Similarly, the family contribution for independent students will no longer be divided by the number of family members in college.
This change will significantly reduce the amount of financial aid for middle- and high-income families who have multiple family members enrolled in college at the same time. It will not affect low-income applicants who already have a zero student aid index.
This change appears to be intentional and not due to an oversight.
Changes to the Simplified Needs Test
The Simplified Needs Test has a new name: Applicants Exempt from Asset Reporting.
The criteria for Applicants Exempt from Asset Reporting have changed. If any of the following criteria apply, the applicant will be exempt from reporting assets on the FAFSA.
- The applicant qualifies for an Automatic Zero Student Aid Index.
- The applicant is a dependent student who has a calculated student aid index that is negative, if the parents' adjusted gross income is less than $60,000 and the parents do not file schedules A, B, D, E, F or H in the second preceding tax year and either do not file Schedule C or file Schedule C with net business income that is no more than a $10,000 gain or loss.
- The applicant is an independent student who has a calculated student aid index that is negative, if the student's and spouse's (if applicable) adjusted gross income is less than $60,000 and the student and spouse (if applicable) do not file schedules A (itemized deductions), B (interest and dividends), D (capital gains and losses), E (income or loss from rental real estate, royalties, partnerships, S corporations, estates and trusts), F (farm income and expenses) or H (household employment taxes) in the second preceding tax year and either do not file Schedule C or file Schedule C with net business income that is no more than a $10,000 gain or loss.
- The applicant or the applicant's parent or spouse, as applicable, received a means-tested federal benefit in the previous 24-month period. These means-tested federal benefits include SSI, SNAP, TANF, WIC, Medicaid and (new) federal housing assistance. It is not clear why the Free and Reduced-Price School Lunch is not included in the law, but the U.S. Department of Education can choose to include it.
There are exceptions to the asset reporting exemption for a dependent student if the student's parents do not reside in the U.S. or a U.S. territory or if the parents do not file taxes in the U.S. or a U.S. territory, unless they are not required to file U.S. federal income tax returns because of low income.
Automatic Zero Student Aid Index
The student aid index will be automatically set to zero if the applicant is eligible for the maximum Federal Pell Grant and the calculated student aid index is greater than zero.
The financial aid formula will allow a calculated student aid index that is less than zero, setting the minimum student aid index at -$1,500 (negative $1,500). If the applicant and the applicant's parents or spouse, as applicable, are not required to file a federal income tax return in the second preceding tax year, the student aid index is automatically set at -$1,500.
New Pell Grant Eligibility Criteria
The law establishes new criteria for Federal Pell Grant eligibility based on a multiple of the poverty line.
- A dependent student will be eligible for the maximum Pell Grant if the student's parents are not required to file a federal income tax return in the second preceding tax year.
- An independent student will be eligible for the maximum Pell Grant if the student and the student's spouse (if applicable) are not required to file a federal income tax return in the second preceding tax year.
- A dependent student whose parent is a single parent will be eligible for the maximum Pell Grant if the parent's adjusted gross income (AGI) is greater than zero and less than or equal to 225% of the poverty line.
- An independent student who is a single parent will be eligible for the maximum Pell Grant if the student's adjusted gross income (AGI) is greater than zero and less than or equal to 225% of the poverty line.
- A dependent student whose parent is not a single parent will be eligible for the maximum Pell Grant if the parent's adjusted gross income (AGI) is greater than zero and less than or equal to 175% of the poverty line.
- An independent student who is not a single parent will be eligible for the maximum Pell Grant if the student's adjusted gross income (AGI) is greater than zero and less than or equal to 175% of the poverty line.
- Otherwise, the student will be eligible for a Pell Grant equal to the difference between the maximum Pell Grant and the student's Student Aid Index if the Student Aid Index is less than or equal to 90% of the maximum Pell Grant, rounded to the nearest multiple of $5. If the student's calculated eligibility is for less than the minimum Pell Grant (10% of the maximum Pell Grant), the student is not eligible for a Pell Grant.
- If a dependent student is not eligible for a Pell Grant under these rules, the student will be eligible for the minimum Pell Grant if adjusted gross income (AGI) is less than 325% of the poverty line if the student's parent is a single parent and 275% of the poverty line if the student's parent is not a single parent.
- If an independent student is not eligible for a Pell Grant under these rules, the student will be eligible for the minimum Pell Grant if adjusted gross income (AGI) is less than 400% of the poverty line if the student is a single parent, 350% of the poverty line if the student is a parent but not a single parent, and 275% of the poverty line if the student is not a parent.
Incarcerated students will once again be eligible for the Pell Grant.
Students who are under age 33 whose parent died serving in the U.S. Armed Forces after September 11, 2001 or whose parent died in the line of duty as a public safety officer will qualify for the maximum Pell Grant.
Although this change does not really simplify Pell Grant eligibility, it does allow the use of a lookup table to show applicants whether they will be eligible based on family income, dependency status, and the number of parents in the household. It also makes it easier for single parents to qualify for the maximum Pell Grant.
Other Changes to the Financial Aid Formula
There are several other changes to the financial aid formula:
- The allowance for state and other taxes, which never accurately reflected the state tax burden experienced by families, has been dropped.
- The employment expense allowance for two-income households, which is currently at $4,000 or 35% of the lower of the two earned incomes, will be adjusted annually for inflation.
- If the parent's available income (AI) is negative after subtracting the allowances against income, it will still be treated as an offset to the student's income.
- The assessment of the parents' adjusted available income (AAI) remains on a bracketed scale from 22% to 47%, the same as for the 2021-2022 FAFSA, but the assessment will be set at -$1,500 if the AAI is less than -$6,820.
- Emergency financial aid for a component of the cost of attendance will no longer be considered to be estimated financial assistance (EFA) and will no longer be subtracted when determining the student's financial need.
- The FAFSA will include a question about the applicant's race or ethnicity.
- The law authorizes free assistance in completing the FAFSA but does not authorize paid preparation services. Charging a fee to complete the FAFSA will be prohibited.
- Male applicants will no longer be required to have registered with Selective Service.
- Applicants will no longer lose eligibility for federal student aid because of a conviction for the sale or possession of controlled substances while receiving federal student aid.
The confirmation page will provide information about means-tested federal benefits for which the student or the student's family may be eligible, if the FAFSA did not indicate that they receive those benefits, if the student aid index is less than or equal to zero.
Changes in Financial Aid Appeals
There have been several changes in the process for financial aid appeals, more formally known as Professional Judgment (PJ).
- Colleges and financial aid administrators may no longer have a policy of denying all financial aid appeals.
- There will be a separate set of special circumstances for Pell Grant eligibility.
- Dependency overrides and professional judgment adjustments will be integrated in a single authority for the college financial aid administrator to make adjustments to the cost of attendance and data elements on the FAFSA.
- Special circumstances can include an unusual amount of business, investment and real estate losses.
- Special circumstances can include severe disability of the student, a dependent student's parent, or an independent student's spouse.
- A dependency override will be presumed to continue for the duration of the student's enrollment at the same institution unless the student tells the financial aid administrator that their circumstances have changed or the financial aid administrator has specific conflicting information about the student's dependency status.
- During a qualifying emergency, such as COVID-19, professional judgment may be used to set income earned from work to zero if the applicant documents the receipt of unemployment benefits within the past 90 days or provides confirmation that they have applied for unemployment benefits, unless the financial aid administrator knows that the individual has already obtained other employment.
- Financial aid administrators may now allow a dependent student who does not qualify for a dependency override to receive unsubsidized Federal Direct Stafford loans if the parents refuse to complete the FAFSA, even if the parents have not cut off financial support to the student. Such a student will not receive any other federal student aid.
- The law provides several examples of acceptable documentation, including documented interviews between the student and the financial aid administrator. College financial aid administrators may now rely on documentation of homelessness from a financial aid administrator at another college from a prior academic year.