Understanding the FAFSA Simplification Act: What It Means for You
September 5, 2023
In recent news, you might have caught wind of the buzz surrounding student loans—from talks about potential loan forgiveness, the return of interest, and the resumption of payments. While these discussions mainly concern current student loan holders, some noteworthy changes are brewing for future borrowers, particularly when it comes to the Free Application for Federal Student Aid (FAFSA).
The FAFSA Simplification Act, enacted into law in 2021, is introducing changes aimed at streamlining the application process. While some changes have been implemented gradually since the 2021-2022 Award Year, certain aspects won’t take effect until December 2023, which marks the start of the FAFSA application period for the 2024-2025 Award Year.
Good to Know: The FAFSA application period was temporarily pushed back from its usual October start date to December as changes are rolled out this year. It’s set to return to the October start date for the 2025-2026 Award Year.
If you or your dependent(s) are seeking federal student aid in the coming years, here are some of the changes on the horizon that could impact your application process and eligibility for federal student aid:
1. Transition from Expected Family Contribution (EFC) to Student Aid Index (SAI)
The SAI will replace EFC as the calculation of the amount of need-based financial aid a student is eligible to receive. Although SAI and EFC are similar, there are some changes to the need analysis formulas (more on that in the next section).
- SAI Number – Unlike the EFC, which could not go below $0, the SAI can be a negative number, with the lowest possible amount of $-1,500. This change allows colleges to more precisely identify and potentially support students with the most pressing financial needs.
- Income Threshold – Under SAI, independent students (including spouses, where applicable) and dependent students using their parents’ information with an adjusted gross income (AGI) of up to $60,000 will be exempt from reporting assets on the FAFSA. This threshold is $10,000 higher than in previous years.
2. Changes to the Need Analysis Formulas
While the core structure of the need analysis formulas didn’t substantially change, adjustments were made to the data elements used in the formulas. Here are some noteworthy changes:
- Elimination of Number of Family Members in College – Previously, a student’s EFC was influenced by the number of family members enrolled in college, but this will no longer be a factor.
- Updates to Income Components – The Act reduces the types of untaxed income considered in the need analysis process. The primary untaxed income items considered now include deductions and payments to self-employed retirement accounts (i.e., SEP, SIMPLE, Keogh), tax-exempt interest income, and untaxed portions of IRA distributions and pensions (excluding rollovers).
The Act further simplifies the need analysis process by removing several categories of untaxed income that were previously considered, including housing, food, and living allowances for members of the military and clergy; veterans’ non-education benefits; and money received by or paid on behalf of the student.
- Updates to Asset Components – The Act introduces changes to how assets are factored into the equation. Notably, it now considers the annual amount of child support received, which was previously counted as income in the EFC formula.
Other changes include the elimination of the previous requirement that only businesses with more than 100 full-time employees be considered. Under the new guidelines, applicants will be required to disclose the net worth of all businesses, regardless of size.
Furthermore, the Act expands the scope of net worth to incorporate the fair market value of a family farm, which now includes land, buildings, livestock, unharvested crops, and actively used machinery, minus any debts held against these assets, while the primary residence remains excluded.
3. Use of Federal Tax Information (FTI)
The calculation of SAI and Pell Grant awards will now rely on data directly obtained from the IRS. This process, known as the FUTURE Act Direct Data Exchange (FA-DDX), will require an applicant’s consent, as well as that of parents and spouses, where applicable.
The primary aim of this approach is to simplify the application process. The previous tool used to share data, known as the IRS Data Retrieval Tool (DRT), only facilitated the transfer of data into the FAFSA application but didn’t directly provide FTI to the Department of Education.
4. Flexibility for Dependency Status
The criteria for determining dependency status for federal student aid remain mostly the same. However, the Act adds flexibility for special cases, such as students unable to contact their parents due to certain circumstances.
5. Eligibility Changes for Pell Grant Awards
There will no longer be a requirement for students to maintain at least half-time enrollment to be eligible for Pell Grant awards. Instead, the Pell Grant award will be modified based on what the Department of Education calls the student’s enrollment intensity, which is the percentage of full-time enrollment at which the student is registered.
6. BONUS: Fewer Questions on the FAFSA!
While the official number of questions for the upcoming application hasn’t been released, preliminary information from various sources suggests that we can anticipate a significant reduction, potentially dropping from the previous 108 questions down to approximately 36.
At its core, the FAFSA Simplification Act aims to streamline and simplify the application process. It eliminates redundant and unnecessary questions, making the application less burdensome for applicants, which could ultimately improve access to higher education funding.
Navigating the FAFSA Simplification Act Changes
Keep in mind that this list doesn’t cover all the changes, but it highlights some significant ones that will likely affect many applicants. The Department of Education’s Office of Postsecondary Education has already released several resources, and they plan to offer more guidance and resources as these final changes are implemented.
If you have specific questions or concerns about your situation, we recommend reaching out to your trusted financial advisor for personalized assistance during this transition period.
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