If you’ve ever had a child who applied for college or even technical training, you’ve probably dealt with the FAFSA—the Free Application for Federal Student Aid. Parents with students within a year or two of college enrollment must fill out the application and provide the required family financial data so that they can be considered for education grants, student loans, work-study programs, and other forms of financial aid.
There’s a little bit of good news for applicants this year: the FAFSA form is shorter and the process is simpler to complete. It used to be that applicants had to answer up to 108 questions, and parents had to upload their tax return information. Now, with the 2020 passage of the FAFSA Simplification Act, the process is little easier. The new, revised form for 2024–25 is now available online. Let’s take a look at the major changes.
- The new FAFSA is up to 57% shorter. In place of the 108 questions that applicants used to have to work their way through, the new FAFSA has only 46.
- Easier financial reporting. Parents’ tax return information, rather than needed to be separately uploaded for consideration, will now be directly transferred from the IRS database using Direct Data Exchange.
- Revised methodology for assessing need. The outgoing FAFSA system relied on a metric called the expected family contribution (EFC) when determining how much federal aid a student would receive. This system that relied more heavily on a family’s financial status as a whole. The new FAFSA system relies on a metric called the student aid index, or SAI.
- More flexible. One of the advantages of using SAI is that it allows a dependent student’s income contribution to be negative (as low as -1,500), such as from a tax write off, which means that students with $0 income can see an SAI that’s $1,500 lower compared to the old EFC system. This potentially makes these students eligible for more aid.
- More generous Pell grant qualifications. The new legislation authorized an increase of $3 billion in funding, equating to a 4 percent to 7 percent increase in the number of students who will be eligible for federal Pell Grants, which may be up to 10% larger than previously.
- Updated information for divorced and separated parents. The new FAFSA will require information from the parent who provided the most financial support during the previous 12 months (called the “parent of record”), not necessarily the parent with whom the student was living.
- New rules for family farms and small businesses. Previously, family farming operations and small businesses with less than 100 employees did not have to be reported as assets. Under the new SAI formula, that exclusion is going away, which means such families may be expected to contribute more.
Speaking of the FAFSA, here’s a special note for grandparents using 529 education plans to help fund a grandchild’s college expenses. One of the advantages for grandparents using these plans is that the funds held the plan enjoy tax-free growth within the plan and are not counted as taxable income when disbursed for qualified educational expenses. Another plus is that when the plan is owned by a grandparent, the assets in the plan are not required to be disclosed on the FAFSA application. This means that they are not included in the calculation for the SAI (what used to be called the EFC—expected family contribution). In other words, the assets in the grandparents’ 529 plan would not prevent the grandchild from qualifying for a higher level of student aid.
Under the previous FAFSA rules, any income the student received from a 529 Plan had to be reported on the FAFSA for the second year after it was received. This could have the effect of reducing the amount of financial aid for which the student was eligible in the year of the subsequent application. But the new FAFSA does not have this requirement; distributions from a grandparent–or any other third-party owned 529 fund—won’t have to be reported on the FAFSA. This means that a withdrawal from a 529 plan owned by a grandparent (or other family and friends) is no longer included as untaxed income, meaning it won’t directly impact student aid calculation.
And there’s also another way to make funds available and minimize the impact on the student’s financial aid eligibility. Let’s say a student is looking at a bill for the semester of $50,000, and the financial aid package will pay only $40,000. The grandparent who owns the 529 plan could give partial ownership to the parents of the student, providing sufficient funds to take care of the gap. The parents can make the payment without triggering income to the student, as long as the 529 plan sponsor will not categorize the partial ownership change as a non-qualified distribution, which would trigger income tax and a 10% penalty. If considering this strategy, it’s important to carefully check the plan requirements before proceeding.
At Mathis Wealth Management, we help clients craft individualized financial plans for education funding, retirement, and other important financial goals. To learn more, please visit our website to read our article, “529 Plans and SECURE 2.0: Now Even Better.”
