HERE'S WHAT YOU MUST KNOW!
It will be FAFSA season soon.
And hopefully it won’t be the nightmare it was last year.
Last years FAFSA(for the 24-25 school year) was indeed a disaster for parents. First, there was a delay of 3 months. Usually the launch date for the FAFSA is October 1st. Last year it started on Jan 1st. That wasn’t even the worst of it. After submission from both student and parent, there was a tremendous processing delay, sometimes delayed well into May. Now, this is a big deal because the majority of Freshman rely on financial aid to make a decision as to where to attend, and May 1st is decision date. Some institutions did delay decision day, but others held firm. Can you imagine buying a house or a car or just about anything where the seller says, you have to buy this now, before we tell you the final price? Mind boggling!
The reason for all the troubles was the U.S. Department of Education’s roll-out of a significantly overhauled FAFSA that wasn’t ready to be rolled out. By the way, the Department of Education just announced that the FAFSA roll-out will again be delayed. The 2025-2026 form is now expected to be available on Dec. 1. I can hear all the “uh oh. Here we go again” from families all over the country.
While the FAFSA roll-out was indeed disastrous, what was largely overlooked were some of the changes that help families and others that will hurt families.
With the FAFSA getting ready for its latest debut, it’s worth revisiting some of the critical changes that your clients should know about and, in some cases, take advantage of.
The Multi-Child Discount Is Gone
Families used to receive a significant financial break if they had more than one child attending college simultaneously. Previously, a household’s expected family contribution would drop by 50% when two children were in college simultaneously and the discount increased even more with additional siblings in school. Now that no longer exists.
This is one of the more inane decisions the Dept. of Education has made. You are essentially punishing a family for having more the one student in school.
This feature dramatically increased the number of students eligible for need-based aid. Here’s an example of how that happened:
Let’s say the family with only one student in school had an EFC (Expected Family Contribution) or SAI (Student Aid Index) of $50,000. The next year, a sibling started college, so now there are two students in college simultaneously. This would have dropped the EFC for each child to $25,000. However, the total family EFC is still $50,000. You may be saying, so what's the big deal? Not so Fast. The way they figure out how much financial aid you are eligible for is called a needs analysis formula. It works like this: Cost of Attendance- EFC/ SAI = NEED. Your NEED is how much aid you are eligible for. So, if a school costs $80,000 and your EFC is $50,000, you are eligible for $30,000 ($80,000-$50,000) in aid. So, from our example, when two students were in school at the same time, their need would almost double to $55,000 ($80,000-$25,000=$55,000.) This EFC drop is no longer possible thanks to the revised federal formula.
It's important to know that the sibling-discount elimination only impacts the FAFSA and not CSS Profile schools. Profile schools have traditionally given a 40% discount for two siblings in college and more for additional students.
The College Board, which operates the CSS Profile, has refused to discuss what changes, if any, were instituted in reaction to the FAFSA overhaul. I’m assuming this discount remains, but it makes sense to ask a Profile school about its policy.
I should add that another change that seemed unnecessary was the government’s decision to ditch the term EFC and substitute it with Student Aid Index. What will make the name switch more confusing is that the CSS Profile, an aid application that 187 colleges, nearly all private, use, has stuck with the term EFC.
Workplace Retirement Account Contributions Won’t Hurt a Household’s SAI
Here’s some good news. Previously, if you contributed to a workplace retirement account, a 401k or a 403b for example. That contribution, not the total value, or balance of the account, would be added back to the family's income as untaxed income in the aid formulas. So contributing more into the plan would NOT increase your eligibility for aid, even though this decreases their Adjusted Gross Income, which is what the aid formulas typically look at.
With the new FAFSA formula, however, parents who save more in their workplace plan will no longer have that contribution added back into the FAFSA formula’s calculation. This will have the effect of lowering the household’s SAI. So it may be a good idea to contribute as much as you can to your workplace retirement account
This strategy though will not work for contributions to traditional IRA’s. Any of those contributions will be treated as untaxable income.
Increasing aid eligibility by stuffing more money into a workplace plan, however, won’t help with CSS Profile schools. These schools use the FAFSA to determine if a student is eligible for federal or state aid, but they use the Profile to determine eligibility for their own in-house institutional aid.
You can find out what colleges and universities use the CSS Profile by clicking the participating school link on the CSS Profile home page. Most, if not all, of the most elite and popular private colleges and universities in the country use the Profile.
Sibling 529 Assets No Longer Count
It always seemed unfair that parents were required to include siblings 529 and Coverdell assets on the FAFSA.
The supposed reason for this is that it was assumed that parents would be tempted to shift the college-bound student’s 529 assets to a sibling’s account to avoid them being counted in the FAFSA formula.
The new FAFSA formula, however, allows this shifting. Parents no longer include these sibling assets on the aid application. This is a great development for parents who decide to park more assets with a brother or sister to avoid detection.
Here’s an example of how this change could benefit households. Let’s say parents have saved $60,000 in a sibling’s 529 account. Previously, this balance would have been assessed as a parent asset at up to 5.64%. This money would have boosted the student’s SAI by $3,384. Losing that amount in eligibility.
Once again, however, the CSS Profile schools will continue to require parents to share sibling 529 and Coverdell assets. So, depending on the school you choose will depend on how effective this strategy can be.
Michael Gaer, CFP™, EA is a nationally recognized college financial planning expert with over 25 years of experience helping parents save thousands of dollars.
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