Big FAFSA Changes and the New Student Aid Index

A guest post from Brad Baldridge, host of the Taming the High Cost of College podcast

We are pleased to be cross-posting an account of upcoming changes to financial aid rules from Brad Baldridge, host of the Taming the High Cost of College podcast. Brad is a Certified Financial Planner® and one of the nation’s leading experts on college planning.

Big changes are coming to the Free Application for Federal Student Aid (FAFSA) in 2023, and the changes could dramatically affect how much parents and families end up paying for college and how much financial aid their students receive. If you’re the parent or guardian of a college-bound student or helping with their college search, you’ll want to know which new guidelines apply to you and how they might impact your college financial planning.

To help you get up to speed quickly, I’ve put together this article to walk through each change so you can figure out if it applies to your situation and what it could mean.

Some of the biggest changes with the widest impact are:

• Renaming the Expected Family Contribution (EFC) to Student Aid Index (SAI)

• Reducing the Number of Questions on the FAFSA

• Eliminating Discounts for Parents with Multiple Students in College

• Expanding Pell Grant eligibility

• Updating the definition of cost of attendance

• Changing rules for untaxed income and benefits

• Changes to the income protection allowance

• Changes involving drug convictions or selective service registration

• Additional changes to financial aid rules

There’s some good news and some potentially bad news for many families in these new rules, most of which go into effect on July 1, 2023 for the 2023-2024 academic year. Other changes have been delayed and won’t go into effect until the 2024-25 academic year.

But the changes will only apply to certain students and parents depending on status, income and assets, and circumstances.

Let’s jump in and take a deeper look at what’s changing so you can determine which changes might apply to you and plan accordingly.

Student Aid Index (SAI): The New Name for EFC

There will be a new name for the Expected Family Contribution, or EFC, which is a number calculated during the FAFSA process that measures a family’s ability to pay for college. It’s part of the process of determining a student’s financial need and how much need-based financial aid they’re eligible to receive.

The EFC will now be known as the Student Aid Index (SAI), and here’s why it’s changing.

Over the years, colleges have used the EFC as a tool to help them determine how much financial aid students and their families should be awarded. Parents and students use EFC calculators to help them plan for college and figure out how much they might have to pay compared to how much they will receive in need-based financial aid.

However, the name, “Expected Family Contribution” sometimes confuses and misleads families.

Your EFC is just an estimate of a family’s ability to pay for college, and it’s not necessarily the actual amount you will be expected to pay. Schools compare your EFC to their cost of attendance to determine your financial need, which most colleges will try to fill with available need-based financial aid.

You might end up paying more or less than your EFC depending on how much aid you’re offered from a given college, in what form, and which aid you accept.

For example, most colleges don’t meet 100% of students’ financial need, so you may get less financial aid than your EFC indicates. In many cases, colleges and universities will try close that gap by offering loans as part of their financial aid package. But if you choose not to accept and take out those loans, you will obviously have to pay more for college through other means.

Similarly, you might end up getting a bit more financial aid than your EFC indicates, especially if you’re applying for college at a school that meets 100% of financial need, uses its own financial aid formulas, or awards more aid to attract your student to enroll.

The hope is that changing the name to Student Aid Index will help dispel the confusion and discourage families from thinking that their SAI is the exact number of what they’ll have to pay for college.

A Simpler FAFSA Form with Fewer Questions

The FAFSA form is being simplified and reduced from 108 questions to about three dozen questions, so the process of filling out and submitting the FAFSA should get a lot easier for parents.

But there are many other changes coming that will potentially complicate things, especially in terms of financial aid eligibility and how much families are expected to contribute toward college costs. Let’s take a look at those next.

Changes for Families with Multiple Students in College

The most controversial FAFSA change could cost many families a lot of money. For parents who have multiple children in college at the same time, the FAFSA will no longer divide up their assessment by the number of family members in college.

For example, in the past, if you had an expected family contribution of $40,000 per year for each of two children who are in college at the same time, that $40,000 would be divided evenly between the two students. So you would only be expected to contribute $20,000 for each student.

Under the new FAFSA rules, you’ll now be expected to pay that full $40,000 per year per student, for a total of $80,000 per year.

This is going to a have a huge negative financial impact on families, so the new rule has already been delayed until the 2024-25 school year. Parents will still get the multi-student discount until that time.

Not surprisingly, some organizations are lobbying and petitioning against the new guideline, and as more parents learn about what’s coming, we might see more pressure to reverse or modify it. Additionally, colleges and universities might decide not to follow these rules, or they might grandfather the rule and allow more time before they implement it.

Schools are able to dole out federal money as they see fit, so they have that option. But families can’t count on that, so you need to start planning right away if you’ll have multiple kids in college at the same time starting in 2024-25 or later.

Changes to the Definition of Cost of Attendance

There are a number of new changes in how the cost of attendance is defined, including which expenses are allowed to be factored into the cost and what sorts of rules that colleges can set.

Here is quick rundown of what’s changing:

Housing and Meals

• The allowance for room and board will be split between housing and a separate allowance for meals, and the allowance for meal plans must assume three meals per day.

• Colleges can no longer set the housing allowance to zero for a dependent student living at home with their parents.

• There will be two new housing allowances. One is for students living off-campus and not in institutionally owned or operated housing, and the other is for students with dependents living in institutionally owned or operated housing. This expands the total housing allowances to six types.

• Housing allowances for students living in institutionally owned or operated housing must be based on the greater between the average or median housing charges at that institution.

Miscellaneous, Transportation and Professional Expenses

• Allowance for miscellaneous personal expenses will now require at least half-time enrollment.

• Allowance for the purchase or rental of a personal computer will no longer require at least half-time enrollment.

• Allowance for student transportation expenses now includes travel between home, school and work, but the actual allowance is subject to the discretion of the college.

• Costs for obtaining a required professional license, certification or credential as part of a student’s education must be included in the cost of attendance.

Loan Fee Allowances

• Schools must now include an allowance for loan fees on federal student and parent loans.

• The allowance for loan fees for private student loans has been removed.

Additional Changes

• Colleges are required to disclose all the elements of the cost of attendance wherever the college lists tuition and fees on its website.

• The U.S. Department of Education will be able to issue regulations concern all aspects of the cost of attendance beyond tuition and fees.

New Rules for Untaxed Income and Benefits

A number of forms of untaxed income and benefits are now redefined or excluded for FAFSA purposes. These include:

• Child support received (which will now be classified as assets rather than income)

• 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

Untaxed income and benefits for FAFSA purposes will now include:

• Deductions and payments to retirement plans 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 receives a foreign tax credit

Excludable income, which might be subtracted from income, will include:

• Federal work study wages

• The American Opportunity Tax Credit and Lifetime Learning Tax Credit

• The taxable portion of a grant or scholarship that was included in your adjusted gross income (AGI)

What all of this means is that a number of types of untaxed income and benefits will no longer be counted as part of a family’s income and assets for the purposes of determining how much they’ll be expected to pay toward college.

In the case of child support received, that income will be reclassified as part of your assets, which are assessed at a lower rate for determining how much you’re expected to pay. In other cases, the income or benefits won’t be assessed at all.

Expansion of Pell Grant Eligibility

The new FAFSA rules and criteria also include some major changes in Pell Grant eligibility.

Pell Grants provide need-based aid that typically doesn’t have to be repaid, especially for low-income students who need extra help in covering their college costs.

With the new eligibility changes, Pell Grants are now based on two primary components: family size and adjusted gross income (AGI).

The maximum possible Pell Grant award will go to students in a number of categories depending on the student’s status (dependent or independent), the student and parents’ income level, and whether the student or parent involved is a single parent.

But here are the two most common criteria that will come into play:

• Families with an income under 175% of the federal poverty level as well as single parents making less than 225% of the federal poverty level will be granted the highest awards.

Otherwise, students will be eligible for a Pell Grant equal to the difference between the maximum Pell Grant amount and the student’s Student Aid Index (SAI), as long as the SAI is less than or equal to 90% of the maximum Pell Grant. If a student’s eligibility is for less than a minimum Pell Grant, then the student won’t get one.

However, 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 275% of the poverty line or less than 325% of the poverty line if the student’s parent is 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).

Also, incarcerated students will be eligible for Pell Grants. And students who are under age 33 and 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.

Student Aid Index of Zero or Less Than Zero

The Student Aid Index (SAI) will be set to zero if the applicant is eligible for the maximum Federal Pell Grant and the calculated SAI is greater than zero.

The new financial aid formula will also allow a calculated SAI to be less than zero. If the applicant and the applicant’s parents or spouse are not required to file a federal income tax return in the second preceding tax year, the SAI will be automatically set at -$1,500.

Changes to the Independent Student Definition

There are some minor changes to how independent students are defined for FAFSA purposes. One is that “married” has been replaced with “married and not separated” in the criteria for married students.

The criteria for independent student status will also include circumstances where the student is unable to contact their parents, such as parental abandonment or estrangement, student or parent incarceration, or where contact with parents poses a risk to the student, such as human trafficking, refugee or asylum status.

Changes to the Income Protection Allowance

The income protection allowance (IPA) shelters some of an applicant’s income based on certain living expenses, and there are several changes to this for both students and parents.

• The IPA will no longer be reduced based on the number of children in college, which means parents can shelter more income from the financial aid formula.

• The 2023-2024 IPA for parents is set at 20% higher than 2021-2022.

• The 2023-24 IPA for dependent students is $9,410, which is a 35% year-over-year increase.

• For independent students without dependents other than a spouse, the IPA is $14,630 if single and $23,460 if married, which represents an increase of 35%.

• For independent students with dependents other than a spouse, the IPA for married students is 35% higher and the IPA for single students is 60% higher.

• The IPA will be adjusted for inflation based on the year prior to the beginning of the FAFSA’s award year.

Changes to the Simplified Needs Test

FAFSA applicants can potentially be exempted from reporting their assets on their application if they meet certain criteria. Previously, this was known as the Simplified Needs Test, but it will be referred to as Applicants Exempt from Asset Reporting, and the criteria have changed.

An applicant will be exempt from asset reporting if any of the following criteria apply:

• The applicant qualifies for an Automatic Zero Student Aid Index (SAI).

• The applicant is a dependent student with a negative calculated SAI and:

  • The parents’ adjusted gross income is less than $60,000

  • 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 with a negative calculated SAI and:

  • The student’s and spouse’s (if applicable) adjusted gross income is less than $60,000

  • 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 received a means-tested federal benefit such as SSI, SNAP, TANF, WIC, Medicaid, or federal housing assistance in the previous 24 months.

There are exceptions to the asset reporting exemption for a dependent student if the student’s parents aren’t U.S. or U.S. territorial residents or if the parents don’t file taxes in the U.S. or a U.S. territory. But this exception doesn’t apply if they are not required to file U.S. federal income tax returns because of low income.

Other Changes to Financial Aid Formulas

There are other changes to the FAFSA financial aid formulas as well:

• The FAFSA will include a question about the applicant’s race or ethnicity.

• There is no more allowance for state and other taxes.

• The employment expense allowance for two-income households 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) will be set at -$1,500 if the AAI is less than -$6,820.

• Emergency financial aid will no longer be considered estimated financial assistance (EFA) and won’t be subtracted from a student’s financial need.

• Charging a fee to help students and parents complete the FAFSA will be prohibited.

• 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 to Financial Aid Appeals

There are a number of changes to the process of appealing financial aid awards, which is also known as Professional Judgment (PJ):

• Colleges and their financial aid administrators can no longer maintain a policy of denying all financial aid appeals.

• Applicants who appeal on the basis of special circumstances can now use unusual losses in business, investment or real estate as a basis for those appeals.

• Special circumstances can also include severe disability to a student, a dependent student’s parent, or to an independent student’s spouse.

• There is a separate set of special circumstances for Pell Grant eligibility appeals.

• Dependency overrides and appeal adjustments will be integrated to allow college financial aid administrator to adjust cost of attendance and select data on the FAFSA.

• A dependency override will continue for the duration of a student’s enrollment at a given school unless the student notifies the school that their circumstances have changed or the financial aid administrator has conflicting information about the student’s dependency status.

• 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.

Drug Convictions and Selective Service Registration

Male applicants will no longer have to be registered with Selective Service to submit a FAFSA and qualify for financial aid.

Applicants will no longer lose eligibility for federal student aid if they were convicted of the sale or possession of controlled substances while receiving federal student aid.

National Emergency Clause

During a qualifying emergency such as the COVID-19 pandemic, income earned from work can be set to zero if the applicant can document receiving unemployment benefits within the past 90 days or prove that they’ve applied for unemployment benefits, and they haven’t already obtained other employment.

The Bottom Line for Parents and Students

This is a lot for parents to unpack and understand, but remember that most of these FAFSA changes only apply to certain students, parents and circumstances. Unless a change is specifically relevant to your case, you don’t need to worry about it.

If one of these changes applies to you, the key is to make sure you understand how it might impact your financial aid eligibility and your potential award, so you can adjust your college financial planning and expectations accordingly.

Ultimately, when you submit your FAFSA, the rules are going to be applied automatically by the U.S. Department of Education and the financial aid administrators at the schools you’ve included in the process. You just need to focus on submitting all the required information on your application and make sure you have a good understanding of what you can expect in terms of financial aid.

How to Estimate Your Financial Aid Eligibility

If you want to get a good estimate of what your expected family contribution and your financial aid award might look like, use my free College Money Report.

Based on some basic information you provide about your family, your student and your financial situation, and based on the actual formulas used by colleges and the federal government, it will estimate how much you’ll be expected to pay at the schools you’re considering and how much money you’ll receive in federal grants and institutional scholarships.

You’ll get it all in a professional and organized PDF that you can download and save for future reference, and it’s absolutely free. Just visit my College Money Report page right now to start the process!