This one’s for you parents who have kids in college or soon going to college…
New rules are bringing significant changes to college financial aid. This week, I deep dive with my friend Ann Garcia, aka The College Financial Lady, on what these changes are and how they will impact you and your family.
- Overview of the federal student financial aid application process, including key dates
- Important changes coming to the federal financial aid process: for the FAFSA application, families with multiple college-aged kids, grandparent 529 plans, divorced parents, and more
- Timeline and phasing of these changes coming in 2021, 2022, 2023 and beyond
Will you be applying for college financial aid over the next few years? What one thing brings you the biggest worry when it comes to college financial aid? Let me know by leaving a comment.
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- The College Financial Lady
- Ann’s College Financial Plan Masterclass (HYW readers: use code “ffphyw20” for a 20% discount)
- College financial aid tips and strategies, with Ann Garcia (HYW053)
- 529 college savings plans: rules, tax benefits, & qualified expenses (HYW026)
- College financial aid strategies to optimize your assets, income & EFC (HYW025)
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Andrew Chen 01:22
My guest today is Ann Garcia.
Ann is a Portland-based Certified Financial Planner who specializes in advising on college financial planning and financial aid.
She advises parents on how to navigate college financial aid, and she writes frequently on this topic on her blog: TheCollegeFinancialLady.com.
There’s a good amount that has changed over the last year about financial aid, so I invited Ann back to the podcast today to share with us the latest updates and tips when it comes to applying for college financial aid.
Ann, thanks so much for joining us – the topic is timely since families are getting ready for back to school now.
Ann Garcia 01:52
Yeah, absolutely. Thanks for having me, Andrew. It’s great to be back.
Andrew Chen 01:56
You’ve been a guest on the podcast a couple of times now: Episodes 26 and 53, which were about 529 plans and college financial aid strategy. For those who may not have caught those episodes, or who maybe just aren’t as familiar with your background, could you help orient us?
What is your background when it comes to college financial planning and financial aid? How did you get into becoming an expert on this?
Ann Garcia 02:16
I’m a family financial adviser. And as I was getting started in my career, I noticed that a lot of our clients were asking questions about college, and very few advisers were prepared to answer them.
At the same time, I was a parent of twins who were at elementary school at that point, and I thought, “This is something I need to know about for myself anyway.” So I just started digging into the topic and found that I was getting the same questions again and again, and I thought, “I could just write these all on a blog.”
So I started doing that as a self-improvement project about eight years ago. And apparently, I haven’t improved enough to stop.
Andrew Chen 03:01
I love it. Could you walk us through the high level college financial aid application process, including the key dates that parents and students should pay attention to when they’re applying this year?
Ann Garcia 03:14
Yeah, absolutely. I think a lot of people think of the FAFSA when they think of the financial aid process, so let’s just start there.
You will complete your first FAFSA in the fall of your student’s senior year of high school, and you’ll renew it every year throughout their college career. The FAFSA is available every year on October 1st. You can certainly complete it right away, but actual deadlines are set by the schools, and they tend to be much later than that.
As a general rule, though, if you submit your FAFSA by the time you submit your application, you’ll get your financial aid award when you get your acceptance.
Another general rule is it’s usually best to complete it sooner rather than later because there is a pool of financial aid that’s available and awarded on a “first come, first served” basis. There are a few other key dates in the aid process, not just that October 1st.
The calculation for the FAFSA is based on your income and your assets, both the parents and the students. The FAFSA uses your income from your most recently completed tax return. That means that if you’re completing the FAFSA in the fall of 2021, it’s going to use your 2020 income.
If you’re a parent of a high school senior this fall, that means the FAFSA is using the income year that started January 1st of your student’s sophomore year of high school.
If you’re not the parent of a high school senior, but maybe of a junior or a sophomore or someone like that, keep in mind that you are now in the year, or coming up on the year that’s going to be the most consequential income year for the FAFSA. And income is the biggest component of your expected family contribution.
The other key date for the FAFSA is the date you file, because the other piece of the formula is your assets, and your assets are reported on the day that you file. Your assets being the money in your bank account, all of your 529 accounts, any taxable investment accounts you have, things like that.
So, it’s always a good idea, when you’re thinking about when you’re going to do the FAFSA, to think about when your mortgage or your rent payment is due, when your credit card bill is due, anything like that, and get those big bills out of the way.
Likewise, if you have any large purchases planned that are going to soak up a bunch of your assets, anything from a computer to a new car, just make sure that you actually spend that money, and not just put it on your credit card, but pay the bill for them before you file the FAFSA, because a few thousand dollars here or there can make a bit of a difference.
All of this points out that if you want to position yourself as best as possible for the FAFSA, don’t wait until October 1st to start thinking about it. Planning needs to happen well in advance of filing it. If you wait until fall of senior year to think about it, you’ve lost most of the planning opportunities because income is the biggest piece of it.
Talking about financial aid timelines, we tend to think of the FAFSA, but there are some other opportunities that exist while your student is in college. For example, we tend to forget about this on the West Coast, but most families nationwide are eligible for the American Opportunity Tax Credit, which is a tax credit worth $2500 per year per student.
To be eligible for that, your adjusted gross income needs to be below the phase out range, which is from $160,000 to $180,000 of adjusted gross income for married couples. If you’re anywhere in that threshold range, you’ll want to plan for things like 401(k) and IRA contributions during that year because those will help to reduce your adjusted gross income and get you the tax credit.
I’m a big believer in free money, so another date that I like to remind people of is December 31st, because if you’re in one of the majority of states that give tax benefits for 529 contributions, typically those are required to be done by December 31st. And not just made, but received by the plan on December 31st. There may be a few states left that still let you contribute up to the tax deadline, but by and large, December 31st is the cutoff date.
Getting back to that timeline, FAFSA is available in the fall. Fill it out on the best possible early date, and then you will get your aid award when you get your acceptance, depending on when the colleges involved do it: between December and April.
Andrew Chen 08:14
Got it. Really helpful framework overview.
You had mentioned that since income is the largest determinant of your ultimate award, and you’re encouraging families to think early, not think the fall of senior year, what are the key planning opportunities that might be available to put your income in the best light possible?
Maybe you could talk about the more restrictive case where the person is a W-2 wage earner, and then the more flexible case where perhaps you’re self-employed.
Ann Garcia 08:58
The most important thing to remember (and I think this is confusing for a lot of families) is that the FAFSA uses your total income, not your adjusted gross income.
A lot of people say, “I’m going to load up my 401(k) in my FAFSA year because that brings my adjusted gross income down.” In fact, you do have to add back all of your pre-tax or your untaxed income in the formula.
When the FAFSA looks at income, it’s looking at your total income, so your gross salary and any passive income, any business income, any investment income. All of that gets added in.
There are a couple of big subtractions that the FAFSA makes in the formula. One is what’s called an income protection allowance, and that is currently a number that’s roughly equivalent to the federal poverty level for a family of your size. It’s enough income for you to survive, theoretically.
I think if you ask most families of four how they might survive on $28,000 a year, they would struggle to answer that question. But that’s a philosophical thought for another time.
The other thing that is subtracted from your income is your actual tax liability. Not your taxes paid, but your federal income tax liability.
So, thinking of that from a planning perspective, one planning opportunity that most families have is to pay more or less taxes in any given year. Oftentimes, people say, “I’m going to load up my 401(k), bring down my adjusted gross income.” In fact, that has the opposite effect on your income for the FAFSA because it reduces your tax bill and you actually get to subtract your taxes from your income.
Getting back to your original point, there are different planning strategies depending on your tax status. Families who are really just W-2 earners, your main planning opportunity revolves around paying more taxes in your FAFSA years.
That might be changing some of your 401(k) contributions to Roth. If you itemize on your taxes, it may be, the year before your FAFSA year, making your January mortgage payment in December, so that you don’t have that mortgage interest deduction. If you’re itemizing, pulling your charitable contributions into non-FAFSA years.
That’s really your main planning opportunity as a W-2 worker. I think if you went to your boss and said, “Hey, can I get my January paycheck in December?” they would probably say no. You typically get a bonus in January and ask for that in December, that’s also probably not going to work.
Just not a lot of planning opportunities for W-2 earners. Really, it’s just around your tax liability.
If you’re a business owner, it’s very different. There are lots of things that businesses can do. Typically, I know, as a business owner myself, I get recommendations from my CPA every December to bring in all my business expenses for the year and do my first quarter office supplies shopping in December, and things like that.
If it’s December before your first FAFSA income year, and you’re a business owner, you might choose not to do that. You might choose to defer those into your FAFSA year, so you can have those expenses deducted against your income for the FAFSA.
If you have employees, there are lots of things you can do between profit sharing contributions in your 401(k), bonuses, other incentives that happen in those FAFSA years.
The other thing for self-employed people is how you structure your self-employed retirement plan. If you’re an LLC or an S corp, you can have an individual 401(k) and max out your employer contributions to that because that’s a business expense, not part of your personal income, as long as it’s a plan that’s not reported under that self-employed line in the FAFSA.
Definitely, business owners have a whole lot more flexibility in that regard. But it has become tougher and tougher to manage things for the FAFSA, between changes to the FAFSA and changes to tax law, with less people itemizing.
Andrew Chen 14:05
Good tips, though. I wanted to shift a little bit to talking about some of the changes this year to the financial aid process, since we last spoke, that parents should know about. What are some of the key things that have changed about the financial aid application process and about how the award calculations are done that parents may want to know about going forward?
Ann Garcia 14:31
As part of the big omnibus spending bill that was passed at the end of 2020, there was a 170 plus-page section called FAFSA simplification. And how you simplify things in 170 pages is good for insomniacs.
The simplification was supposed to go into effect with the FAFSA that comes out in the fall of 2022, but there are some changes that are being phased in over time.
And then just in June, the Department of Education announced that they’re actually pushing it back to the FAFSA that comes out in fall, pushing most of the changes back to the FAFSA that comes out in the fall of 2023, which will be for the 2024-2025 school year. Currently, their technology couldn’t handle this magnitude of change in that short of a time.
There’s a few key areas of change, and those are primarily going to impact three groups: families with multiple college students, grandparents who want to help out with college, and then divorced parents.
In addition, they’ve reduced a bunch of the questions, so it’s supposed to go down to about 31 questions. They haven’t said which 31 are going to be there, although they’ve mentioned a couple that are coming out.
I’m going to talk in great detail about all of these, but I want to preface this with one comment: This only pertains to the FAFSA and the federal needs analysis methodology.
This does not pertain to the CSS profile. Or at least the CSS profile has not come out and said that they’re implementing any of these changes, and a lot of them are not pertinent to the profile’s formula.
And the really important thing to remember with the FAFSA is, yes, you should absolutely understand how the FAFSA works, understand how to get a low expected family contribution, understand all the inputs in it, but really the most important thing about your FAFSA is what the schools you’re applying to do with your FAFSA, because they’re not under any obligation to meet your need.
A lot of families spend so much time planning for the FAFSA and never research whether the schools they’re applying to meet need.
So, I will step off of my soapbox and turn back to the topic at hand. What are the changes that are coming to the FAFSA? The big one that has gotten a lot of attention is how the FAFSA treats families with multiple children.
The current formula, which will be in place for the 2021 FAFSA and the 2022 FAFSA, but not the 2023 FAFSA, divides your expected family contribution, or the EFC, which is the amount that the formula says that a family can afford to contribute to college costs annually by the number of college students in the family.
It’s like saying, “We know you’ve got all of this money, and you’re using some savings and some income to pay for college. And obviously, each dollar can only get spent once, so we’re going to divide it in half for you.”
There are some adjustments that they make, so it’s not exactly 50% of what it would be for a single child.
Andrew Chen 18:02
That’s in the case of two kids?
Ann Garcia 18:04
Exactly. So this is a great setup for someone like me who is a parent of twins, because my expected family contribution is just that. It’s the total amount that it’s expected that my family can shell out for college in any given year.
However, the new formula is not going to divide by the number of students in college and, instead, says that a family can pay that much money for each college student.
If you think about it, it doesn’t really make a lot of sense when you’ve got a family with two or three college students, and they’re required to report all of their children’s 529 accounts on all of their FAFSAs. Obviously, each dollar in those accounts can only be spent one time, not three times.
Another way of looking at it is this: that the current formula penalizes families for having children further apart. Why should I get a bigger benefit in financial aid than another family with two kids, whose kids happen to have been four years instead of four minutes apart?
We can debate the logistics of that. I feel like there should be adjustments to the formula on that basis as well. But that is going to be a significant change for a lot of families.
Next is families who have grandparents who want to contribute to college. 529s are a great planning tool for grandparents.
They’re a great way for grandparents to help support their families. They’re good for estate planning reasons and whatnot. The bad news, historically, has been that when you start spending money out of that grandparent 529, the student has to report it back as income.
There’s a question on the FAFSA currently that is called money paid on your behalf, and it says, “Did anyone pay money on your behalf?” And that includes distributions from a 529 that’s owned by anyone who isn’t a parent on your FAFSA.
So, that can have a big impact on a student’s financial aid. That question is going away, so it makes the grandparent 529 a freebie on the FAFSA.
Another big change is coming for divorced parents. Under the current formula, the custodial parent for the FAFSA is the parent with whom the student spends the most time. The new formula requires it to be the parent who provides the most financial support for the student.
This can be a really big change for a lot of families. For divorced, at least nominally amicable parents, there can be a really big planning opportunity when there’s significant income differences between the two ex-parents. That’s going away, and now the higher-earning parent, or not necessarily the higher-earning, but the one who is providing the most support.
This can be a really gray area, for example, when you have two parents who both work and there isn’t child support being paid by either one, less gray when you have one parent is a very high earner and the other is a stay-at-home parent getting alimony, child support, and whatnot. It’s pretty obvious where the financial support is coming from in that case.
There have been some changes to the formula, such as increasing the income protection allowance. That’s that amount that the family is allowed to subtract from income available to pay for college.
That will be beneficial to larger families because the maximum amount is going from about $35,000-$38,000 to almost $60,000. So, that will help larger families. I think across the board, it’s going up 40% or 50%.
Another big change, it’s more interesting than impactful. The number that the FAFSA calculates is being renamed.
Currently, it’s called the expected family contribution or EFC, which is logical, but it’s really a terrible name because if you’re a normal person who hears the phrase “expected family contribution,” you would think, “That’s what I’m expected to pay for college. Now that I know what my expected family contribution is, I know what I should expect to pay for college, and that’s how much college should cost.”
However, in the time since the FAFSA has been available, we’ve evolved to this world where schools aren’t required to meet need, and many of them don’t do that. In fact, very few meet full financial need.
So, it’s a bit of a rude awakening for families to hear that your expected family contribution is not what you should expect. I tell families to think of it as the minimum family contribution.
That’s being renamed the student aid index or SAI. And really, that speaks more to how most colleges and universities use the FAFSA, which is just that it’s a tool to evaluate all students’ ability to pay for college on a consistent set of metrics.
So, taking all these changes into account, some people are jumping for joy: people whose grandparents have set aside the full cost of college. Others are really concerned: parents who have multiple college students who are likely to lose out on some need-based aid. And of course, anyone who thought their expected family contribution was what they should expect to pay.
But here’s what’s really important to understand what the FAFSA does. The FAFSA is not the tooth fairy. It doesn’t promise you anything other than access to federal financial aid dollars and student loans.
It’s a tool that colleges use to evaluate all students’ financial means on a consistent set of metrics. It does allocate things like Pell Grants, work-study subsidized loans that are all part of the federal financial aid toolkit. And it gives access to the non-need-based financial federal programs, like direct student loans that are unsubsidized, parent PLUS loans, grad school loans, and whatnot.
But beyond that, colleges can do whatever they want with your FAFSA data.
There are some that say, “We meet full need.” There are some that say, “We don’t meet full need.” There are some that say, “We meet full need through loans.”
And then, of course, there’s the other financial aid form, the CSS Profile, which is required by about 400 private schools. And when we talked about all these changes being really big, they’re almost completely moot within the profile.
The profile, for example, requires both parents, in the event of a divorce, to complete the profile, not just the custodial parent. The profile requires you to report all the 529s for which your student is a beneficiary, regardless of whether you own them or not.
And then the profile’s formula is far more opaque than the FAFSA. The FAFSA publishes their formula, how they calculate EFC. You can just Google “EFC formula guide,” and you will get the Department of Education’s 30-page detailed worksheet of how to calculate your expected family contribution.
There is no such thing for the profile.
Andrew Chen 26:13
Is it fair to say, if you’re looking at mostly profile schools, maybe you submit your FAFSA, but they actually don’t do anything with it? They just use their own profile info?
Ann Garcia 26:25
Pretty much. You’ll still need to submit a FAFSA because the majority of schools use the federal aid programs as part of their financial aid funding.
At a profile school where you’re getting need-based aid, you might get institutional grants from the school, but you might also get work-study, a subsidized loan, parent PLUS loans, a Pell Grant. Any of those things can be part of the package, and those require you to complete the FAFSA.
The other thing about the profile is schools can add their own questions. When we filled out the profile, one of the schools my daughter applied to wanted to know what cars we drove. Another one actually asked how much we had spent on her summer job, given that there’s a whole bunch of “internships” or “summer jobs” that are really summer camps, that basically you’re paying to have this job.
The other thing is even FAFSA schools that are private schools can ask their own set of questions. I thought it was really interesting for my daughter’s school.
My daughter attends a private university that’s a FAFSA-only school, but they have some supplemental questions that you always have to answer as part of their aid process. This year, one of the questions was “How many other college students are in your household?”
So, take all the changes with a grain of salt. Colleges do know that changes to the federal needs analysis methodology do not translate to families having more money available. Some of them will address that; some won’t.
The profile continues to ask how many college students you have in the household. So, there will be pros and cons. And many of the negative changes for families who are higher-need will be offset by the increase in things like the income protection allowance.
Andrew Chen 28:50
Interesting. Let’s set aside the profile schools for a moment because they essentially have an alternate methodology.
But for the ones that really do rely on the FAFSA, given the changes that you mentioned (the multiple children, the divorced parents scenario, and the grandparent’s 529 or grandparent’s contribution scenario), I’m just wondering, particularly for the grandparent 529 scenario where the form no longer asks if you’re getting any income from non-parental sources, doesn’t that present a huge planning opportunity?
Sorry for the simpleton question. Why wouldn’t I as a parent just gift my parents, i.e. my child’s grandparents, the free federal exempt amount gift every year for a couple of years, they will load up a 529, and then that gets paid down when my kid goes to college and not reported as income?
Maybe that’s too dumb, but I’m curious. Doesn’t that open up a lot of planning opportunities?
Ann Garcia 30:05
The other great planning opportunity that that opens up, because that is a strategy that we are encouraging a lot of our families who have good intergenerational relationships to pursue, is, as a parent who owns the 529s, you report all of your kids’ 529s.
If the grandparents have the 529, and sometimes what we have people do is the parents open the 529 for the oldest child, and then the grandparents have it for the subsequent children.
When it comes to the profile, first and foremost, on the FAFSA, you’re only reporting the one 529. Then, when it comes to the profile, because the profile asks about all of the 529s for that particular student, you don’t have to report all the sibling 529s if you do it that way. So, it can definitely help on the asset side.
Something to remember: Assets are a very small part of the formula. $0.47 of every incremental dollar of income you have is considered available to pay for college. Five cents of every dollar of assets you have is considered available to pay for college.
These are good strategies to pursue, for example, in a family that is lower income but higher savings, where the assets are going to be a larger part of the picture for them.
And often, another thing that we see a lot of is families who receive an inheritance right around when their kids are in college because that’s just a normal life timeline. And then you’re trying to figure out what to do with all this extra money that you suddenly have that is going to destroy years of college planning.
Andrew Chen 32:10
How do you handle that? I would think make it go into a trust that doesn’t pay out until the kids are out of college or something like that.
Ann Garcia 32:19
Yeah, you still have to report all your trusts. But to your point about gifting to the other grandparent’s 529, or if you have a sibling whose kids aren’t yet college age, where they can hold your 529 for you.
Here’s the challenge with all of these strategies: you’re really reliant on that other person following through and not changing the beneficiary on that account.
Andrew Chen 32:58
But it’s family. I know that can go both ways.
Ann Garcia 33:03
Yeah, it’s definitely a gamble, a big planning opportunity for divorced parents where it’s a little bit less clear, because when students get older and into the college years, there is typically less child support, less alimony being paid back and forth between the parents.
When one parent is wealthier and wants to provide more for college, having that 529 set up can be very beneficial, because if the student is just taking money out of the 529, the IRS considers that 529 a completed gift to the beneficiary.
So, when a parent has funded a 529 and the student is withdrawing money from that 529, for FAFSA purposes, one might say that is not providing current financial support. That’s a gift that they gave to the student in the past.
Andrew Chen 34:12
Interesting. Will that be successful?
Ann Garcia 34:18
It hasn’t gone into effect yet.
Andrew Chen 34:20
Ann Garcia 34:21
But I think you could absolutely make the argument on the basis that the IRS says this is a completed gift. This isn’t the parent providing support. It is the student using something that they already have.
Andrew Chen 34:39
Interesting. Are there any planning opportunities for divorced parents in this new regime? I know it’s not taking effect for a couple of years, but it used to be that if you’re divorced, put the child, even if it’s only nominally, with the less wealthy.
Ann Garcia 34:58
Andrew Chen 34:59
Yeah, the lower-earning parent. Are there any alternate planning opportunities that arise now with this upcoming rule change?
Ann Garcia 35:09
I think a lot of it just depends on the relationship between the two exes and how much they’re willing to work together, and how much flexibility each of them has. Because if one parent is receiving child support, it would be very difficult to make the case that the other parent isn’t the one providing the most financial support.
Even if mom and dad each run their own household, pay for the kid’s groceries while they’re there, equally contribute to all of their activities’ costs and share the costs of their car, and have joint custody, but the lower-earning parent gets 183 days of the year.
If there is financial support flowing in one direction, that is basically saying who is providing the most financial support.
So then, the question becomes: Are you willing to give up that financial support in exchange for potentially doing better on the FAFSA?
Andrew Chen 36:25
And just to be clear, it means that the analysis for determining the EFC is entirely then analyzed based on the higher-earning parent’s profile, right?
Ann Garcia 36:42
Correct. Not the lower-earning parent.
So then, of course, you could say, “Give all the 529s to the lower-earning parent.” But again, income is so much bigger of a factor than assets in that case.
The other thing is the current FAFSA wants to know where the student spent the most time in the year leading up to doing the FAFSA. In the new FAFSA, it will be based on the income year that’s being used for the FAFSA. That’s a sophomore year of high school question, as opposed to senior year of high school question.
And it’s quite possible that with a fully dependent child, there is a whole lot less flexibility about things like child support and whatnot.
I have no idea how the FAFSA will keep track of all these things. I would not say that this is a source of heavy auditing. I’ve never heard of a school requesting a sleep log from a parent to confirm that, in fact, the student was with them 183 days.
So, I don’t know how they might suss out whether or not there is money going back and forth between the parents other than if the custodial parent reports untaxed child support, or if they’re receiving untaxed alimony, depending on when their divorce was. They do have to add that into the formula.
Absent transactions like that, I’m not sure how that all gets found, which is not to be considered with me saying you should go ahead and cheat on this.
Andrew Chen 39:11
Any other major changes to call out that are upcoming? I didn’t realize they were actually getting pushed out that far. So it sounds like if you have a kid that’s about to go into college, you’re not going to hit this anyway until maybe they’re a sophomore or junior.
And if you already have a kid that’s in college, they might have already graduated by the time this stuff comes into effect. Is that right?
Ann Garcia 39:30
Yeah. I think it’s far less pertinent for students who are currently in college, especially if they are the youngest in their family, because the change that’s going to have a lot of impact for families is the multiple children piece. So, if you are the youngest of three children and you’re currently a college student, you could reasonably expect that by your senior year, you’re the only college student in your household anyway.
If you look at the timeline, the original plan was all this would go into effect in the FAFSA that you fill out in 2022 for the 2023-2024 school year. Now they’re phasing it out back by one year.
They have announced several minor changes that are going to go into effect in the current FAFSA. Those are things like removing the penalties for having a previous drug conviction. They’ll still have questions about previous drug convictions and selective service registration, but the responses to those will not be shared, will not be used by the system.
So then, it’s a question of what goes into effect in 2022 and what goes into effect in 2023. And that is very unclear at this point.
I do think if you are a family who is just at the start of this aid process, or who will have kids in school during these changing years, an important thing to do right now, if you’re impacted by this, is reach out to your school’s financial aid office and ask them to confirm that they will keep your aid package as is, based on the current methodology, for all four years of your student’s education.
Because what you don’t want to do is say yes to a school where you’ve been given a generous aid package, only to find out that two years into your education, you’re going to lose your financial aid because of changes in the formula. So, that would be my number one piece of advice: Ask your school to confirm that your aid will continue under the current rules.
Andrew Chen 42:03
But don’t colleges only grant year by year?
Ann Garcia 42:07
They only grant year by year. However, typically, if you’re getting a very generous scholarship, it’s coming from the school itself, and they have a great deal of discretion in how they disperse those funds.
The federal aid pieces that you can get are the Pell Grant, the FSEOG grant, work-study, and an unsubsidized loan. You could lose any of those in your package on the basis of the changes to the formula, if you’re eligible for any of those. But like I said, I believe that the increase in the income protection allowance is going to offset the loss of the multiple child discount in the lower income levels.
But the people who are really going to be impacted by this are middle-income families of multiple children, where your EFC might go from $18,000 to $36,000.
Andrew Chen 43:12
What income level does that break point or does it really start to transition based on the two changes interacting with each other?
Ann Garcia 43:21
I would say probably people below about $120,000 of income will come out fairly similar in the formula, because about $120,000 is going to give you an expected family contribution that’s roughly equivalent to the cost of in-state public college.
Andrew Chen 43:51
If your family makes more than $120,000, then the more kids there are in the family that are in college at the same time, the worse you are off under this new regime. But if you’re under $120,000, the income increase that’s allowed as an exemption from consideration in calculating your EFC essentially will offset multiple kids that you may have.
Is that basically the right way to think about it?
Ann Garcia 44:23
Yeah. So, getting back to the point about families who are just starting this process, or who will have students in college under both formulas, which is current high school seniors and juniors, depending on the timeline of the implementation, upfront, things you can do are: do the FAFSA4caster. Just Google that, and you’ll get it.
It only shows the current formula, so you have to do it twice: once with the number of actual students you have in college currently, and once with just a single student. And you’ll get an approximate equivalent. There are other adjustments to the formula, so it won’t be quite that big of a number, but you’ll get a sense for where you’re going to fall as far as expected family contribution or student aid index.
The other thing to do is, as your student becomes interested in colleges, do the net price calculator for those schools. And again, do it with one student, and do it with the number of students you might have. That way, you can at least get a sense of “How much of my financial aid is driven by having multiple overlapping students?”
That’s something that families with multiple children in college should do anyway, because unless you’re a twin parent, you’re going to have some years with one student, some with two, maybe even some with three. And you want to make sure that you’re not making assumptions about what your aid package is going to look like that turn out to not be true after the older sibling graduates anyway.
So, make that part of your research, such that if you are accepted to a school with a financial aid package that is based on siblings, you can go back to that school and ask them to confirm that they will consider siblings in their needs analysis methodology for all four years of your student’s education.
Andrew Chen 46:49
Are there any other major or noteworthy changes upcoming that parents should know about?
Ann Garcia 46:57
One of the other big things is I think the changes to the FAFSA are going to be really beneficial for lower-income families. A couple of things are happening.
One is the simplified formula which is currently for families with incomes up to $50,000, that income threshold is going up to $60,000.
The way it stands currently, after the 2018 tax law changes went into effect, they had to come up with a new way of figuring out who would qualify for this. Because it used to be if you were eligible to file a 1040A or 1040EZ, and your income was below $50,000, then you’re eligible for the simplified formula, which didn’t require you to report assets.
Once 1040A and 1040EZ went away after the 2018 tax law changes, they came up with a new set of tests. There was a list of tax forms that if you filed them, you weren’t eligible.
It ruled out anyone who was receiving alimony, who contributed to an HSA account, people who collected Social Security. It was just a bunch of weird little loopholes. All of them are not eligible for the simplified formula.
So, the income level is going up for the simplified formula, and they’re actually increasing the group of people who are eligible for the formula.
Andrew Chen 48:45
You mean by doing away with those checklist of things, for example?
Ann Garcia 48:50
It’s a shorter checklist of things for it.
Andrew Chen 48:55
Where can parents find the checklist?
Ann Garcia 48:58
Good question. A lot of the details of this have not yet been published. The main place that you can find them is by looking up the simplified formula language in the omnibus bill, and it is, I kid you not, 170 pages.
I keep telling myself I’m going to sort through it and list all that up there, but I haven’t done it yet. Who knows? By the time this podcast is live, maybe it will be on my site.
The other thing is the eligibility for Pell Grants is expanding, and that will be a really positive change. Part of it is just increasing the income protection allowance, but now you can also have a negative EFC. Once the changes come to place, you can have a negative EFC.
There are families whose incomes are so low that once all the elements are subtracted, like the income protection allowance and whatnot, their EFC or their SAI is actually negative. That also allows colleges to grant more aid, because colleges who participate in the federal funds programs are restricted to only providing enough aid to meet the difference between demonstrated need and cost of attendance.
So, for someone whose need would be calculated to be a negative number, they actually lose out on aid dollars.
The other big change is the formula will be much more favorable to independent students. Independent students really, if they don’t have a family of their own, are treated very poorly in the formula.
There are lots of students who are legitimately independent young adults who would like to go back to college, and their income and assets in the current formula get treated the same way as the dependent students, where all of their assets are considered available and assessed at a very high rate, and their income protection allowance is less than $7000.
The new formula does improve things for independent students, so young adults thinking of going back to college will have more opportunities to do so.
Andrew Chen 51:21
By the way, the young independent students’ analysis, at least under the old regime, when did that flip over? Was it the stay on your parents’ health insurance age of 26? Was there an age when it would cut over?
Ann Garcia 51:46
It’s not age-based. It’s based on your actual status. For FAFSA purposes, you are dependent as long as you’re not in the military or have children of your own.
So it’s very difficult, for FAFSA purposes, to be called independent.
Andrew Chen 52:19
Really? So, if you had just gone to work when you were 18, didn’t join the military, but you’re not at home and you’re not taking any money from home, and now you want to go back to college at 24, you’re still considered a dependent?
Ann Garcia 52:30
For FAFSA purposes, yeah. If you’re living with your parents, you’re considered dependent.
Andrew Chen 52:36
But you have to be living with them?
Ann Garcia 52:38
If you’re living on your own and self-supporting, you are independent for FAFSA purposes. But the current formula assesses everything the same as they would for a dependent student, unless you’re married with children of your own.
I think this is something that, after this year, might be a little bit interesting for families, because I think a lot of families have tried not to claim their college students as dependents in order to let their college students claim the stimulus, if the parents are over the income limit. So, if you’re doing that, for the FAFSA purposes, your student is still your dependent.
Andrew Chen 53:25
This was really interesting, as always. Ann, where can folks find out more about you and your work and services?
Ann Garcia 53:32
My blog is The College Financial Lady, and it’s just thecollegefinanciallady.com. I have tons and tons of free content on there about all these topics and a whole lot more, so that’s the best place to learn more about me.
Andrew Chen 53:48
Awesome. We look forward to sharing that link in the show notes. And as always, a pleasure talking to you.
Hopefully, this will be useful for our parents who have kids that are college bound in the upcoming year.
Ann Garcia 54:00
Absolutely. It’s been a pleasure, Andrew, as always.
Andrew Chen 54:02
Thanks so much. Take care. Bye.
Ann Garcia 54:04
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