FAFSA Simplification is continuing and will have a significant impact on this year’s college-bound seniors. In addition, for current college students that will be in college for school year 2024-25 and beyond, these changes may affect your current financial aid packages. Learn what you need to know for proper college funding and student loan planning.
FAFSA is the abbreviation for Free Application for Federal Student Aid. It is the cornerstone process for need-based financial aid. For years, financial aid professionals, parents, and students have been complaining about how complex the FAFSA process is. The implementation of FAFSA Simplification is planned to be completed by the 2024-25 school year, with the goal of improving the process. It was approved as part of the Consolidation Appropriation Act of 2021. Families will need to be aware of these changes, especially for the outer years of their college cost decisions.
The list of items in the FAFSA Simplification is substantial. Many of the simplification changes started with the FUTURE Act of 2019. The FUTURES Act provided the legal ability to share data between the IRS and the Department of Education. Much of the FAFSA financial analysis requires income, family size, and tax information as part of its calculation, so this data share laid the foundation for the simplification. The current plan will automatically complete the FAFSA with the information from a family’s tax forms from the prior year.
FAFSA Simplification List of Changes
FAFSA Simplification Effective Date
With the passing of the Consolidation Appropriation Act, the official FAFSA Simplification implementation date was for school year 2023-24 but will be delayed until 2024-25. That may seem like a long time away. In reality, for high school families, it has started and needs to be part of your planning for the graduating class of 2023. The first high school class to face all of the changes is the graduating class of 2024 or current juniors. For these students, 2022 will be their FAFSA base tax year.
Within the financial aid process, the FAFSA uses a tax timing method called Prior Prior. This rule was implemented in 2015 and developed to help families have their completed tax information in hand to complete the FAFSA financial information.
Knowing this timing, the financial aid that will be distributed starting in July 2023 will be associated with the FAFSA submission process beginning in October 2022. The FAFSA 2022 submission will use tax year information from the 2021 tax year.
Here is a table that may help better explain the timing of these events.
Early Changes Include the Elimination of Selective Service and Drug Conviction
Under the prior FAFSA application, there are two questions that many parents were reluctant to answer, which may have caused them not to submit a FAFSA. The first was that male students were required to register for selective service to qualify for federal financial aid. Many students and parents would hesitate when asked this question. Many college financial aid officers also complained since they were the ones that often needed to answer the questions.
The other question was the drug conviction question. This question was an issue not just for financial aid but could impact a student’s admission opportunity.
As part of the FAFSA simplification, both of these questions were eliminated.
2023-24 Pell Grant Changes and Increases
As you can see, many of the changes address accessibility for lower-income students. The Pell Grant program is specifically designed to help those types of students. The Pell Grant formula changes will allow more students and families to qualify for this need-based financial aid.
Maybe the most crucial change is the new transparency of what a student will receive based on their family’s income. The new Pell Grant will use the annual maximum award less their SAI to project their amount. The Pell amount will be available to the student since it is calculated outside the need-based formula.
The current President’s budget has increased the annual maximum award to $2,175. He plans to double this by the year 2029.
This change will increase the aid for many students since most Pell recipients have a zero EFC under the current rules. Here is the proposed list of students who qualify for the maximum Pell Grant under the new guidelines.
- Independent student tax non-filers
- Dependent children of non-filing parent(s)
- Independent students who are single parents and whose student AGI is below 225% of the annual poverty level
- Dependent children of a single parent whose parent AGI is below 225% of the annual poverty level
- Independent students who are not single parents whose student AGI is below 175% of the annual poverty level
- Dependent students with parents who are not single parents whose parent AGI is below 175% of the annual poverty level
- Students under age 33 when a parent died serving in the armed forces after Sept. 11, 2001
- Students under age 33 whose parent died in the line of duty as a public safety officer
Another change is Pell Grant access for incarcerated students. Under the Violent Crime Control and Law Enforcement Act of 1994, the Pell Grant eliminated these students. It is now available under specific rules and programs for certain students.
EFC becomes SAI (Student Aid Index)
Under the FAFSA Simplification, the EFC or Expected Family Contribution will now become the SAI or Student Aid Index. The EFC term has been debated among financial aid professionals for years. The term was misleading. For many families, the EFC number is unrealistic as an indicator of what a family should be able to pay.
A student’s EFC or Expected Family Contribution is the resulting number of completing the FAFSA. Colleges use the EFC number to identify the financial need of each student. The basic formula is:
Cost of Attendance (COA)
Minus EFC (Future Name SAI)
Equals Financial Need
The name change to the Student Aid Index (SAI) better reflects what the number determines rather than an estimate of what a family could pay. There are also changes to how it will be calculated, which are explained below.
FAFSA and IRS Data Sharing
Most of the FAFSA confusion and complexity is due to a family’s income, taxes paid, and asset questions. In recent years, the availability to simplify some of these income and tax questions has occurred. The process is called DRT or Data Retrieval Tool. It was initially not perfect but has improved each year.
The new automation is a significant change in submitting the FAFSA. Through the Future Act, various Department of Education statements, and now the FAFSA Simplification direction will have a direct feed from the IRS data rather than a manual process. As a result, better tax planning will be required for families. This change is especially true for divorced and separated parents.
The 2023-24 FAFSA submission process will still use the manual DRT option to import the income and tax information. For the college financial aid offices, it sets a DRT flag on each student’s FAFSA who uses it. The DRT flag identifier reduces the colleges’ need for additional income verification. The colleges must have a formal financial verification process since they are indirectly disbursing federal funds. The Department of Education regularly audits the college’s procedures.
FAFSA Simplification will link the IRS data using the FSA ID information. The FSA ID is required for every person to submit and sign a FAFSA. It is expected that once a person signs into the FAFSA, their IRS information will be populated automatically into the FAFSA. This automation will start with FAFSA submission in October 2023. Other Department of Education income processes, such as Student Loan Repayment, will start this automation in the summer of 2023.
The problem with the current DRT submission method is a blind FAFSA submission. This method protects people’s personal identifying information, such as the Adjusted Gross Income. With it being a blind submission, people will need tools to help them better plan for college funding, financial aid, and student loan decisions. Tools like PayForED’s College Cost Analyzer can help families get the transparency they will need if the FAFSA only provides the new SAI number.
IRS Data Automation May Not Work for Some Families
Under the current Data Retrieval Tool (DRT), some taxpayer information is not transferred, and a manual submission is required for verification. It is unclear how non-matching information will be submitted under the new FAFSA Simplification rules. The current DRT process requires that the 1040 contact information match exactly the FAFSA information. It is possible that the FSA ID contact information and the 1040 information could be different. We do not know how this information will be imported into the system.
Here is a list of other possible reasons why the IRS information will not automatically populate the FAFSA form.
- Did not file a prior year’s tax return
- Marital Status change from the previous tax year
- Married Filing Married and separate
- Filing Head of Household
- Unmarried parents living at the same address
- Filed a Puerto Rican, foreign tax return, or an IRS Form 1040-NR or 1040NR-EZ
- Have filed an extension – Tax return may take up to 11 weeks before it is available.
- Are enrolled in a tax payment plan
- Have an IRS identify security warning
- Have an individual tax bill outstanding
Need Formula Changes
We will not see the full impact of the FAFSA calculation changes until next year. Some students could see significant changes to their financial award package after their first year. For the senior class of 2023, the issue will require better planning and understanding of the possible award amount changes in future years.
With the formula changes, the colleges will also need to adjust their financial aid packaging. Depending on the college student demographics, they need to plan for these formula changes since it will impact the financial aid they will receive from the federal and state government. Listed below are the EFC/SAI formula changes.
Here is a list of the FAFSA need formula changes:
- Pell Grants will be calculated outside the need formula (More Details Below)
- The new SAI could have a value of $-1,500. The current EFC’s lowest value is 0.
- Simple Means Test Income will increase to $60,000 from the current $50,000. This income level will be applied based on the student’s status as either an independent student or a dependent student. This test will eliminate the need to report any asset values.
- IRS tax information will automatically populate many of the FAFSA financial-related fields.
- The multi-child discount for families that have multiple children in college is eliminated.
- The family business and farm asset values will be added to the asset calculation.
- For divorced and separated parents, the parent who supplies the larger amount of financial support should be the FAFSA-submitting parent.
- Child support will be reported as an asset and not as income
- Student external financial support will no longer be considered income for the calculation’s student income portion. (As an example, Grandparent 529 money.)
- State and other tax allowances are eliminated.
- Increase in income protection to offset other tax allowance elimination
- Elimination of Subsidized Usage Limit Applies (SULA) rules. This rule returns the unlimited use of subsidized loans for need-based students. In 2013, a limit was set on the number of terms a student could receive federally subsidized loans.
- Expansion of Financial Aid Profession Judgement rules. This gives the financial aid offices additional flexibility in helping certain students with unique family situations.
- New requirements on how the Cost of Attendance (COA) is defined. As stated above, COA is the starting point of the need-based formula. Schools will need to make more information available, including other items such as specific loan fees and additional costs for non-residential students.
Students of Divorced/ Separated Parents
As the FAFSA Simplification depends on existing information within the IRS system, students of divorced and separated parents will need to do some additional planning. We have always recommended that families in this situation plan ahead and include their dependent on the correct tax return based on who would be submitting the FAFSA.
The elimination of the dependent deduction, this decision made it easier for many divorced and separated parents. Under the new rules, the FAFSA parent will be based on who provides the most financial support, not where the child resides. We anticipate some pushback on this definition and clarity over the upcoming months.
The first step in preventing an issue is listing the dependents correctly on the tax return. It is unclear how this will be determined and audited by the Department of Education. Remember the FAFSA Prior Prior rule, which would be starting with the tax year of the high school sophomore (second semester) and the high school junior (first semester). The tax years and school year do not match.
FAFSA Simplification Impact 2023 College Decision
The college financial decision will be more difficult for this year’s high school seniors. The financial award rules will be changing in your second year. It will be important that students and parents understand the different types of awards they receive with their admission letters. For some families, the first-year financial aid packages could change significantly depending on each student’s situation.
We have always promoted that families take a four-year approach to college decisions. Colleges have traditionally only provided one year of financial information during the decision process. Due to the number of changes in the FAFSA Simplification, families will need to be more diligent than ever before.
The risk of not planning for the possible financial changes could result in the need to transfer in the second year. In most cases, a college transfer results in a loss of credit and a delay in graduation.
This analysis is not just applicable to the entering freshman. If you have a current college student who receives financial aid and will be in college for school year 2024-25. A review of your package of financial aid should be done so that you can avoid any surprises.
FAFSA Simplification on Student Loan Repayment
The FAFSA Simplification is highly dependent on the FUTURE Act, which is the process of allowing IRS data to flow to the Department of Education Systems. Along with the FAFSA’s impact, it will significantly affect the student loan and repayment process.
Over the past few years, usage of Income-Driven Repayment (IDR) methods has grown insignificantly. Since 2016, IDR usage is up over 75%. The IDR methods help borrowers make their payments by making them based on their income and not on the terms of the loan. These same methods are needed to qualify for the various loan forgiveness programs.
The Department of Education is planning to have the Income Recertification process of IDR automated by mid-summer of 2023. This change will increase the need for borrowers to better plan their tax filing process each year. The current process is manual. During COVID, many borrowers did not recertify their income since they did not need to. With repayment restarting in January of 2023, it will be essential for student loan borrowers to understand how they will file their 2022 taxes and make their benefits decision going into 2023.
FAFSA Simplification Summary
As you can see, we are getting more clarity on the future changes in financial aid. We are expecting additional modifications and details over time. These changes are a step in the right direction to simplifying a complex problem for many families. With more transparency, it helps us plan better and make informed decisions.
The PayForED staff is committed to updating you on information as it evolves. Most of these simplifications are due to a spending and funding bill. As a commitment to helping students and families make better college decisions, we have a webinar series that is free to attend. We call it our Virtual Financial Aid Night Series. Due to the amount of change, three specific ones will be important to college-bound students: Paying For College, Student Loans and Repayment, and Understanding Your Financial Award Letter.