What is the FAFSA?

Many parents of college-bound students feel anxious when completing financial aid forms, specifically the FAFSA.  The Free Application for Federal Student Aid (FAFSA) is the form families submit to apply for federal financial aid. It is used by the federal government, states, and colleges to award grants, work-study programs, and loans.  Completing the FAFSA forms is required in order to get the Student Aid Index (SAI) which was formerly called expected family contribution number. The SAI is generated after inputting your personal financial information into the FAFSA form. The process does require some detailed financial organization, but there is a lot of helpful information available to aid in this calculation. A good start would be to go to the government websites or check out the insights section on the PayForED website.

PayForED has created three comprehensive student loan solutions to help you plan your child’s educational future.  To help you better understand your Student Aid Index (SAI), we have created a list of the essential concepts a family should review to help improve your college decision.

Student Aid Index (SAI)

Most people believe the SAI to be one number, but it is the sum of four significant calculations.  Our SAI chart breaks down the Student Aid Index, allowing parents and students to understand the details involved in this calculation and their corresponding positioning. The calculation involves four separate numbers that are summed together: the parents’ income, the parents’ assets, the student’s income, and the student’s assets.  Each of these components has distinct rules and allowances.

A family will receive their Federal SAI by completing the Free Application for Federal Student Aid (FAFSA).  This process only provides one number and does not break out the four separate numbers.  To create an effective college-funding strategy, you need to understand the four quadrants of the SAI calculation. The SAI Chart below shows the four individual numbers used to calculate the SAI number.  Some colleges require additional financial information beyond the FAFSA, so please review your college list and their financial aid form requirements.

The Department of Education manages the FAFSA process and SAI rules. The actual FAFSA process gives the family their SAI after completing the form. Currently, the government source does not provide the four-quadrant details of the Student Aid Index.  The PayForED College Cost Analyzer does provide the details of the SAI and can be used as an estimate before submitting your FAFSA.

FAFSA is Federal Methodology

The FAFSA process is also called the federal methodology. Any college or postsecondary education program that receives federal funds will require the student and family to submit a FAFSA form. This form has to be completed in order for the student to qualify for any federal financial aid. The exception to this rule is merit aid, which can be granted without any financial aid forms submitted.

Institutional Methodology

Some colleges require a second financial aid process called the institutional method. The most common of these methods is the CSS Profile managed by College Board. Generally, colleges that use a secondary process have a significant endowment that they are trying to distribute to their targeted applicants. The institutional methods will ask additional questions beyond the FAFSA, and there is often a fee to use these methods.

One of the biggest differences between the federal and institutional methodologies is how the colleges recognize the SAI. The FAFSA federal methodology value will be a fixed number at every school. The institutional method value will vary from college to college based on how each college develops its calculation. Most schools will not disclose your institutional number to you. This goes back to how schools use an admissions matrix to select their students and plan their revenue stream for the upcoming year. Remember, the matrix includes how much money you need and, indirectly, your ability to pay.  This process is called Enrollment Management and is often not explained to families.

Methodology Differences

There is a great deal of confusion between the two methods. An essential part of creating your funding strategy is determining your college list. If the colleges on your list do not include a CSS Profile school, you will not need to worry about completing the additional forms.

In general, the more competitive colleges use an institutional process. Over the past few years, the difference between the two methodologies has lessened. Listed in the table below are the major calculation differences between the federal and institutional methods.

Classification of the Applicant

The majority of college-bound students will apply for financial aid as dependent students. This means students receive 50 percent of their living expenses through the support of a parent or guardian. These rules are very similar to the IRS rules when determining the filing status of your taxes.

To qualify as an independent student, you must meet at least one of the following conditions:

• Be twenty-four years or older
• Be married
• At the beginning of the coming school year, be working on a master’s or doctorate degree program (such as an MA, MBA, MD, JD, Ph.D., EdD, graduate certificate, etc.)
• Be currently serving on active duty in the US armed forces for purposes other than training (if you are a National Guard or Reserves enlistee, you must be on active duty for other than state or training purposes)
• Be a veteran of the US armed forces.
• Have—or will have—children who will receive more than half of their support from you prior to the application year you are applying for
• Have dependents (other than your children or spouse) who live with you and who receive more than half of their support from you, now and through the upcoming year
• At any time since you turned thirteen, both your parents were deceased, you were in foster care, or you were a dependent or ward of the court.
• It has been decided by a court in your state of legal residence that you are an emancipated minor or that you are in a legal guardianship.
• At any time on or after July 1 of the previous year, you were determined to be an unaccompanied youth who was homeless or self-supporting and at risk of being homeless, as determined by a) your high school or district homeless liaison, b) the director of an emergency shelter or transitional housing program funded by the US Department of Housing and Urban Development, or c) the director of a runaway or homeless youth basic center or transitional living program.

Source: Department of Education

The advantage of being an independent student is that the SAI will generally be lower. A lower SAI will provide increased financial aid for the student in most cases. An independent student will also get an increase in Federal Direct loan limits—this means an additional $4,000 of direct unsubsidized loans per year.

The independent student will not have the parents’ quadrants to complete the FAFSA form. As a result, the parent’s assets and income will not be part of the SAI calculation. This could be an advantage.

In the past, some students tried to establish themselves as independent when they weren’t. The rules are very strict now, and with the IRS link, it is almost impossible to achieve an independent classification without one of the requirements listed above.

SAI Four Components

Now let’s dive into the SAI components so you can better understand the major parts of the SAI calculation.

The first component of the SAI is the parents’ income, which for most applicants will be the most significant component of their SAI. It is based on the family’s structure, the number of dependents, adjusted gross income, and state of residence.  These terms are similar to your federal tax terms, as the two systems are now linked.

The parent income section of the calculation is progressive.  As the family’s Adjusted Gross Income increases, a higher percentage of the multiplier will be applied to the income contribution amount.  This method will result in the SAI increasing more quickly.

The one exception to the adjusted gross income is in the years you are applying for financial aid; the amount a person contributes to a traditional IRA will be added to the income number since it appears on the 1040.  Other deferred contributions that appear on your W-2, such as 401 (k), 403 (b), and 457 contributions, will not be included as income for the FAFSA.  Using the company retirement contributions will reduce the income section of the FAFSA and have higher annual contribution limits than a traditional IRA.

The second component is the parents’ asset calculation.  For the parents’ FAFSA asset calculation, nonretirement assets are all included.  Small farms, small family businesses, and home equity are also excluded in the 2026-27 FAFSA submission. Your primary residence home equity is also not included as a counted asset. There is an allowance amount based on the tax-filing status and the age of the oldest FAFSA-filing parent. The asset amount that exceeds the allocation amount will be multiplied by 5.64 percent to arrive at the parent asset calculated amount.

For dependent student income, the rules are very simple. Since dependent students are included on another person’s tax return, their income allowances are limited by the state they reside in and the federal income exception amount. Amounts over the allowances are weighted at 50 percent.

In the SAI student asset calculation, there are no allowances, and assets are weighted at 20 percent. Therefore, many people believe that removing assets from the student’s name is a good idea. People compare the student’s percentage of 20 percent to the parents’ percentage of 5.64 percent and disregard the cost of attendance as part of their decision.  This asset-moving strategy is a standard error.

It is best to be cautious when liquidating student assets.  The first issue is the tax consequence of liquidating assets.  For dependent college students up to the age of twenty-four, if there is a taxable gain from the sale of assets, the “Kiddie Tax” rules will apply.  For the student, the first $1,150 of unearned income will be tax-free; the next $1,150 is taxed at the child’s marginal tax rate, and any amount exceeding that will be taxed using the parent’s marginal tax rate. Do your research, as this limit changes periodically in accordance with the tax code.  Depending on the amount of gain, a very high tax rate could be charged due to the parents’ income level.

The next issue is ownership of the account or asset.  If the primary social security number on the account belongs to the student, then the asset or account is legally considered their money.  Legally, this money must be spent on the student’s behalf.  A parent would need documentation to properly liquidate a Uniform Gift to Minor Account (UGMA account), which is the type of account issued for most children under eighteen.

FAFSA Timing Is Important

There are two important aspects of maximizing your financial aid award: The first is the timing of the financial decision for the FAFSA reporting, and the second is the impact of other siblings.  The 2023-24 FAFSA was the last year of the multi-child discount for families that have multiple children in college at the same time.  This is part of the FAFSA Simplification change.

The FAFSA form becomes available on October 1 of each year and is used for student financial aid packages.  When completing the FAFSA, the tax year and school year do not match. As an example, for entering college freshmen, the school years that will be used to complete the FAFSA are their second semester of junior year and their first semester of senior year of high school. With that understood, the best time to review your financial aid position is the tax year when your child is a second-semester sophomore and first-semester junior in high school. As an example, the graduating high school class of 2026 will be using the 2024 taxes to complete the FAFSA.

It is also important to take into consideration when other siblings will be in college at the same time. This is why a four-year cash flow can help you determine the best college value analysis and better allow you to determine the debt structure for paying for college .  The multi-family discount for college was eliminated starting in the financial aid school year of 2024-25.  It is still important to review when the last sibling will be in college and review retirement dates to adjust how this will affect paying for college and your retirement goals.

Having a better understanding of your SAI will allow you to make a better paying-for-college strategy. Doing a four-year cash analysis helps families project their total financial cost of college. Currently, most schools will only give you a one-year projection.

Creating a Federal Student Identification or FSA ID

Before you start your FAFSA, the student and at least one parent must create their FSA ID.  The FSA ID is the acronym for Federal Student Aid Identification and is the login and electronic signature process used by the Department of Education.  The FSA ID replaced the FAFSA Pin on May 10th, 2015. For students, parents, and borrowers, the FSA ID will be the electronic method used to apply for federal student aid and access any federal student aid records online.   This login process authenticates the user and allows them to access the following websites or processes:

• FAFSA on the Web
• NSLDS® Student Access
• StudentLoans.gov
• StudentAid.gov
• TEACH Grant

The FSA ID login process improves security since you create a user-selected username and password.  The person will enter less information with this single sign-on process.  The FSA ID eliminates the need for people to enter personal identifiers such as Social Security, name, and date of birth each time they want to login.   The FSA ID gives people a lifetime ID. The FSA ID is a similar process to most other secure login systems used for your banking and credit cards.

To establish the FSA ID click here.

DDX or Direct Data Exchange

The colleges verify the FAFSA information through a process called Direct Data Exchange (DDX).  Starting with the 2024-25 FAFSA, the retrieval of Federal Taxpayer Information by the IRS Data Retrieval Tool (DRT) was replaced by the IRS Direct Data Exchange (DDX). The IRS and the DDX tool transfers the tax return information directly onto the FAFSA form. To import this information, the tax information needs to match the input exactly.  Before disbursing financial aid, colleges need to ensure that the information is reported correctly.

The problem is that this imported information cannot be changed or even seen by the person who is submitting the FAFSA.  This inability to see or change a person’s number was done to minimize personal identity issues that occurred a few years ago.

On October 1^st, the FAFSA form became eligible for the 2026-27 school year submission.  For this FAFSA, parents and students will be using their 2024 tax return information. Under the current rules, the FAFSA needs to reflect the IRS tax information submitted for that base year.  IRS partnered with the Department of Education (ED) to simplify the online process to apply for Free Application for Federal Student Aid (FAFSA).

FAFSA SAR

The Student Aid report is generated after the FAFSA is submitted.  It is the information that will be sent to the colleges. Normally it is available 2 – 5 days after the FAFSA is submitted.  It is highly recommended that you review this report to confirm your submitted information.

This is also a big difference between the FAFSA and Institutional financial aid methods.  The SAR confirms your information and generates the Student Aid Index or SAI. The Federal SAI is the same number at every college.  The Institutional SAI will vary by college and is often not disclosed to the student and family.

Who Should complete the FAFSA?

The FAFSA should be completed by every family even if you do not think you will qualify for financial aid. Completing the FAFSA allows the family to structure their student loans better, show the college your ability to pay, and qualify for need-based financial aid. It is the only way a family and student can be eligible for federal loans.

It can also be part of a paying-for-college strategy if your child is thinking of going to post-graduate school, as undergraduate loans have a lower interest rate than graduate loans.  It just takes planning!

What Is FAFSA Summary

The FAFSA process is a cornerstone process for creating effective strategies for paying for college.  PayForED helps families and students understand college affordability, financial debt and the benefits of earning a college degree through our educational material, software resources and trained advisors.  The PayForED student loan solution provides a detailed SAI (Student Aid Index) calculation by college.  We also have a list of trained advisors in college funding and student loan repayment, in case additional help is needed.