#FAFSA

The Free Application for Federal Student Aid (FAFSA) is a financial aid form administered by the Department of Education that helps students qualify for loans and financial aid. The FAFSA window typically opens every year on October 1 for high school seniors planning to attend college in the following year and for returning college students. However, due to an extensive redesign of the FAFSA, the filing season for the 2024-2025 school year will be delayed until December. Here are the forthcoming changes to FAFSA.

FAFSA Changes

The simplified FAFSA will have fewer questions — 46 compared to 108 previously — and the direct transfer of financial information from the IRS to the FAFSA will now be mandatory. A new student aid index (SAI) will replace the current expected family contribution (EFC) terminology, and a raft of changes to the formula could impact the amount of need-based aid offered to students.

For example, the simplified FAFSA will expand Pell Grants to more low-income students and will link eligibility to family size and the federal poverty level. The income protection allowance for parents will increase by 20%, and the income protection allowance for most students will increase by 35%, which will shield more income from the needs analysis formula.

The new FAFSA will no longer provide an advantage to parents with multiple children in college at the same time. The current FAFSA divides the EFC by the number of children in college, but the new FAFSA does not. This could decrease aid eligibility significantly for middle- and high-income students.

Cash support and other money paid on a student’s behalf by grandparents or other relatives will not need to be reported on the new FAFSA, so they can help with college expenses without affecting the student’s eligibility for financial aid based on the FAFSA. However, grandparent gifts will likely continue to be counted by the CSS Profile, an additional aid application typically used by private colleges when distributing their own institutional aid. Read more here about the new FAFSA rules around grandparent owned 529 plans.

Summary

If education planning is important to you and your family, it may be more beneficial to focus on having a greater balance in a grandparent-owned 529 plan rather than a parent-owned 529 plan. There also may be options to change the owner of a 529 plan from a parent to a grandparent, depending on the state that your 529 plan is in. If you have both a parent-owned and a grandparent-owned 529 plan, it is important to coordinate the distributions from each account for the optimal financial aid available for the student. Due to the new Secure Act 2.0, there is also the ability to roll over up to $35,000 of funds in a 529 plan to a Roth IRA for the beneficiary if the beneficiary chooses not to go to college. The funds had to be in the 529 plan for at least 15 years to take advantage of this and the amount that can be rolled over each year is subjected to the annual Roth contribution limits. Our goal is to help you understand the overall costs of college, and the process and best types of financial aid available. Check out our “Definitive Guide to Education Planning” webinar to understand your options, the costs, and the best ways to pay for education.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

A 2023 survey revealed a notable shift in public opinion over the past decade about the value of a college degree: 56% of Americans think a four-year college degree isn’t worth the cost due to students graduating with significant debt and a lack of specific job skills vs. 42% who believe college is worth it. The survey numbers have almost reversed from ten years ago, while college enrollment has declined by about 15% over the same period. (1,2)

A big reason many Americans are foregoing college is the cost. For the 2022-2023 year (most recent data available), the average one-year cost for tuition, fees, room, and board was $23,250 for in-state students at a four-year public college, $40,550 for out-of-state students, and $53,430 at a four-year private college. (3) But many schools, especially “elite” private colleges, cost substantially more, with some over the $80,000 mark. (4)

Causes and Consequences

Public misgivings about college intensified during the pandemic, when academic instruction moved online, and students had to pay large tuition bills despite missing out on the positive aspects of campus life. During the 2022-2023 school year, 62% of high school graduates enrolled in college, down from 66.2% in 2019-2020. (5)

Sky-high costs and growing skepticism are not the only factors playing into enrollment declines. A hot job market and higher earnings for less-educated workers has made it easier for high school graduates to justify skipping college and head straight into the workforce. At the same time, alternative forms of job training, such as apprenticeships and certificate programs, have become more prevalent and are increasingly seen as viable educational paths toward a good job. (6)

There has been a surge of interest in public colleges, particularly state flagship universities, many of which offer robust academic and student life opportunities comparable to their private counterparts at a lower cost. Conversely, lower student enrollment is putting financial pressure on many small schools and forcing some to close their doors. (7)

FAFSA Changes Coming Soon

The Free Application for Federal Student Aid (FAFSA) typically opens every year on October 1 for high school seniors planning to attend college in the following year and for returning college students. However, due to an extensive redesign of the FAFSA, the filing season for the 2024-2025 school year will be delayed until December.

The simplified FAFSA will have fewer questions — 46 compared to 108 previously — and the direct transfer of financial information from the IRS to the FAFSA will now be mandatory. A new student aid index (SAI) will replace the current expected family contribution (EFC) terminology, and a raft of changes to the formula could impact the amount of need-based aid offered to students.

For example, the simplified FAFSA will expand Pell Grants to more low-income students and will link eligibility to family size and the federal poverty level. The income protection allowance for parents will increase by 20%, and the income protection allowance for most students will increase by 35%, which will shield more income from the needs analysis formula.

The new FAFSA will no longer provide an advantage to parents with multiple children in college at the same time. The current FAFSA divides the EFC by the number of children in college, but the new FAFSA does not. This could decrease aid eligibility significantly for middle- and high-income students.

Cash support and other money paid on a student’s behalf by grandparents or other relatives will not need to be reported on the new FAFSA, so they can help with college expenses without affecting the student’s eligibility for financial aid based on the FAFSA. (Grandparent gifts will likely continue to be counted by the CSS Profile, an additional aid application typically used by private colleges when distributing their own institutional aid.)

The Specter of Student Loans

Even with a discount on the sticker price, many students need to take out federal, and sometimes private, loans to cover college expenses. About 54% of the class of 2021 graduated with student debt averaging $29,100. (8)

Interest rates on federal student loans are based on the rate for the 10-year U.S. Treasury note and reset each year. For the 2023-2024 school year, rates have increased again and are now the highest in a decade.

In August 2022, an executive order cancelled up to $10,000 in federal student loans ($20,000 for Pell Grant recipients) for borrowers with incomes below certain limits, but the order was struck down by the U.S. Supreme Court in June 2023. (9)

As a result of the action from SCOTUS, The Department of Education recently launched the most generous federal student loan income-driven repayment (IDR) plan to date — the Saving on a Valuable Education (SAVE) Plan. The SAVE Plan includes multiple new benefits for borrowers, some of which take effect now and others that will take effect in July 2024 when the plan is fully implemented. Learn more here and here.

Nine repayment pauses have been in effect since the pandemic began in March 2020, but payments will soon start again in October — a sobering reality for millions of borrowers after three-and-a-half years of reprieve.

Will College Pay Off?

Many people go to college because they want to pursue a lucrative career and/or qualify for a specific occupation that requires a bachelor’s degree or higher. One smart approach is to treat college choices like any other business decision — by considering the potential return on investment (ROI).

A Georgetown University analysis of public data from the U.S. Department of Education’s College Scorecard found wide disparity in lifetime earnings among college graduates. The average difference between a high school and college graduate’s lifetime wages is about $1 million, but the difference between the lowest- and the highest-paying majors is $3.4 million. Degrees in science, technology, engineering, and mathematics (STEM) had the highest ROI, followed by business and health majors. (10)

Whether a student aspires to be an engineer or a teacher, it’s important to take a hard look at earning potential when assessing the value of any academic program. Students who plan to enter lower-paying fields may fare better if they can keep their costs down and hold borrowing to a minimum.

Tips for Managing Costs

To help avoid overborrowing, here are some ways for students to reduce college costs: pick a college with a lower net price (use the net price calculator on every college’s website); focus on in-state colleges and/or attend community college for one or two years and then transfer to a four-year college; aggressively seek out need-based and merit aid; live at home or become a resident assistant to get free housing; work part time throughout college and budget earnings wisely; and if possible, use college credits earned in high school to graduate from college early.

Sources:

1-2, 5-6) The Wall Street Journal, March 31, 2023, and March 29, 2023

3, 8) The College Board, 2022

4) Harvard University, 2023; Stanford University, 2023

7) CNBC, June 17, 2023

9) The New York Times, June 30, 2023

10) Georgetown University, 2015 (most current data)

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By: Henry VanBuskirk, CFP®, Wealth Manager

One of the biggest decisions that a person about to graduate from high school can make in life is whether or not they choose to go to college. That’s also why it’s no coincidence that when toymaker Milton Bradley was designing the board game, The Game of Life®, one of the first things you do in the game is to decide whether or not your character will go to college.¹ In the real world, electing to go to college is not as easy of a decision. The actual game of life is much more complicated. Going to college means a significant financial cost for you and your loved ones that has outpaced inflation over time. To highlight this, take the University of Pennsylvania’s tuition and associated expenses in 1960 (the year that the board game Life® was published).

Now fast forward to the 2020-2021 academic year for the University of Pennsylvania and the price tags have increased drastically:

I’m not here to preach one way or the other on whether or not this is wrong. I’m just here to point out that this is the reality we live in. If you went to college in the early 60s, imagine what life was like for you. If you have grandchildren, chances are that you want them to have a better start to the game of life than you did. If their parents do not have the means to fund college, then they will have to use student loans and fill out the FAFSA (Free Application for Federal Student Aid) to receive financial aid to help pay for those post-secondary education goals.

You may want to contribute to an investment vehicle to help them save for college. The most popular investment vehicle for saving for future college expenses is the 529 plan. There have been new changes to the 529 plan and how it interacts with the FAFSA form. My goal today is to show you how you can take advantage of these new changes to help your grandchildren have a better opportunity to graduate from college and have a fulfilling career of their choosing.

What is a 529 plan?

A 529 plan is an investment account that is sponsored by states, agencies, or investment companies, that grows tax-free, and distributions can be tax-free as long as the distributions are made to pay for qualified education expenses (such as tuition or room and board). In 2023, you can contribute up to $17k per person, per beneficiary. There is also the option to “superfund” a 529 plan, which would be making 5 years of contributions to the 529 plan in one year.  This is where you can put $85,000 into the 529 in year one (5 * $17,000) but cannot make additional contributions until year 6. This can also be used to help mitigate the size of your taxable estate at the time of your death. However, careful planning must be done since if the 529 plan is super funded and you pass away within the 5 years of super funding, the 529 plan as the contribution would then be added back to your estate.

The FAFSA Rules

The old FAFSA Rules when it came to grandparent-owned 529 plans were that distributions from the 529 plan would be counted as non-taxable income to the student and 50% of the distributed value would impact potential financial aid. This would impact the Expected Family Contribution (EFC), potentially meaning that less federal financial aid would be awarded to the student.

The new rules are that distributions from a grandparent-owned 529 plan are not counted at all towards FAFSA and are not considered non-taxable income to the student. The EFC is not impacted, and the grandparent-owned 529 plan is just assumed to not exist when it comes to awarding federal financial aid to the student. Keep in mind, however, that grandparent 529 plans are still considered on the CSS Profile (an additional financial aid form used by about 200 private colleges to award their institutional aid).

The rules for a parent-owned 529 plan are that the first $10,000 of a 529 plan account is excluded from FAFSA and only 5.64% of the account’s value above $10,000 is factored into the EFC when filing the FAFSA and determining any potential federal financial aid.

What does this mean for you?

If education planning is important to you and your family, it may be more beneficial to focus on having a greater balance in a grandparent-owned 529 plan rather than a parent-owned 529 plan. There also may be options to change the owner of a 529 plan from a parent to a grandparent, depending on the state that your 529 plan is in. If you have both a parent-owned and a grandparent-owned 529 plan, it is important to coordinate the distributions from each account for the optimal financial aid available for the student. Due to the new Secure Act 2.0, there is also the ability to roll over up to $35,000 of funds in a 529 plan to a Roth IRA for the beneficiary if the beneficiary chooses not to go to college. The funds had to be in the 529 plan for at least 15 years to take advantage of this and the amount that can be rolled over each year is subjected to the annual Roth contribution limits.

Conclusions

As a grandparent, now your grandchildren have all of the tools they need to succeed in any post-secondary education that they choose. You sit down with your grandchild, explain that you started a 529 plan to save for their future post-secondary education goals, and they give you a hug since they know that they can fulfill their dreams now because of you:

Ok, maybe some dreams should be scrutinized. I’m guessing you probably don’t want your legacy walking around in oversized shoes, wearing multicolored overalls, and donning a large fake red nose (and I’m not here to judge if that is what you want for your legacy).² If you wish, you can also change the beneficiary on the 529 plan at any time and as often as you like. Since Bart isn’t planning on using the funds in the 529 plan wisely, it may be prudent for you to change the 529 plan beneficiary to his more responsible sister, Lisa:

While Bart is upset that he won’t get any funds from the 529 plan (he’ll just need to pull himself up by his oversized bootstraps and work hard to finance his Clown College tuition), you and Lisa are ecstatic to learn how the new FAFSA rules for grandparent-owned 529 plans and how you contributing to a grandparent-owned 529 plan can bolster your grandchild’s future educational endeavors and help instill your personal morals and values to the next generation.³

Legacy planning is one of the most important financial planning topics that we address with our comprehensive financial planning services. If you are in a comfortable financial position where you are looking to help others in your family succeed by passing on your personal morals and values, we can help you fulfill those goals. To summarize, I would like to point out this chart from the National Center for Education Statistics:

To reference another board game from my childhood (this time from Hasbro), don’t take the Risk® of waiting to discuss your grandchildren’s future education needs with your family and your financial planner.⁴ The above chart shows that delaying this conversation means funding future education goals will only become more difficult over time. That hurdle can be conquered by setting up an investment vehicle like a 529 plan to fund future education expense needs now. Our team of Certified Financial Planner™ (CFP®) professionals is here to construct your comprehensive financial plan and be a sounding board for you to voice how you want your family legacy to be remembered by future generations. We’re here to help you win at this game of Life® (at least financially) and the first step to playing is by giving us a call at 714-282-1566 or emailing us directly at financialplanning@bfsg.com to schedule an appointment with our team.

Footnotes:

1. https://en.wikipedia.org/wiki/The_Game_of_Life. Also sometimes called Life®.
2. Bart from The Simpsons
3. Lisa from The Simpsons
4. https://en.wikipedia.org/wiki/Risk_(game)

Sources:

• https://archives.upenn.edu/exhibits/penn-history/tuition/tuition-1960-1969/
• https://archives.upenn.edu/exhibits/penn-history/tuition/tuition-2020-2030/
• https://www.forbes.com/advisor/student-loans/college-tuition-inflation/
• https://www.bankrate.com/loans/student-loans/college-tuition-inflation/#years
• https://www.wealthmanagement.com/college-planning/fafsa-gets-overhaul
• https://www.forbes.com/sites/robertfarrington/2021/10/29/grandparent-529-plans-get-a-boost-from-new-fafsa-form/?sh=4b02026e3acb

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

October is the kickoff month for financial aid. That’s when incoming and returning college students can start filing the Free Application for Federal Student Aid (FAFSA) for the next academic year. The FAFSA is a prerequisite for federal student loans, grants, and work-study, and may be required by colleges before they distribute their own institutional aid to students.

How do I submit the FAFSA?     

The FAFSA for the 2023-2024 school year opens on October 1, 2022. Here are some tips for filing it.

• The fastest and easiest way to submit the FAFSA is online at studentaid.gov. The site contains resources and tools to help you complete the form, including a list of the documents and information you’ll need to file it. The online FAFSA allows your tax data to be directly imported from the IRS, which speeds up the overall process and reduces errors. The FAFSA can also be filed in paper form, but it will take much longer for the government to process it.
• Before you file the FAFSA online, you and your child will each need to obtain an FSA ID (federal student aid ID), which you can also do online by following the instructions. Once you have an FSA ID, you can use the same one each year.
• You don’t need to complete the FAFSA in October, but it’s a good idea to file it as early as possible in the fall. This is because some federal aid programs operate on a first-come, first-served basis. Colleges typically have a priority filing date for both incoming and returning students; the priority filing date can be found in the financial aid section of a college’s website. You should submit the FAFSA before that date.
• Students must submit the FAFSA every year to be eligible for financial aid (along with any other college-specific financial aid form that may be required, such as the CSS Profile). Any colleges you list on the FAFSA will also get a copy of the report.
• There is no cost to submit the FAFSA.

How does the FAFSA calculate financial need?

The FAFSA looks at a family’s income, assets, and household information to calculate a family’s financial need. This figure is known as the expected family contribution, or EFC. All financial aid packages are built around this number.

When counting income, the FAFSA uses information in your tax return from two years earlier. This year is often referred to as the “base year” or the “prior-prior year.” For example, the 2023-2024 FAFSA will use income information in your 2021 tax return, so 2021 would be the base year or prior-prior year.

When counting assets, the FAFSA uses the current value of your and your child’s assets. Some assets are not counted and do not need to be listed on the FAFSA. These include home equity in a primary residence, retirement accounts (e.g., 401k, IRA), annuities, and cash-value life insurance. Student assets are weighted more heavily than parent assets; students must contribute 20% of their assets vs. 5.6% for parents.

Your EFC remains constant, no matter which college your child attends. The difference between your EFC and a college’s cost of attendance equals your child’s financial need. Your child’s financial need will be different at every school.

After your EFC is calculated, the financial aid administrator at your child’s school will attempt to craft an aid package to meet your child’s financial need by offering a combination of loans, grants, scholarships, and work-study. Keep in mind that colleges are not obligated to meet 100% of your child’s financial need. If they don’t, you are responsible for paying the difference. Colleges often advertise on their website and brochures whether they meet “100% of demonstrated need.”

Should I file the FAFSA even if my child is unlikely to qualify for aid?

Yes, probably. There are two good reasons to submit the FAFSA even if you don’t expect your child to qualify for need-based aid.

First, all students attending college at least half time are eligible for unsubsidized federal student loans, regardless of financial need or income level. (“Unsubsidized” means the borrower, rather than the federal government, pays the interest that accrues during school, the grace period, and any deferment periods after graduation.) If you want your child to be eligible for this federal loan, you’ll need to submit the FAFSA. But don’t worry, your child won’t be locked in to taking out the loan. If you submit the FAFSA and then decide your child doesn’t need the student loan, your child can decline it through the college’s financial aid portal before the start of the school year.

Second, colleges typically require the FAFSA when distributing their own need-based aid, and in some cases as a prerequisite for merit aid. So, filing the FAFSA can give your child the broadest opportunity to be eligible for college-based aid. Similarly, many private scholarship sources may want to see the results of the FAFSA.

Changes are coming to next year’s FAFSA

Changes are coming to the 2024-2025 FAFSA, which will be available October 1, 2023. These changes are being implemented a year later than originally planned. One notable modification is the term “expected family contribution,” or EFC, will be replaced by “student aid index,” or SAI, to better reflect what this number is supposed to represent — a measure of aid eligibility and not a definite amount of what families will pay. Other important changes are that parents with multiple children in college at the same time will no longer receive a discount in the form of a divided SAI; income protection allowances for both parents and students will be increased; and cash support to students and other types of income will no longer have to be reported on the FAFSA, including funds from a grandparent-owned 529 plan.

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Withdrawals from 529 educational accounts owned by grandparents and others outside the nuclear family will soon have no impact whatsoever on federal financial aid eligibility due to new changes to the forthcoming simplified Free Application for Federal Student Aid (FAFSA). Previously, those withdrawals had to be reported two years later on the FAFSA as student income. Read here for more information on how 529 educational accounts impact financial aid.

This means funds in grandparent 529 plans won’t be counted at all — not when the FAFSA is filled out and not later when distributions are made to cover eligible college expenses.  Keep in mind, however, that grandparent 529 plans are still considered on the CSS Profile (an additional financial aid form used by about 200 private colleges to award their institutional aid).

The new FAFSA form will not be released until October 1, 2022, therefore, until income reporting changes take effect, grandparent 529 plan distributions may count as untaxed income on a student’s FAFSA. We will keep an eye out for when this new rule will apply to your situation and plan. 

With a 529 plan, you can build an educational legacy for your grandchild while taking advantage of tax and estate planning benefits.  If you want to find out more about 529s or how these new rules may apply to your situation, give us a call.

Sources: JP Morgan, Forbes, and Savingforcollege.com

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.