Dear Colleague Letter: FAFSA Simplification

Paying for College
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Very informative: FAFSA Simplification Act Changes for Implementation in 2024-25 | Knowledge Center.

Some key takeaways:

The formula no longer takes into account additional students in college when calculating SAI. “Schools may use professional judgment to adjust other data items related to COA or SAI that reflect costs associated with additional family members enrolled in college.”. This will require that the family request a PJ review, and it does not allow the school to adjust the SAI itself (in the past, the parent portion of the EFC was divided by the number in college). I honestly don’t know what schools would adjust or how it might affect the SAI.

Family size will be based on dependents reported on parent tax return. Applicants may update family size if it changes after filing the tax return.

Parent 529 account balances will only be reported if they are designated for the student (sibling accounts won’t be reported on a FAFSA other than their own).

There will no longer be an option for an independent student to provide parent information. This will impact some professional programs that have required it to award their own aid (they’ll probably have their own form or possibly require Profile).

The value of business with fewer than 100 employees will now be reported.

The value of a family farm will now be reported. There was legislation introduced to try to change this, but apparently it didn’t pass.

Certain types of untaxed income will no longer factor into the SAI, including housing, food, and living allowances paid to members of the military and clergy; veterans noneducation benefits; and the general categories of “other untaxed income” and “money received by or paid on behalf of the student.”

Cooperative education employment earnings, child support paid, combat pay, and the state and other tax allowance are no longer treated as allowances against income in the SAI formula and will no longer be reported on the FAFSA. This may negatively impact co-op students. FWS earnings will still offset total earnings, but they won’t be reported on FAFSA … schools have to make the adjustments using their records. Students who earned FWS and later transferred schools may want to talk to their financial aid office about an adjustment based on providing their records from their previous school (this would require a special circumstances request).

The Simplified Needs Test (SNT) and Auto-Zero were eliminated. Some applicants will still qualify for an automatic Maximum Pell Grant or be exempt from asset reporting based on similar criteria. The Dear Colleague letter details who will have assets ignored, how income affects the SAI and Pell grant, how negative SAI works, etc.

Pell grants are no longer prorated for less than full time enrollment in the manner they used to be. Instead, the Pell grant amount for the semester based on full time enrollment will be multiplied by the number of credits divided by 12. This may result in a higher or lower semester total than what the student would have had using the previous formula.

There may be other changes that stick out for those of you reading this.

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This will be very easy to game, as changing a 529 beneficiary is a fairly simple process.

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I agree. However, the idea of FAFSA simplification was to help the neediest. I assume that Congress figured those who save a lot in 529 accounts usually don’t qualify for a Pell grant. They aren’t concerned with what a college might want in order to award institutional aid.

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My thought exactly. Parents could have $300,000 total in 529 accounts for two kids…and would just need to make sure that as of the date of filing…all the money was in the other sibling’s 529 account. Right?

No simplified needs test removal shouldn’t be an issue. In my opinion.

I do wonder how some medical and law schools will deal with independent students no longer being able to provide parent financials. Honestly this places a lot of burden on these schools because the vast majority of their students are independent. For the schools that require this info, it will mean doing something for every single student up to whatever age the school requires.

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Exactly. There are numerous administrative burdens for processing federal aid as a result of the changes. I am really glad that I’m not dealing with this!

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A bit late to the party here. One positive change I noted is that 401k and 403b retirement contributions will no longer count as income. So, increasing these contributions up to the maximum can reduce your SAI significantly. The opposite of the EFC formula which effectively penalized you for making large contributions during the college years.

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True, although we don’t yet know if the CSS Profile schools will also adopt this change. We will know this cycle and/or when the NPCs are updated.

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That is an excellent point. The contributions are not counted due to the FAFSA simplification process. Very few families that receive Pell grants are able to save significant sums in their 401k accounts, so for federal aid, the idea is that families who make significant contributions to their 401k accounts aren’t receiving Pell anyway (yes, there are always exceptions). But … institutional methodology, which Profile uses, may well take them into account.

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So pretax 401k contributions do not count any longer. Is that also for HSA contributions deductions from your paycheck?

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I don’t believe that they will be considered. I don’t see anything in the typical FAFSA changes discussions that specifically addresses this, but it’s not collected on the FAFSA. See this link for 2024-25 pdf, which illustrates the questions that are asked, in the order they are asked (although some are skipped depending on responses): https://www.nasfaa.org/uploads/documents/Draft_FAFSA_2024_25.pdf.

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Note that many CSS Profile schools ask for 401K contributions and HSA contributions, and add those back to income. It’s not clear what CSS Profile schools are going to do this cycle with regard to those items…just because FAFSA doesn’t add those back to income anymore, doesn’t mean the CSS schools have to follow. If you have CSS schools on the list best to call their FA dept and ask. Of course, you will know their policy once their CSS Profiles open on Oct 1.

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I meant to add that. Thanks for doing it!!

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A discussion I found suggested that only tax return info will be considered for FAFSA. So, HSA contributions made through payroll wouldn’t be added back, while those made outside payroll would be. I don’t know if this is accurate. If you are required to use the CSS profile, things will very likely be different.

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From the Federal Student Aid Partners website (FTI = Federal Tax Information):

The following data received by the Department from the IRS are considered FTI, starting with award year 2024-25 data:

  • Tax Year (ex. Award year 2024-25 is based on 2022 tax year information from the IRS)

  • Tax Filing Status

  • Adjust Gross Income (AGI)

  • Number of Exemptions and Number of Dependents

  • Income Earned from Work

  • Taxes Paid

  • Educational Credits

  • Untaxed IRS distributions

  • IRA deductible and payments

  • Tax exempt interest

  • Untaxed pension amounts

  • Schedule C net profit/loss

  • Indicators for Schedules A, B, D, E, F, H

  • IRS response code

HSA contributions outside of payroll deductions are reported on Form 8889, carried onto Schedule 1, and then reduce taxable income. They are not reported in such a way that they would be added back via the items that will be transferred from the IRS.

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