Help me understand how Lower income but Frugal Savers are being penalized by NEW College formula...

You have that backwards. Because you are in a low bracket it is cheap to put money into a Roth IRA or Roth 401k.

Ignoring state income taxes, if you put $5000 into a Roth 401k or Roth IRA the foregone tax deduction is only $750. (15% federal tax marginal rate)

For someone in the top bracket, the foregone tax deduction of a $5000 Roth 401k or back door Roth IRA is $1,980. (39.6% marginal rate)

When you take retirement withdrawals (generally at least age 59.5) of Roth money you pay ZERO income taxes. For retirement withdrawals of non-Roth money you pay income tax at whatever your marginal rate is that year.