FAFSA Changes You Need To Know (Part 3)
Part Three of this three-part blog series is all about the Free Application for Federal Student Aid (FAFSA) changes that pertain to both taxed and untaxed income.
These changes listed below are set to begin in July of 2023 and will impact the academic year of 2024-2025. That means that the following fall (after July of 2023), parents of seniors (graduating 2024) will be filling out the FAFSA with all its new terms and conditions. It also means that parents of students who are already in college will see these impacts and changes, as well. While this might seem far away, and therefore not a huge priority, I invite you to reconsider.
Here’s what many families are not aware of: the FAFSA is based on the year before the year before the year. Let’s break that down.
The 2024-2025 academic school year will be based on the 2022 tax filing. 2022 is the year before the year (2023) before the year (2024). What does this mean for you? It means that what you do financially this year, and how you file your 2022 taxes in the spring of 2023 will have a big impact on how you fill out your financial aid forms and how much aid your student/family will receive.
Now that you understand the urgency, let’s take a look at part three of this three-part blog series that focuses on the changes that may impact families the most. If you have not yet read part one and part two of this blog series, please follow the links to do so.
Grandparent-owned 529 Plan on FAFSA
As of now, a parent or student-owned 529 account can negatively impact the outcome of the FAFSA. These accounts will increase the Expected Family Contribution (EFC), soon to be called the Student Aid Index (SAI), which increases the amount the family is expected to pay. This basically penalizes a family and increases the amount the family has to pay due to planning and saving for college.
However, the changes to the FAFSA will favor grandparent-owned 529 accounts. This can be a very beneficial strategy for using 529 accounts.
This type of cash support (or money paid on the student’s behalf) will not be counted on the FAFSA. When a grandparent gifts the grandchild money, or the family takes a qualified distribution from a grandparent-owned 529 account, this cash support will not be used in the EFC or SAI formula.
Income Protection for Parent and Student Income
Both the parent and the student have a certain amount of income each year that is exempt from the FAFSA. As of now, these are the current parent and student income protections listed below.
Current Parent Income Protection = approximately $4,000 per year
Current Student Income Protection = approximately $6,800 per year
The new changes to the FAFSA will increase the amount of income that is exempt from the FAFSA.
New Parent Income Protection = approximately $8,000 per year
New Student Income Protection = approximately $9,400 per year
This is especially important to note for the student. Anything over $9,400 per year that the student makes in income will be assessed at 50%. Knowing this, it may be beneficial to keep an eye on that income level for the student and cap it from going over this. Otherwise, that additional income can negatively impact aid.
That’s All For Now
This concludes Part Three of this three-part blog series. We hoped this has helped you get a better understanding of all the chances to come.
If you’d like to learn about solutions you and your family can use in order to prepare for these changes while also setting your student up for success academically, be sure to check out the DIY College Planning Course available here at College Strategy.