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Saving for College and Changes to FAFSA Under COVID Relief Bill

Colleges and universities charge an average tuition of $26,820 per year for a public four-year in-state college, and $54,880 per year for a private four-year college, according to a Fidelity study, College Savings and Student Debt.  (And closer to $80,000 if you are thinking Ivy League.) After a tough year dealing with the COVID pandemic, four in ten college bound high school seniors now rate cost as the most important factor when asked about choosing where and how to pursue their education.

With college costs so high, most families turn to federal aid, which requires filling out a FAFSA form (Free Application for Federal Student Aid). Last December, the COVID Relief Bill was passed, which included several important changes to the FAFSA application; changes which could significantly impact the financial aid you or your child are eligible for.


FAFSA Changes Under COVID Relief Bill

Although changes to FAFSA do not go into effect until the 2024-25 school year, the 2022 tax-year will be the first tax year impacted (since FAFSA info is based on two years prior tax filings).

For reference, federal financial aid determinations are made using the following formula:

Cost of Attendance (COA) – Expected Family Contribution (EFC) = Demonstrated Need. And, although FAFSA is a needs-based federal program, colleges and universities also reference it when determining merit awards. The formula for non-needs-based aid is as follows:

Cost of Attendance (COA) − Financial Aid Awarded So Far* = Eligibility for Non-need-based Aid

With this in mind, here are the four most important changes to the FAFSA you should be aware of:


Change #1: Expected Family Contribution (EFC) has been renamed to the Student Aid Index (SAI). 

This change was enacted to dispel confusion caused by the term Expected Family Contribution (EFC). Understandably so, families assumed that the EFC was the amount they were expected to pay, when in reality it was simply a measure of a family’s financial health. Since each college and university has their own financial aid policy, the EFC was simply used as a signal to these colleges by which they could then determine their own financial aid offering. The goal of this name change to SAI is to create a better reflection on the true cost of college. The formula to calculate the SAI is basically unchanged.


Change #2: If you are divorced, the parent who provides the most financial support will complete the FAFSA application.

In prior years, the parent who had physical custody of the child was expected to fill out the FAFSA application. Under the new rule, it is the parent who provides the most financial support that is expected to fill out the FAFSA application. In scenarios where the parents provide equal financial support, the parent with the greater income is responsible for completing the FAFSA.


Change #3: Benefit is Reduced for Parents of Multiple College Students

While the previous EFC calculation divided the parent assessment by the number of family members in college, the new calculation does not. This will significantly impact high and middle-income families who have multiple children in college at the same time. For low-income families with an SAI of zero, however, there will be no effect.


Change #4: Financial support from others, such as grandparents, aunts and uncles, or friends, will no longer be considered income to the student

In an attempt to simplify the FAFSA application to encourage more families to apply, the Department of Education has reduced the number of questions from 108 to less than 40. One of the questions to be eliminated asks about cash gifts from grandparents (and anyone else outside of the custodial household).

This is good news for grandparents and other relatives who are interested in leaving an educational legacy while also reaping the tax and estate-planning benefits these plans offer. That’s because under the old rules, distributions from these 529 accounts were factored into a student’s “total income” when calculating need-based aid, reducing a student’s aid eligibility by up to 50%!


Saving for Your Child’s Education

At Artemis, we often encourage parents to make sure their children have a little skin in the game for college.  But for those that have intentions of paying the full cost of college, we recommend you aim to have about 75-80% of the total cost of college funded in 529’s saved by the time the child graduates high school. Utilizing a 529 plan can help you save and grow your money tax deferred. And, with the recent (BIG) change to how 529 distributions are viewed, whether you are a grandparent, or a PANK ® (Professional Aunt No Kids) like me, you can now contribute to a loved one’s education without the financial aid hit of the past.

College is expensive. There is no way around it. But education is an important investment in a child’s future. By planning ahead and utilizing 529 plans, you can ensure you are financially prepared when it comes time to sign the tuition check. After all, that day will be here sooner than you think!

 Finally, if you’re looking to dig in and learn more about saving for your child’s future education, I recommend Ron Lieber’s newest book, The Price You Pay for College: An Entirely New Road Map for the Biggest Financial Decision Your Family Will Ever Make.


*includes aid from all sources, such as the school, private scholarship providers, etc


Picture of Kathleen McQuiggan
Kathleen McQuiggan
Kathleen is a Partner and Wealth Advisor at Artemis Financial Advisors LLC. She has 30+ years of experience in the financial services industry. Her specialties include the financial planning needs of women and employing sustainable investing approaches. She considers herself a financial ally, helping clients develop strategic wealth plans.

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