FAFSA changes shape financial aid eligibility for 2024-2025 & beyond

Is someone in your family college-bound? Take note: The Free Application for Federal Student Aid (FAFSA) is undergoing major changes. The revised form will arrive in December this year for the 2024-2025 school year.

You fill out the FAFSA to request federal need-based financial aid to help you pay for college. Typically, a new FAFSA is released annually on Oct. 1 for the school year that starts the following fall. This year's release is delayed so the 2024-2025 FAFSA changes can be incorporated.

That doesn't mean it's too soon to start planning. A lot already is known about the new FAFSA. Let's go through its most significant revisions.

The new FAFSA is the result of the FAFSA Simplification Act passed by Congress in 2021. The overhaul was driven by several goals, including:

• Simplifying the application process. The previous form was longer and more complex than the new version. That kept some applicants from filling it out, which prevents them from accessing financial aid.
• Adjusting the eligibility formulas. Changes in how the form assesses income and assets were designed to help students and families with the greatest need maximize their financial aid awards.

Historically, a key factor in determining federal financial aid eligibility was the Expected Family Contribution (EFC), a dollar figure calculated from information that applicants supplied in the FAFSA. The new FAFSA replaces the EFC with the Student Aid Index (SAI), which is calculated a bit differently.

One reason for the change was to minimize confusion. Despite its name, the EFC was never meant to express how much a family would pay toward college expenses. Instead—as the new name "Student Aid Index" better suggests—the figure serves as a guidepost to help schools assemble financial aid packages based on what students need.

A college determines financial need by subtracting the SAI and other financial assistance from the school's estimated cost of attendance.

The old EFC formula couldn't result in a figure below zero, but the SAI calculation can go as low as -$1,500. Allowing the SAI to be a negative value helps identify the students with the highest need. It may enable some students to receive aid beyond the school's cost of attendance, allowing them to cover additional college-related expenses.

A major factor in determining the SAI is student and family income. The new FAFSA assesses income differently than in previous years. Changes include:

The FAFSA's income protection allowance (IPA) is a portion of parent and student income that's left out of the SAI calculation. The IPA is rising significantly with the arrival of the new form—parent IPA amounts are up 20% while most student IPA amounts are up as much as 35%. Students who are single parents could see IPAs up to 60% higher than in previous years.

The new FAFSA only considers income reported on federal tax returns. That means you no longer must report certain untaxed income sources, including:

• Contributions to tax-deferred retirement accounts, such as 401(k)s and 403(b)s. This change may benefit parents who increase or maximize their retirement-savings paycheck deductions.
• 529 education savings plan distributions from grandparents. Previously, up to 50% of distributions from grandparent-owned 529 plans toward the student's education were added to the EFC. The new FAFSA doesn't treat those distributions as income. Unlike parent- or student-owned 529 distributions, they don't count as assets either.

The way EFC was configured before, 50% of a student's annual income was part of the total. Now, up to $9,400 doesn't factor into the SAI calculation at all. If the student earns more than that, then 50% of the additional amount is added to the SAI.

Before the overhaul, a parent receiving child support would report the money as untaxed income. Now, the FAFSA treats those received payments as assets. That means a smaller percentage of their value is added to the SAI.

Parent and student assets still play a big role in the calculation of the SAI, but the FAFSA has revised some aspects of how they're counted. Changes include:

On the old FAFSA, if your farm or business employed fewer than 100 people, its value was excluded from EFC calculations. Now, all family-owned farms and businesses count as assets in the SAI formula.

Previously, to exclude assets from the EFC calculation, you had to qualify based on answers to a series of questions called the Simplified Needs Test. Now, you don't have to report assets on the FAFSA if any of the following are true:

• Your income is below the minimum amount that requires filing a federal income tax return.
• Your adjusted gross income is less than $60,000; you don't file tax Schedules A, B, D, E, F or H; and you don't file a Schedule C showing a net income or loss of $10,000 or more.
• You receive benefits from a federal means-tested program such as the Supplemental Nutrition Assistance Program (SNAP).
• You qualify for an automatic maximum Pell Grant.

As mentioned, a key aspect of the FAFSA overhaul was simplification and streamlining. A handful of updates to the new form adjust the ease of reporting and the information's logical impact on eligibility.

In past years, families with more than one student attending college may have had a reduced EFC. Now, the number of family members in college has no impact on the SAI.

Family size will now reflect the number of dependents reported on federal tax returns. Family size is a factor in determining Pell Grant eligibility.

A new formula to determine Pell Grant eligibility factors in SAI along with adjusted gross income. As a result, some students will receive grants even if they don't qualify based on income alone.

Previously, if a student's parents were divorced, the custodial parent filled out the FAFSA. Now, the parent who provides the most financial support must submit the form.

The new form features just 36 questions compared to 108 on last year's version. Among the questions nixed were ones about selective service and drug-related convictions. Plus, income information now can be imported directly from previously filed tax returns. The new FAFSA also will be offered in at least 11 languages, further eliminating barriers to applying.

If you or your child plan to attend college in the near future, it's important to understand how the FAFSA's overhaul may affect your financial aid eligibility. A Thrivent financial advisor can help you navigate the new application and explore additional ways to cover education expenses.