FAFSA Simplification Act: Changes Coming Soon

A desktop showing a clipboard with a piece of paper that says "Financial Aid" and on top of it is a graduation cap with some dollar bills in the upper left hand corner.

FAFSA is a Free Application for Federal Student Aid to help students/parents pay for college tuition. However, many students and their families have avoided completing the application due to its complexity and a common misunderstanding regarding who is and isn’t eligible to receive financial aid. To remedy this, in 2021 Congress passed The FAFSA Simplification Act (FSA) as part of the Consolidated Appropriations Act of 2021. The Department of Education is responsible for making the changes.  Although the original release date was delayed, we now have the start date for the 2024-2025 FAFSA, which is set to be December 2023. (Typically, the start date for submitting FAFSA is October 1 – and the October 1 start date will resume with the 2025-2026 FAFSA.) 

Keep reading to learn about significant changes designed to update the processes for applicants and change the way federal student aid eligibility is determined. 

FAFSA Application Process Changes

Of course, one significant goal of the The FAFSA Simplification Act is to make the process of applying easier for students/their families so that it’s more widely used. Scroll over the icons below to see the user-side improvements:

Faster & Easier

The FSA will reduce the 108 questions to about 36. Some applicants will answer less due to intelligent skip logic and better alignment of the form with federal income tax returns.

Additionally, the questions will be edited so they are easier for all applicants to understand what they are answering.

Automatic Tools

Tax information will be sent automatically.

When completing the FAFSA, applicants and their spouse/parents will be required to consent to the IRS transferring federal tax information to the FAFSA using the IRS Data Retrieval Tool (DRT).

More Options

A student can now list up to 20 colleges, which doubles the old FASFA limit of 10.

Though the user-side changes may seem simple, they are expected to make a great impact on feasibility of submitting FAFSA going forward. On the other side, there are several amendments to how FAFSA will calculate financial aid eligibility. 

FAFSA Financial Aid Eligibility Changes

The Student Aid Index

For decades, FAFSA has contained an index called the “Expected Family Contribution” (EFC), which will be renamed to the “Student Aid Index” (SAI). The EFC uses information submitted within the FAFSA application to calculate how much a student/their family can contribute to college tuition. Then, the EFC is subtracted from each college’s “cost of admission” (COA) to reveal how much financial aid a student is eligible to receive from the government and the school. However, the EFC calculation often produces results beyond the family/student’s actual means. This has contributed to students turning to unsubsidized loans. The FSA Amendment to replace the EFC with the SAI is intended to more accurately show the true costs of college.

The SAI calculation will generally remain the same as the EFC (just with some rule changes you can read about below), but difference is that the college requirements for “Cost of Attendance” will be much more inclusive of actual costs. Click here to see the COA changes.

Pell Grant Changes

In the past, you had to complete the FAFSA to receive a Pell Grant, which is money provided to students with exceptional financial need that does NOT have to be re-paid. Under FSA, students have an option to estimate their Pell Grant award before applying for financial aid, but there are several FAFSA changes that can affect Pell Grant eligibility:

  • FAFSA will now use both adjusted gross income (AGI) and the SAI to determine eligibility for a Pell Grant, which could make more students eligible.
  • The amount of Pell Grant awarded will decrease for students not enrolled full-time.
  • $750 is set as a minimum award amount for full-time enrollment for the 2023-24 award year.
  • If the student is eligible for the maximum federal Pell Grant, the SAI will be set to 0. But, the financial aid formula can allow for an SAI to be below zero, as low as -$1,500. This will help colleges more accurately determine a student’s financial needs. 

Potential DECREASES in FSA Financial Aid Eligibility

Divorced/Separated Parents

For divorced or separated parents, the FAFSA financial aid eligibility will now be determined by the income of the parent who provided more financial support through the year. In the past, FAFSA was determined by whoever was the “custodial parent”  – meaning whoever the student lived the majority of the 12-month period prior to the application opening date of 10/1.

Going forward, instead of using the custodial parent’s income information, the new FAFSA will default to the parent who claims the student as a dependent on their tax returns. Typically, the parent claiming the student on his or her tax return is the higher earner (although this is not always the case). In cases in which the support provided is 50/50, it may default to the parent or household with the highest adjusted gross income. 

Multiple Children in College

Under the old rules, a family’s EFC was divided equally by the number of children simultaneously in college, which could drastically increase the amount of financial aid provided to families with twins or children close in age. The new FAFSA will still request information on the number of children in your household, but the SAI will no longer provide a discount for multiple children in college at the same time. This will be a substantial change, and likely decrease aid eligibility for many families.

Potential INCREASES in FSA Financial Aid Eligibility

Income Protection Allowance

The FAFSA income protection allowance (IPA) is an amount that is excluded from the financial aid eligibility formula. Both students and parents can receive an IPA amount.  For parents, it is the amount of income that covers a family’s basic daily living expenses – and the exact amount varies from family to family. For students, it’s an amount of money the student can earn working that will not affect student aid eligibility. 

The FSA Amendment increases the IPA for parents by 20% and by 35% for dependent students. However, as noted above, the number of children in college will no longer be factored into the formula for the parent allowance. 

Cash Support

Cash support and other types of income will no longer have to be reported on the FAFSA, including funds from a grandparent/family-owned 529 plan. In the past, the amount of money a relative or friend contributed to help pay for college was included as the student’s untaxed income – which increased their EFC and therefore decreased the amount of aid available to a student.

Under the FSA, these contributions made in 2023* and later will not be considered in the SAI calculation for financial aid. *The FSA amendments are currently set to go into effect this year. If another delay in implementation occurs, these non-parent contributions toward college costs may continue to be assessed as the student’s untaxed income.

New FAFSA Changes

As you can tell, the changes under the FAFSA Simplification Act are varied. The major wins are that filling out the FAFSA will certainly be more streamlined, the Pell Grant is more accessible, and outside support will no longer be included as income. However, some families will face the negative consequence of not being able to discount having more than one student in college at a time. Ultimately, if funding someone’s college education is important to you, now is the time to set up a meeting and start planning (and the earlier the better!!). Contact our office for advice on what you can do to prepare.

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Taylor Clinkenbeard, CPA

Taylor is a Strategic Analyst in our tax and client accounting services teams.  She has developed specific expertise in software, accounting processes, and tax laws to serve our clients.

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