With one daughter, Maeve, a sophomore in college now and my twins, Phoebe and Sophie headed there very soon, education funding has long been part of my own personal financial strategy. And like any aspect of financial planning, the ground rules can change . . . and change they have. Case in point, is the ongoing COVID crisis and the Consolidated Appropriations act which passed in response by Congress in December 2020. It will bring significant changes to federal financial aid eligibility for college students and their parents so it’s crucial to know what you’re up against – and what your resources are – when it comes time to send your kids off to that new and exciting chapter called “college life”. So, this week let’s spend our time together to explore college funding and things that affect the planning process.
Starting in 2023, parents and students from middle and upper-income families will see a significant drop in federal financial aid eligibility according to Mark Kantrowitz, publisher of Savingforcollege.com and an expert on college financing. The greatest impact will be on middle and upper-income families with more than one child in college. Gone is the preferential treatment for parents with multiple children attending college at the same time. Currently, parents can divide their EFC or Expected Family Contribution by the number of children in college. The EFC determines an individual’s or their family’s eligibility for federal financial aid. Anyone with college bound children close in age or multiple births (like twins!) will see the federally available aid shrink.
Most parents of college age students are familiar with FAFSA (Free Application for Federal Student Aid). I always chuckle that they call it a “free application” since it seems to take several days to complete the lengthy and highly detailed form. After all that work, it better at least be free, right? I’ve even had some folks tell me that they’ve become so frustrated with the complexity of the current form that they gave up in exasperation. In some good news, though, the FAFSA form will soon become shorter and simpler, reducing from eight pages and over 100 questions down to two pages and 36 questions.
Another key change from the bill is the elimination of the family EFC eligibility number, in favor of what will be called the Student Aid Index or SAI. The hope is that using the new SAI will focus on actual need rather than some sort of minimum family contribution. College funding expert Kantrowitz says that lower income families will experience greater eligibility through more favorable treatment of what is called the “cost of attendance”. Terms like Room and Board will now be called Housing and Meals and there will be more credit given to students living at home with their parents. Parents and students will also now get credit for student loan fees.
One new provision will expand some types of non-taxable income that can be sheltered from the income column in the application process. One example of this will be allowing child support to be categorized as an asset rather than income. In addition, the family income threshold for reporting assets increases from $50,000 per year to $60,000 per year. Lower income applicants who qualify for federally subsidized loans that allow for periods without interest payments will no longer have time constraints on completing their degree programs.
Also, the eligibility requirements for Pell Grants will be increased. Pell Grants are a type of financial aid that does not need to be repaid. New and more forgiving criteria may mean an additional 500,000 students may be eligible for the grants₂.
The bill also attempted to address some post-graduation issues with student loans and continued learning. The new law extends the ability of employers to provide up to $5,250 per year in tax-free payments for employees to put towards their student loan balances. In addition, a lifetime learning tax credit goes into effect. This allows taxpayers to receive up to $2,000 in tax credits for any type of secondary education classes needed to improve or acquire new skills.
Finally, in response to COVID, the new law allows financial aid offices at colleges and universities some leeway for improving financial aid access during times of national crisis. In some cases, colleges and universities will not have to count unemployment compensation when determining financial aid or Pell Grant eligibility.
These changes, though still a couple of years away, will impact how many of us plan to fund our kids’ educations, giving us another reminder of the importance of regularly reviewing our overall financial system. After all, college funding, like our own financial and retirement systems, is a long-term endeavor.
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield. Jeff can be reached at firstname.lastname@example.org.
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