overpaying for college
Why are You are Overpaying for College?
September 17, 2019
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Middle-Class Financial Aid Cuts Coming in 2023

How FAFSA Calculates Your EFC

Don’t Pick Your College Without Considering these Changes

Published by Robert J Falcon, CFP®, CPA/PFS, CCFC®, MBA

As part of the Covid relief package passed by Congress in December 2020, the Free Application for Federal Student Aid (FAFSA) Simplification Act makes significant changes to the FAFSA form beginning with the 2023-2024 school year. The good news is that more low-income families will qualify for full Pell Grants, and there will be a significant reduction in the number of questions. However, middle-class families entering college today must be prepared for potentially significant cuts to their aid packages beginning with the 2023-2024 school year.

EFC/SAI Primer
The income and assets of parents and students on the FAFSA drive the calculation of the Expected Family Contribution (EFC), which represents the minimum amount families are expected to pay each year for college. Most families pay much more than the EFC, and since the term was seen as misleading, the EFC term is being replaced in this law by the Student Aid Index (SAI). I’ll refer to this number hereafter as the “EFC/SAI.”

Families should calculate the EFC/SAI as the first step in their college search if they do not want to overpay for college. The EFC/SAI reduces the total Cost of Attendance (COA) at a school to determine your financial need. For example, if a student attends a college with a COA of $75,000 and the family has a $60,000 EFC/SAI, the family has $15,000 of financial need. Colleges typically “meet” 50% to 100% of that need, and they may do so with grants (free money), loans, and work-study. So, the lower your EFC/SAI, the greater your financial need and aid.

Changes Hurting Middle-Class Families

Unfortunately, there are two significant changes that will negatively affect middle-class families that do not qualify for Pell Grants and who do not have a minimal EFC/SAI.

Multiple Siblings in College
Current Rules: Today, it is beneficial to have multiple kids in college at the same time. Why? Because under current FAFSA rules, you get to divide your EFC/SAI by the number of students you have in college that year.

For example, if a family today has an EFC/SAI of $60,000 and has 3 kids in college, each would get a prorated share of the EFC/SAI equal to $20,000 ($60,000 ÷ 3 students). If one of them attended a school with a COA of $50,000, that student would have $30,000 ($50,000 – $20,000) of financial need.

New Rules:  The proration of the EFC/SAI will be eliminated starting with the 2023-2024 school year. Applying the new rules to the example above, each of the 3 students would have an EFC/SAI of $60,000.  The student attending the school with the COA of $50,000 would pay the full cost as the COA ($50,000) does not exceed the EFC/SAI ($60,000).

Divorced Families may pay More
Current Rules: Today, the spouse with which the student lives the majority of the time (> 183 days) is responsible for filing the FAFSA and reporting their income and assets. The income and assets of the other birth parent are ignored. The terms of a divorce decree or the parent providing the most financial support are irrelevant in determining which parent files and reports their income and assets on the FAFSA.

Example: Assume that a student splits her time between her divorced parents. The student spends all weekdays during the school year plus some weekends (say ~200 days/year) with Parent #1, who is a teacher making $60,000/year, has minimal assets, and rents an apartment. Parent #2 is a professional making $150,000/year, owns a condo at the beach, and is responsible (under the divorce decree) for child support of $15,000/yr. The student vacations with and spends most of the Summer at the beach with Parent #2 who provides the greater portion of the student’s support for the year.

Under the current FAFSA, Parent #1 would file the FAFSA and report their assets and income (including the $15,000 of child support received) since the student lives with them more than half the time.

New Rules: Starting in 2023, the divorced parent who provides the most financial support for the student must file the FAFSA and report their income and assets (Parent #2 in this example). Therefore, this family’s EFC/SAI (and the net cost of college) will be much higher than it would be if the custodial parent (Parent #1) filed the FAFSA.

But this is a good and equitable change, right? Maybe not. Consider the following situations:

Situation 1: Many divorce decrees stipulate how college costs are to be shared between the birth parents (e.g., 50%/50%, 25%/75%). Since the result of these new rules is a decrease in financial aid, the family’s total cost of college will go up. This means Parent #1 (who makes a lot less than Parent #2) will need to pay more than under current FAFSA rules.

Situation 2: Parent #2 just got remarried, and their new spouse also makes $150,000 per year. Under current (and new) FAFSA rules, the income of the new step-parent must be included on the FAFSA filed by Parent #2. Now, Parent #1’s share of the college costs will go up considerably simply because their ex-spouse got remarried. Wait, it gets worse….

Situation 3: What if the divorced couple had 2 or 3 children in college simultaneously? Then, the increase in the cost of college triggered by the change in the divorce rules is made much worse because the family doesn’t get to split the EFC/SAI amongst the siblings.

A Caution to High School Seniors
Families with high school seniors will soon select the college they will attend. They need to determine if and by how much their 4-year college costs will increase due to these changes, and possibly choose a less expensive school to attend for all 4 years. If the family waits until their costs go up in 2023 before addressing these changes, they will then need to make some uncomfortable decisions that may include (a) taking out parental PLUS loans, (b) asking their student to take a gap year to earn money to finish college, or (c) asking their student to transfer to a lower-cost college. Do not conclude that a college is affordable based solely on your Freshman financial aid award.

Options to Consider
These changes to the FAFSA do not affect the aid given by many private colleges that require the CSS Profile in addition to the FAFSA. The CSS Profile still permits the EFC/SAI to be prorated between multiple siblings in college simultaneously, and it treats the income and assets of divorced parents (and their new spouses if remarried) differently than the FAFSA. While CSS colleges generally have a higher COA, they also typically award higher amounts of gift aid compared to public colleges. Families should consider CSS schools to see if their net 4-year cost is lower than at FAFSA-only schools.