How to Pay for College

View Original

SAI Formula Guide for the 2024-25 FAFSA

Ann Garcia

Last week, the Department of Education updated its draft Pell Eligibility and SAI Guide for the 2024-25 FAFSA. This is a draft of the formula that will be used for the FAFSA that will be released this fall. While it's not final, the key elements in it are already part of the Federal Register so we're unlikely to see changes to the formula itself.

What's new? First of all, it's no longer called the EFC Formula Guide since the Expected Family Contribution has been renamed the Student Aid Index, in the hope that the new name will make it more clear to families that your Student Aid Index or Expected Family Contribution is no guarantee of financial aid.

The formula retains its four buckets:

  • Parent Income

  • Parent Assets

  • Student Income

  • Student Assets

Each has some changes from previous formulas-- some standard like updating allowances based on inflation or their calculation basis; others reflecting changes to inputs or calculations due to FAFSA Simplification. Let's take a look!

Parent Income:

One of the biggest changes coming from FAFSA Simplification is that the FAFSA will only use tax return data for income-- not W-2 data. That means that your pre-tax contributions to your employer's 401k or 403b or to your HSA no longer have to be added back. With the FAFSA using prior-prior year income, you'll be using your 2022 tax return when filing the FAFSA for the 2024-25 school year.

The new formula for parent income is:

Adjusted Gross Income

+ Deductible retirement contributions from the tax return (those made to traditional IRAs or self-employed retirement plans such as SEPs, SIMPLEs and individual 401ks)

+ Tax-exempt interest income

+ Untaxed portions of IRA distributions and pensions (money withdrawn from a Roth IRA, for example)

+ Foreign Income Exclusion reported on tax return

= Total Parent Income Additions

Then parents get some Income Offsets which are subtracted from the above. These include any taxable college scholarships or grants or work-study income (received by the parents) and education tax credits claimed.

Then come Allowances Against Parents' Income, which are also subtracted:

- US Income Tax

- Payroll Taxes

- Income Protection Allowance based on family size.

- Employment Expense Allowance, which is he lesser of 35% of the parents' combined earned income or $4,000

= Parent Available Income. This can be a negative number if allowances and offsets exceed income.

Parent Assets:

This category got expanded due to simplification. One change is beneficial: child support received in the previous year is now listed as an asset, not as income. The other change is less so: business and farm owners are now required to report the "adjusted net worth" of their business or farm regardless of size. Previously, small businesses and farms were exempt from inclusion in assets. As has long been the case, assets other than child support received are assessed at their value on the date you file the FAFSA.

Parent assets include:

  • Bank accounts (checking, savings, money market, CDs)

  • Investments including the student’s 529 accounts (but not their siblings’ 529s), non-retirement investment accounts, bonds (including I Bonds), investment real estate, vacation homes, trusts including any for which the parent is the beneficiary

  • Adjusted net worth of businesses or farms. The formula provides a calculation to determine the value for FAFSA purposes of the business, with smaller businesses being 40% of their stated value, with progressive brackets-- much like taxes-- at which higher values are assessed.

  • Child support received in the previous year.

Parent assets are totaled, then a nominal Asset Protection Allowance is subtracted. The Asset Protection Allowance is based on the age of the older parent, and whether the household has one or two parents. The Asset Protection Allowance is one of the stranger elements of the FAFSA formula-- perhaps one of the strangest federal formulas around and something that really should have been simplified through FAFSA Simplification. The good news is, unlike last year when it was $0 for all filers, there is once again an Asset Protection Allowance. The bad news is, it remains near historical lows, with a single 48-year-old parent receiving an APA of $2,500 and a two-parent household where the older parent is 48 receiving $6,600. Parents whose assets are less than the APA get $0 as their Contribution from Assets.

Parent assets are then multiplied by 0.12 to come up with a Parent Contribution from Assets. Here's a hypothetical calculation:

  • $5,000 in checking

  • $25,000 in 529

  • $12,000 child support

  • Parent is 48, single

  • $42,000 assets - $2,500 APA = $39,500 x 0.12 = $4,740 Parent Contribution from Assets.

I assume that many people reading this are asking, "When did they start counting 12% of assets? It used to be 5.64%!" That's a great segue to the next element of the formula: Total Parent Contribution.

Total Parent Contribution adds Available Income and Contribution from Assets to get Parent Adjusted Available Income. This number is then assessed at progressive rates-- much like taxes-- ranging from 22% to 47%. And 47% of 12% is 5.64%. And that is the Parent Contribution.

One step from previous FAFSAs was eliminated here, too: previously, the Parent Contribution was divided by the number of college students in the household. That is no longer the case; the Student Aid Index no longer considers how many students are in college. I'm interested to see how a family with three college students could make 47% of their income available to each student.

But of course, that's not all: student income and assets are also part of the formula, and perhaps the most overlooked part.

Student Income

Student income is an area where most families will benefit from the formula changes. Not only do students get an Income Protection Allowance of $9,410, but students only report income if they filed a tax return and the full IPA is subtracted from student income, which will leave many students with negative Available Income. So a student who did not file a tax return has Available Income of -$9,410; a student with $4,000 of income on their tax return will have available income of -$5,410. Student income is assessed at 50% of its value, and students can have a negative contribution from income of up to -$1,500. Student income is likewise prior-prior year, so most students filing the FAFSA during their senior year of high school will have a negative contribution from income.

Students also no longer have to report distributions from non-parent-owned 529s as their income, since the FAFSA will only use income from a tax return.

Student Assets

Student assets continue to be assessed at 20% of their value with no asset protection allowance. This can result in a large increase in SAI if a student worked all summer or during the school year at current high wages. Every $1,000 that the student has will increase SAI by $200. It is beneficial to transfer money that's for college into the student's 529, where it's assessed as a parent asset, and to have the student contribute to a Roth IRA.

Some general comments about this year's FAFSA:

  • One additional big change is that this year, all the changes have resulted in a delay in availability. Instead of Oct. 1, the FAFSA will be available in December. You'll want to check with your schools as to what their FAFSA deadlines are.

  • Parents should file a tax return, even if they're not required to do so. Filing taxes allows you to use the IRS Data Retrieval Tool, which then reduces the likelihood of FAFSA verification.

  • Additional information about the FAFSA Simplification changes is available here and here.

  • As noted above, the FAFSA uses prior-prior year income, which really means your most recently filed tax return, and asset values on the date that you file. That means that if you are filing the FAFSA in fall (December) 2023, your planning opportunities are assets only this year. Your best date to file is probably after you've paid your big bills for the month-- mortgage or rent, credit card, car payment, etc. Similarly, make any large purchases that you intend to make anyway before filing.

  • Other than families with multiple college students, most families will see a lower SAI under the new formula than their EFC under the old formula. And due to changes such as not adding back 401k contributions, even many families with multiple students will have a lower SAI. Unfortunately, the Student Aid Estimator on the Department of Education website still uses the old formula.

And don't forget the most important thing about the FAFSA: The FAFSA is not the tooth fairy. More important than how low your SAI is is whether you apply to colleges that meet financial need. Colleges are under no obligation to meet your financial need, and certainly not exclusively through grants, though many do. You can get a sense of what a school's aid package will look like by doing its net price calculator. Figuring out your SAI only tells you whether you're eligible for need-based aid, not whether you'll get it.

Want to see the whole formula? You can get it here.