Unemployment on the FAFSA

Generally the FAFSA does not count untaxed social benefits as income. Untaxed Social Security, SSI, foster care benefits and welfare payments are excluded from income for the FAFSA, although disability payments and worker’s comp– which are insurance benefits– are added back.

Normally unemployment income is taxable so this exclusion would not apply. However, the American Rescue Plan made 2020 unemployment compensation up to $10,200 per taxpayer tax-free for households with incomes below $150,000. Further complicating the issue for FAFSA filers: the rule was enacted on March 11, 2021. While there was a retroactive correction for tax purposes, anyone who filed their taxes prior to March 11 has taxable unemployment compensation showing on their tax return, and a higher adjusted gross income than had they filed after March 11.

The Department of Education has offered guidance that financial aid administrators “are encouraged to work with applicants affected by the ARP who filed their taxes before March 11, 2021, to use professional judgement to adjust the applicant’s AGI (or the AGI of the applicant’s parents or spouse, if applicable) as appropriate.” In English that means that financial aid offices should recalculate a student’s EFC to exclude untaxed unemployment compensation from income.

Students and families to whom this pertains will need to reach out directly to financial aid departments at the colleges they have applied to in order to correct this, since the colleges themselves do not have direct visibility to this– they do not see when you filed your taxes, or a breakdown of your income sources.