Crack the Code Benefits and Drawbacks of the Latest College Aid Forms
Applying for college financial aid has been a moving target recently amid changes in federal rules. One new loophole is good news for families, however. For the first time, grandparents can set aside money in tax-sheltered accounts to help pay a grandchild’s college expenses without jeopardizing the student’s eligibility for other financial aid. The benefits could be significant for families planning, saving, and working together toward college-funding goals. The primary tool to qualify for federal aid and other sources of help is the Free Application for Federal Student Aid (FAFSA). The latest version of FAFSA does not require students to report distributions from grandparent-owned 529 college savings plans. In the past, those distributions could reduce a student’s financial aid by half of a grandparent’s contribution. Family members, including grandparents, are playing a growing role in covering soaring college costs. Undergraduate students cannot borrow more than $5,500–$12,500 a year in federal subsidized and unsubsidized loans, depending on their school year and whether they rely on their families. This nearly always falls short of the average annual public university tuition of $11,000 for in-state students, $24,500 for out-of-state students, and $43,500 for private college students. Parents are shouldering an increasing share; 11% take out federal parent PLUS education loans, borrowing an average of $40,000 per parent as of 2020. Other changes in the FAFSA form have subtler implications for families. The government no longer considers the number of students one family has in college simultaneously to determine
eligibility. This is bad news for families with multiple children who want to attend college at the same time. In another change, the latest FAFSA substitutes a new measure, the Student Aid Index (SAI), for the Expected Family Contribution measure used in the past. The SAI ranges from -1500 to 999999, and the lower it is, the greater the likelihood a student will get need-based financial aid. States’ 529 plans, named for Section 529 of the Internal Revenue Code, function like a kind of 401(k) account for education by deferring taxes on investment gains on savings for designated educational purposes. States began to develop these plans in the 1980s to encourage families to save for college, and all states now sponsor some version of a 529 plan. Other changes include expanding the number and potential size of Pell Grants. The maximum Pell Grant will rise to $8,145 in the 2025–2026 academic year from $7,395 in 2024–2025. While the SAI is calculated based on a student’s family size, income, and assets, eligibility for Pell Grants also considers a family’s financial standing according to federal poverty guidelines. In other changes, the revised FAFSA relies on federal tax information provided by the IRS rather than answers provided by applicants. It also asks fewer than 50 questions, compared with 108 in the previous form. While many people labor over the form’s detailed questions, the most common mistake is not filling out the FAFSA at all. This omission excludes students from eligibility for numerous subsidized loans and grants, scholarships, and other aid from the college or university they attend. Many students wrongly assume they won’t be eligible for aid because they or their parents make too much money or their grades aren’t high enough. Plenty of circumstances can qualify applicants for grants and awards, from being the first in their family to attend college to being in the military, being unemployed, or planning to major in a specific in-demand subject. With numerous sources of financial aid in play, the potential rewards of completing the FAFSA are well worth the time invested!
“The latest version of FAFSA does not require
students to report distributions from
grandparent-owned 529 college savings plans.”
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