College planning is an essential topic for most families. Clients consistently ask me what they should anticipate paying for college. Many factors influence the cost, and it can feel like trying to plan for a trip with a constantly changing terrain and destination.
The 2021 Consolidated Appropriations Act (CAA) includes provisions for the Free Application for Federal Student Aid (FAFSA), completed by current and prospective college students each year to determine financial aid eligibility. The new provisions go into effect on the FAFSA application period beginning October 1, 2022, for 2023 to 2024 academic year but provide immediate college planning opportunities for families, as the FAFSA form for the 2023 2024 academic year uses reported 2021 income.
One of the more common terms associated with the FAFSA, the Expected Family Contribution, will be renamed the Student Aid Index (SAI). Below are a few significant changes as well as items that have not changed.
The Good
The FAFSA form will be drastically simplified, moving from more than 100 questions to 36.
Grandparent-owned 529 plan distributions will not have any effect on need-based financial aid eligibility. Currently, grandparent-owned 529 plan distributions are reported as untaxed student income, with 50 percent of the gift reported toward a family’s expected contribution. For example, if grandparents distribute $40,000 for a grandchild’s education from a 529 plan they own, a family’s expected contribution increases by half of that amount, or $20,000. The new legislation will alter the $20,000 to zero. This major shift opens the door to planning opportunities using grandparent-owned 529 funds that previously adversely affected aid access.
Also, 529 plan assets can be a valuable estate planning tool. Assets are not included in the account owner’s estate value, but the account owner retains control of the assets. For grandparents or other family contributors, contributions of up to $15,000 annually ($30,000 per married couple) are not counted against their lifetime gift tax exemption. The law also permits a lump-sum contribution up to $75,000, counting toward up to five years of gifts, without affecting the lifetime exemptions.
Employers can make tax-free payments toward their employees’ student debt up to $5,250 through January 1, 2026, extending the provision included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). For 2021, this is a 7.65 percent payroll tax savings for both the employer and employee (assuming the employee is below the Social Security wage base), plus the employer would receive an income tax deduction for the payments made.
Exemption of federal student loan payments has been extended through September 30, 2021, which also is an extension initially included in the CARES Act.
The Not So Good
The current discount for families with multiple children in college will be eliminated.
In situations of divorced or separated parents, the custodial parent is required to complete the FAFSA. The custodial parent is the parent the child primarily lives with, which can sometimes provide an advantage. Under the CAA, the parent who provides the most financial support will be required to complete the FAFSA, which may not be the custodial parent.
The Same
Assets in qualified retirement plans and home equity are excluded from determining the SAI.
A portion of nonretirement financial assets is excluded from determining the SAI. However, most financial assets produce an expected contribution of no more than 5.64 percent, meaning a $200,000 brokerage account equates to $11,280 in expected family contributions when determining the SAI. There is a common misconception that families will be penalized for saving, but the limited inclusion illustrates the savings consequence is little.
A portion of income is excluded from the calculation; however, parents’ after-tax income remains the primary source for determining the SAI.
The legislation does not contain any student debt forgiveness proposals.
Families who do not expect to receive aid are still encouraged to complete the FAFSA.
Ultimately, college planning is a significant component of the “personal” in personal financial planning. Awareness of the changing landscape allows a family to plan efficiently.