What tax year does FAFSA use for 2024 2025?

The FAFSA (Free Application for Federal Student Aid) application for the 2023-2024 school year opens on October 1st and as a result of the Consolidated Appropriations Act of 2021, changes are expected. However, most of these changes will likely be delayed until the 2024-2025 school year.

What's the delay? More than half of higher education schools haven't started preparing for the significant changes coming to the FAFSA. In addition, the CSS Profile, a form used by many higher education schools to determine institutional aid, has yet to reflect the new changes.

While we may have to wait a bit longer than expected to see the changes, some key topics remain.

FAFSA Simplification

The number of questions on the FAFSA is set to decrease from 108 to 36.

Expected Family Contribution (EFC) is now referred to as Student Aid Index (SAI)

The Expected Family Contribution determines how much you can expect to pay for a year of college. Now coined the "Student Aid Index," the SAI aims to help colleges better determine a student's financial needs.

Multiple Children in College

The new SAI formula no longer gives a family with multiple children in college a significant reduction in their expected contribution. Currently, the EFC is cut by almost half for each child that is in college at the same time.

Income Protection Allowance

The Income Protection Allowance is set to change, protecting a greater percentage of the students' and parents' earned income when determining how much can be put towards college.

Grandparent Giving

Previously, withdrawals from grandparent-owned 529 plans counted as income to the student on the FAFSA. Cash support and gifts received were also included. This will no longer be the case, and the student's total income will only come from the data pulled from their federal tax return. Since FAFSA uses a two-year lookback, grandparents can start taking advantage of the new rules this year.

The FAFSA deadline varies for each school, but the federal due date is June 30th. A few states have adopted a first-come, first-serve policy, so completing it as soon as possible is important. Similar to the FAFSA, each school's CSS Profile deadline varies, but many of them typically fall between January 1st and March 31st.

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As children head back to school, it won’t be long before parents of high school seniors start to tackle the issue of financing college.

A big part of this puzzle is financial aid, and specifically the filing of the FAFSA form (Free Application for Federal Student Aid), which can be filed as early as October 1. While completing the FAFSA form can be a daunting task, it’s critical to tap into the funds available for students, including outright grants.

More than half of undergraduate students in 2020 received financial aid, according to the College Board (Trends in Student Aid), with the average grant totaling about $9,000. For more details, see studentaid.gov.

Changes to the financial aid process on the way

The coronavirus relief bill signed into law in late 2020 (The Consolidated Appropriations Act), made several changes to the FAFSA filing process in the future. The law seeks to simplify the financial aid process. Additional provisions will make changes to how student income is calculated.

The new FAFSA application is slated to be implemented in the 2024–2025 award year, although there are a few minor changes that will occur earlier. It’s important to understand how the timing of family income impacts financial aid. Income-related information required on the FAFSA is based on the “prior prior” tax year (referred to as the base year). For example, the 2021–2022 FAFSA will be based on income information in the 2019 tax return. Because the FAFSA changes will be enacted in 2024, families may want to consider their income in 2022 and how future changes may impact their planning.

Here are some of the key changes:

• The term “Expected Family Contribution (EFC)” will now be known as the “Student Aid Index (SAI)”
• The FAFSA form will be simplified, reducing the number of questions to 36 from more than 100
• For divorced parents, the changes will require the parent who provides the most financial support to complete the FAFSA, instead of the parent who lives with the student most of the time
• Some new calculations are beneficial. Distributions from non-parent-owned college savings accounts (a grandparent, for example) will not be counted as income to the student for purposes of the FAFSA test. This is important since the FAFSA counts 50% of student income towards calculation of the EFC. Under current rules, a $10,000 distribution from a grandparent-owned 529 may reduce the following aid award by $5,000
• Additionally, the Income Protection Allowance (IPA), which shelters a certain amount of income from the EFC calculation, will be increased as part of the changes
• One change in particular will have a negative impact on families with multiple children in college at the same time. Currently the calculation for a family’s EFC is generally divided by the number of eligible students attending college at that time, effectively increasing the amount of financial aid available. This will change under the new rules, as the calculation will not incorporate how many children are in college at the same time.

Get an early start

This fall, families filing for aid — especially those filing for the first time — will want to get their records organized (tax returns, etc.) so the process can go more smoothly and the FAFSA can be filed in a timely manner. It’s generally better to file early, especially if colleges require additional information or clarification after the initial filing of the FAFSA. Filing early may also increase the likelihood of receiving a grant.

Also, many private colleges require the CSS Profile in addition to the FAFSA.

Early planning is helpful for families to reach education savings goals. Read our investor education piece, “Early college planning for a growing family,” to get started. Use our “Four-year action plan” to help stay on track for college planning throughout the high school years.

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For informational purposes only. Not an investment recommendation.

This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.

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