Families With Assets Will Receive Less Financial Aid Next Year

On October 1 this year, millions of students planning to start college in the fall of 2023 will begin filling in the Free Application for Federal Student Aid (FAFSA), the form that determines eligibility for different types of federal and state financial aid, as well as aid from colleges and universities. Some of those students will receive less financial aid than they would have a few years ago. This is due to a glitch in how FAFSA counts assets when determining how much aid a student gets paying for college.

Behind FAFSA are a set of tables and calculations used to figure out how much money families should get in financial aid and contribute to college expenses. One of these tables is used to determine what portion of the assets parents and students have available to help pay for college. When Congress designed the formulas, it included a provision called the Asset Protection Allowance (APA), which is meant to protect a portion of savings and assets from being counted toward a student’s Expected Family Contribution (EFC)—the number you get after completing a FAFSA that determines how much financial aid you get.

What is the Asset Protection Allowance?

The APA in FAFSA is meant to prevent every penny of a family’s savings from being considered available to help pay for college expenses. It also allows parents and students to save modest amounts without increasing their EFC.

Ten years ago, for a 48-year-old parent—the median age for parents of college-aged children, the APA shielded just over $46,000 from EFC calculations. For the coming year, $0 in assets will be protected.

The original intent of the APA was that it would increase with the age of the oldest parent for dependent students, or with the age of students for independent students. This design meant that parents who were older and closer to retirement would have a little more of their savings protected than younger parents who had more time to continue saving for retirement.

The APA was meant to shelter enough savings that a family could buy an annuity to generate additional retirement income and make up the difference between the federally defined moderate family income (usually 80-95 percent of the national median income) and the average Social Security benefit . The problem is that the moderate family income level has remained flat while the average social security benefit has steadily increased. For example, if you needed $10,000 in an annuity to make up the difference between the moderate-income standard and Social Security, then $10,000 of assets and savings would be protected. Now that there is no difference between average Social Security benefits and a moderate income, no savings are protected.

How does the asset protection allowance impact financial aid eligibility?

The APA disappearing is likely to increase EFCs for middle-income families. The change is unlikely to hit students eligible for Pell grants since those students are less likely to come from families with assets. For students affected, there is a high chance they will lose or see reduced funding from certain types of need-based financial aid. Need-based aid includes federal Pell grants, subsidized loans, work-study, and need-based grants given out by states as well as colleges and universities.

The drop in the APA amounts to an increase in EFC of over $4,000 for affected families. Even if this does not reduce eligibility for total aid, it can change the types of aid a student qualifies for. For example, subsidized loans are considered need-based aid, so an increase in EFC can reduce or eliminate student eligibility for subsidized loans. Subsidized loans do not accrue interest while the student is enrolled in college, making them more desirable than unsubsidized loans that start to add interest as soon as they are paid out.

Most students and families are unlikely to know that the amount they are expected to contribute towards college will increase. Financial aid formulas are opaque to most people. Middle-income families enjoy more advantages than students from families with more limited financial resources, but after years of rapidly increasing costs, still struggle to pay for college.

Congress could have fixed the problems with the APA when they passed the FAFSA Simplification Act in 2021, but, unfortunately, it chose not to. The law will make FAFSA simpler, and easier to complete for most students, but leave this glitch with the APA unaddressed. This leaves students and families with few options other than belt-tightening when it comes to paying for college.

Students from lower-income households are rightly the focus of most financial aid reform. But, middle-income households, often making too much to get significant aid and not enough to easily pay out of pocket, will struggle with seeing the limited aid they receive reduced even further.

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