Starting with the school year of 2023-2024, students will no longer need to disclose cash support during the FAFSA application. Grandparents with 529 accounts for their grandchildren who wish to use these funds toward college tuition may do so without negatively impacting their grandchildren’s eligibility for financial aid.
This change comes as part of the stimulus bill passed at the end of 2020. In the past, contributions from grandparents could be seen by the FAFSA as untaxed income to the grandchild. These contributions were assessed at a 50 percent rate, a considerable amount compared to the 5.64 percent of a parent’s 529 contributions.
As an example, a $20,000 contribution from a grandparent could reduce a student’s financial aid by $10,000. Due to this, many grandparents delayed their distributions until the student’s junior year of college to prevent the contributions from appearing on the FAFSA. With this change, such a strategy is no longer needed.1
Alongside this change come other updates to the FAFSA, including a reduction in the number of questions on the form. Previously, the form included 108 questions; the appropriations bill reduces this number significantly, bringing it down to a maximum of 36, which will help streamline the process for students and families. Family income information will also be imported to the FAFSA directly from tax returns, simplifying the application process so that there are fewer questions required for self-reporting income.2
In a situation where the parents of a student are divorced or separated, the parent who provides the most financial support must complete the FAFSA now. Prior to the change, the custodial parent, defined as the parent with whom the child resides for most of the year leading up to the day the FAFSA is filed, was the one required to complete the form. There is also no longer a discount when families have more than one child enrolled in college simultaneously. Furthermore, Pell Grant eligibility has been simplified so that families making less than 175% of the federal poverty level will receive the maximum award ($6,345 for 2021-2022). The maximum amount has been increased by $150, raising it to $6,495.3
Sources
1 https://collegeinsidetrack.com/college-planning-changes-for-grandparents/
2 https://www.forbes.com/advisor/student-loans/fafsa-changes/
3 https://www.kiplinger.com/personal-finance/credit-debt/loans/student-loans/602186/fafsa-application-changes-are-coming
