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AmextaFinance > Finance > What The New Student Aid Index Means For Families Paying For College
Finance

What The New Student Aid Index Means For Families Paying For College

News Room
Last updated: 2023/10/31 at 7:41 AM
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Colleges and universities have always used certain data and formulas to figure out how much financial aid students can receive, typically based on the information families input when they fill out the Free Application for Federal Student Aid (FAFSA) each year.

Contents
More Access To Pell GrantsLess Financial Aid For Larger FamiliesMore Aid For Single-Parent HouseholdsLess Aid For Families With Small BusinessesThe Bottom Line

Previously, this information has been used to figure out something called the Expected Family Contribution (EFC), which is essentially an out-of-pocket amount students can expect to pay for school after taking federal student aid into account. However, legislation passed in December of 2020 aimed to simplify the process and will eliminate the EFC completely.

The Consolidated Appropriations Act passed by Congress, which amended parts of the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act and included the FAFSA Simplification Act, ultimately redesigned the way student aid is determined with an underlying goal of making the process less complicated overall.

The new changes mean the Expected Family Contribution (EFC) will be replaced with something called the Student Aid Index (SAI) beginning in the 2024-25 award year (which is the FAFSA you will begin to fill out this year).

Just like any other new legislation, the new Student Aid Index (SAI) has a list of winners and losers. Here’s a rundown of everything you can expect from the new SAI, how it will impact the average family, and who stands to get more or less federal student aid based on this new formula.

More Access To Pell Grants

According to the U.S. Department of Education, the FAFSA Simplification Act itself will expand access to Pell Grants to more students overall based on family size and the federal poverty level (FPL). While the formula to determine Pell Grant eligibility stays the same (cost of attendance (COA) minus Student Aid Index (SAI) and other financial assistance equals eligibility for need-based financial aid), applicants who don’t qualify for the maximum Pell Grant amount may still be able to secure this type of funding.

The U.S. Department of Education says this can be the case if a borrower’s SAI is less than the maximum Pell Grant award for the award year.

“The applicant’s Pell Grant award for full-time enrollment will be equal to the maximum Pell Grant for the award year minus SAI,” reads the fact sheet. “The Pell Grant will be adjusted if the applicant enrolls less than full time, or if the applicant’s COA is less than the calculated Pell Grant award.”

Less Financial Aid For Larger Families

While some types of need-based aid may be more plentiful after the SAI comes into play, student loan expert and Forbes contributor Mark Kantrowitz says many families with several children in school at the same time will qualify for less aid overall.

About half of families who have two or more children have at least one year of overlap in college, he says. Previously, when a family went from one child in college to two children in college, it was like dividing parent income in half, since the parent contribution to the EFC was divided by the number of children in college.

However, Kantrowitz says this loophole is eliminated with the new SAI formula, meaning that middle and high-income families with multiple dependents in college will qualify for less aid for school. However, he points out that the lowest income students won’t be as affected since their SAI will be lower as well.

“If your EFC or SAI is already zero, dividing it by the number of children in college has no impact,” he said.

More Aid For Single-Parent Households

Kantrowitz points out that another change might be meaningful for single-parent households, and it’s based on a secondary formula for the Federal Pell Grant based on a multiple of the poverty line. The poverty line thresholds are higher for students in single-parent households, he said.

As a result of the introduction of this secondary formula, Kantrowitz says we’ll see an increase in the number of Pell Grant recipients by more than 500,000 and the number of Pell Grant recipients who get the maximum Pell Grant will increase by about 1.5 million.

Less Aid For Families With Small Businesses

Financial advisor Daniel Cieniewicz of Hyperion Financial also points out that small business owners who have a sizable small business valuation will hurt their dependent’s chances of getting considerable financial aid for school. He says that, under the previous calculations, the value of a small business with less than 100 employees was not reportable as an asset. Moving forward, however, it will be a reportable asset.

“This can create some strain for families because, depending on the type of small business, it’s not common that small business assets are liquid,” said the advisor.

For example, a small business owner that runs a company and has multiple employees may have a sizable net worth based on the value of the business itself, but that doesn’t mean they can access the underlying value of their business to pay for college tuition and fees without selling the company.

Cieniewicz also points out that another set of losers based on the SAI will likely be family farm owners, mainly because farm owners will have to list their land and farming equipment as family assets for the purpose of determining financial aid moving forward.

The Bottom Line

At the end of the day, the FAFSA Simplification Act itself definitely has its share of pros and cons. The move from using the Expected Family Contribution (EFC) to the Student Aid index (SAI) when determining federal financial aid will leave some borrowers better off and others worse off, but the act does reduce the number of questions on the FAFSA from 108 down to just 46.

Whether you’ll get more or less aid in the 2024-25 award year really depends on your income, family size and family assets, although it seems pretty obvious that the SAI will benefit low-income students at the expense of everyone else.

If you’re a middle-income or high earner and you have dependents heading off to college in the next few years, the best time to start saving for college was ten years ago. The second best time is now.

Read the full article here

News Room October 31, 2023 October 31, 2023
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