Is COVID making College More Expensive?
The last year has brought changes to almost every aspect of our lives and funding college is no exception. The first COVID relief bill last year, known as the Cares Act, quietly made some significant changes to the way college is financed, starting in the 2023-2024 school year. Whether you are paying cash or taking out loans to fund your children’s educational dreams, there are some major need to knows coming down the pike.
The changes are kind of a mixed bag, but overall paying for college is likely to either cost more money, more leg work to find aid, or a combination of the two. We’ll start with some of the positives and then show you some of the doom and gloom.
Starting on October 1, 2022 the Free Application for Federal Financial Aid, aka FAFSA, form is going from 213 to 36 questions. That’s good news for our brains but I’m guessing not so good news for our wallets. They haven’t released what the questions are yet so that’s just a guess at this point. Another big positive was grandparent gifting. In the past any amount of college costs grandparents paid was counted as untaxed income for the child and was assessed at 50% for FAFSA purposes. A good example is if my parents paid $10,000 of my son’s tuition in his freshman year FAFSA would consider that untaxed income and asses it at 50% for his sophomore year. Essentially, they are saying he had a job and made $10,000, $5,000 of which could have been used to pay for college. This includes distributions from 529 plans grandparent’s own for the benefit of their grandchildren. Beginning with the 2023-2024 school year those gifts are no longer taken into account on the FAFSA application. The rules around grandparent owned 529 plans weren’t directly addressed so distributions from those plans may still be counted as untaxed income. Another HUGE positive, which helps the grandparent owned 529 issue, is the ability to now use 529 plan assets to pay for student loans after college. In the past 529 assets could only be used for qualified expenses during college, the SECURE act allows you to now use a total of $10,000 in 529 assets to pay down student loans. This is where we can use grandparent owned 529 plans and to avoid some of the impact on FAFSA. (there are a lot of strategies around utilizing this option but that is a discussion for another day).
Now for the Doom and Gloom. There is something called the EFC, or Expected Family Contribution. This is the amount of the college’s cost of attendance a family is expected to pay, i.e the school’s COA is $50,000 and your EFC is $40,000 you would be eligible for $10,000 in aid. Currently the more kids you have attending college at the same time the less of the EFC you are expected to cover and the more you can qualify for in aid. If you have 1 child in college, you have to pay 100% of your EFC, for 2 kids it’s 50%, for 3 kids it’s 34%, and 4 kids is 25%. I know what you’re thinking, SWEET having three kids is finally having a positive impact on my finances! Not so fast. Beginning in 2023 this particular benefit is being ELIMINATED entirely, so you are going to be paying 100% of the EFC out of pocket for all 3 of your kids in a few years. The next hit is for those of you that have a split household. Currently FAFSA has the household where the child sleeps 51% of the time fill out the application, not the household who contributes the most financially or claims them on taxes. As an example, parents are divorced, Mom makes $250,000 a year, claims the child on taxes, and pays the bulk of the expenses and Dad makes $50,000. Even though they have 50/50 custody the child sleeps at Dad’s house 1 extra day so he can fill out the FAFSA form, so his income is used for determining the financial aid need. Starting with the 2023-2024 school year the parent that contributes the most financially fills out FAFSA. In the example above Mom is going to be filling out FAFSA in 2023 so they are going to qualify for significantly less financial aid. While this change hurts, it was made so FAFSA would more closely align with IRS guidelines.
It’s entirely possible the above changes will change again before some of your kids go to college, but in case they don’t you need to be aware of their impact and you need to start preparing now. The only constant in this life is change and the only thing we can really do to keep up with change is to be adaptable and prepare. As the saying goes “To be Prepared is half the victory” Miguel de Cervantes
Be on the lookout next month for some strategies to reduce the cost of college!
Helping you with preparation,