Okay. Welcome to tonight's presentation on the FAFSA apocalypse. The changes to the upcoming financial aid rules for people who are applying for financial aid this year, which means the 2024-25 academic year, but that's happening now. Andy Lockwood for Lockwood College Prep. Welcome.
I see a lot of people here joining. This is one of our larger audiences, maybe ever more than 400 people registered. I see close to 200 people coming on. A, let me know that you can see and hear okay. Pearl is behind the scenes gathering and helping with questions, so just let us know in chat. B, I want to give you my warnings about what we're going to be covering tonight. So hey to Linda, Stewart, Chris, Rebecca, Wendy, Wade. I see a lot of people coming on. Oh, Jeff is here. Good. College advisor, Jeff. Rayka, Bernie, Steve, Adam, Lisa, just let us know that we're coming in loud and clear. Thank you, Bernie. Rachel, Michelle, Melissa and Rick. Rick, the CPA is here. Wow. He goes to a lot of our webinars these days, right?
So all right, so tonight we're talking about the FAFSApocalypse, the changes that are, as you might guess, not all great changes that are pending for financial aid this year. It's a mixed bag, I'll say. There's some changes that are okay and there's some changes that I would say are downright anti-middle class and upper income families. So that's probably the case I guess with every policy or law or regulation that gets enacted, so no surprise here. There are intended consequences and what we think are going to be unintended consequences.
So I'm going to be talking about that. Again, this is for people who are planning to apply for aid next academic year and beyond. So just to date stamp this, this is the beginning of September 2023. Financial aid applications will be coming out in a matter of a week/months. I'll be talking about that.
They're going in for people who are number one, graduating high school in 2024 and starting college in the 24-25 academic year, as well as people who are already in college who'll be there during that time period and younger kids. So that's who it's about and who this is geared for.
I have to say this, I have to say two things. Number one, this is going to be a relatively fast, this is an impromptu, quick and dirty presentation. I did not prepare any slides. I've actually just been too busy in the office to do that. Plus, we dropped three of our kids off at college in the last... I guess we had a nine-day stretch where we dumped three kids in various colleges. Two of the drop-offs were easy and one was just hellish. So that's why this is impromptu. It's going to be incomplete. I'm just going to highlight the changes that I think are going to be helpful, particularly in terms of advice and strategies on how to get more money based on these new changes.
So it's going to help you get to know a little bit about what's in store for you. Frankly, it's going to be a little bit of guesswork too because the form, the new application, the FAFSA, Free Application for Federal Student Aid has not come out yet. It's pending. We think it's going to be at the end of December. So that's the second thing I wanted to say. I'm going to admit, in many cases, I'm going to be delivering educated guesses, subject to change.
The third thing, which I say, I learned this the hard way, which I say in pretty much every webinar is, I think a lot of the stuff that's going to come out of my mouth, which may surprise me too, is not going to be the same old, same old that you have heard from your guidance counselor or the local rep from a local college who may have come to your high school no matter what part of the country you are from. Some of it may be flat out contradictory. Some of it may sound a little offensive.
Okay, so let's get right into the strategies and then at any time lob in your questions. I'm just going to be working through these strategies and these FAFSA and financial aid changes and then stopping to answer questions. Pearl will probably throw in some of her information and answers too. She's behind the scenes tonight. Normally she'd be on camera, but she had some mouth surgery yesterday, so she's healing.
Shorter FAFSA. One of the changes that have occurred from the FAFSA Simplification Act is that the FAFSA is now officially shorter.
It went from about 108 questions down to around 46. However, depending on how you answer some of those 46, there will be other sub-questions. So it's a little deceptive, but overall, it's a shorter application. It also streamlines how income goes into the FAFSA. Again, I'm only talking about one financial aid application, the FAFSA. I'm going to make some comments about other ways to apply for aid in a few minutes.
Streamlined Income Reporting. It's going to be a little bit easier to get your income information into the FAFSA. It was a little cumbersome for some families before. That could be an issue too for people who don't quite fit in the box in terms of their income, like what's reported historically on the income taxes. So if you have somebody who's graduating in 2024, you're going to be using your income tax returns from 2022.
If things have changed drastically since then, since 2022, like you're no longer filing jointly, you're filing separately, maybe you're divorced or separated, normally what Pearl would do in our financial aid portion of our practice was she would manually carve out the income of the person filing so it doesn't look like it's artificially inflated. You can't do that anymore.
Is that fatal? No, but that's just one example of a probably good change that might have some unintended side effects that are not so good. I said this at the beginning, if you're just joining us, most of the changes are going to benefit low-income families by doing things like expanding Pell Grants and making them more eligible in general, but at the expense of hurting middle class and upper income families. So that's just the way it is. I'm not politicizing or editorializing, but I think that's an accurate way to look at some of these changes.
EFC: Replaced by SAI. So let's get into those changes and then some of the strategies, and brace yourself for my high-budget audiovisual effects, special effects. This is CGI. Here we go. (Holds up index card.)
Here's the first change. This is the dumbest change, by the way. The old term EFC, which stands for Expected Family Contribution, which is supposed to be the number that in a perfect world you would qualify to be able to pay for college, has been changed effective when the new FAFSA comes out to SAI or Student Aid Index.
Why? It's supposed to be less confusing. I'm not going to spend any time on it, but I feel like in order to give you a relatively complete class tonight, I had to tell you that. So there's no more Expected Family Contribution. It's now called the Student Aid Index. Either way, who cares? No one's going to really notice, I think, except for some sticklers.
The whole point of it is to demonstrate how much in a perfect world you should pay for college. Hardly anyone is ever happy with their EFC or what's going to be their SAI. So that is the most boring and least relevant aspect of tonight's presentation.
“Sibling Discount” Gone. Here's one of the biggies, the sibling discount, quote, unquote, "sibling discount." That has gone away. Now, 60% of families who file for financial aid have more than one child in college at the same time. Pearl and I are one of them. We have three kids in college. Under the old rules, let's say our old EFC/SAI was $50,000. That means the government thinks that we can afford $50,000 if we had one kid in college. That seems like a high number, just work with me here. If we then sent a second child to school and everything else stayed the same, our income, our savings, you name it, then our Expected Family Contribution/SAI would be halved, it would be $25,000 because it's a family contribution.
In other words, the old formulas acknowledge that it's not easy to send more than one kid to college at the same time. It's expensive. The formulas are heavily skewed toward income and that would in effect apportion your income between or among your kids, that's gone away.
So now whether you have one kid going to college or five kids going to college, there’s no difference. If you have the same income, same savings, everything else – the two families are financial doppelgangers – but have different numbers of children in college, they will be viewed the same in the financial aid formulas. That's one of the big changes, and it's gotten a bunch of news coverage, but not enough as far as I'm concerned.
Coping. If you have multiple kids in college, what do you do? Two comments. One is after you get a financial aid award, you have the opportunity to appeal that award. Generally, you say, "Listen, I think you got something wrong here," or, "Here's some new information that you don't know about," or this is creating an incredible hardship. I relied on the old rules, now the rug is being pulled out from under me,” or something along those lines.
You ask, "Can you take another look at my eligibility? And here's why I'd like you to do that." So far, it looks like the rules for appeals have expanded a little bit. Reading between the lines and all the webinars and conferences and chitchat I am part of as a college advisor, it looks like colleges in general are going to be open to that argument as a source of appeal even though the federal rules. We will see.
The second thing I want to point out is that this presentation is geared very heavily on the federal rules. Every college in the country takes this form called the FAFSA, Free Application for Federal Student Aid.
Approximately 400 colleges, give or take, require an additional form, the CSS Profile. These colleges generally are the private schools that have their own money and therefore, they have their own way of doling out that money called the Institutional Methodology as opposed to the Federal Methodology. (I know this is a little boring, but I think you need to know this. I'm doing my best.) They can do whatever they want and it does not seem like so far that there's any inkling that they too have decided to eliminate the sibling discount. I don't think they're going to do that. I don't think colleges can really do that, especially with people who are like me and Pearl, but like a lot of you guys probably have a situation where you'll have a couple kids in school and now next year maybe you'll have the same two kids in college. It's unlikely, I think, politically for the colleges to take away money for families that are already there. So that is definitely a big deal to be determined, but I am cautiously optimistic.
Small Business Owners and Fellow Farmers. Okay, moving right along. This is the third change here that I want to talk about for small business owners, not a good change. This is small business owners and owners of farms. So the deal with the old rules before the rule changed this year is that the... and most people didn't know this, so I don't know how big of a deal this is actually going to be.
But we have a lot of small business owner clients, and there's a question on the FAFSA that asks you the value of your business and or farm. We have a couple of farming clients and we also grow tomatoes (we have 1 ½ tomatoes growing currently in our backyard, and I've had four cucumbers in the last couple of weeks, so I relate to farmers.) The rule was if your business or farm employed fewer than 100 employees, then the value of your business was zero.
Most CPAs didn't know this. Most people never saw this because it was buried in the instructions.
Well, now that's gone. That rule has changed. Again, I don't think it's that big a deal 'because most people missed that, but I'm a little miffed because that was one of our pet go-to strategies. I think it's aimed at people who buy real estate and stick those into a corporation and then say that's the value.
What do you do to counteract this? Well, I think anyone with common sense would understand that there's more than one way to value anything, particularly a business. That's why there's a whole industry of valuation experts who testify at trials when partners sue each other and self-employed people get divorced. I would urge you to come up with a low reasonable, defensible, but lowball valuation for your business.
Look, we have a business. It does seven figures. Not that you need to know that or anyone cares, but I can make the argument that if I get hit by a bus tomorrow there's nothing to sell and the value is zero.
Of course, Pearl's here too, but you get the point. She would carry on. She probably would triple it. For financial aid purposes, we’re not going to be optimistic and neither should you.
Let’s say you had to sell your business in a fire sale, because the feds were closing in and you had to just get out like in Breaking Bad and Better Call Saul, you got to call the vacuum cleaner guy and get out of town but first you want to liquidate things. That's a different valuation than if you have an auction and you build up to it, you stage it out over a month, that type of thing. So I would encourage you to try to lowball, but it's got to be in a defensible way.
Support from Grandpa. Okay, next, change. Change number four. This is actually a combination one. This is shorthand. I'm talking about grandma and grandpa.
So under the old rules, if a grandparent or some other family member, not the mom or dad, sent money to a college on behalf of the students, then that would negatively affect the student's eligibility. So if grandpa pays $20,000, the following year, the grandchild would have gotten his eligibility cut by $10,000, 50% of grandpa's cash infusion.
Here's a good change. Under the new rules, that is no longer a penalty. So therefore, your eligibility will not be reduced the following year.
Untaxed Income: Treatment of Worker’s Compensation, Retirement Contributions. So that is a good change. I want to talk about a couple other good changes here. There used to be the situation where certain untaxed income, income that was either off your tax return entirely or just reported as untaxed income, that used to be added back to your income when you're applying to college. Now, certain of those types of income no longer penalize you.
One of those is workman's comp and another one, which I think Pearl saw practically all the time, and we talk about this a lot, is if you made a contribution to your 401(k) or other retirement plan, a pre-tax contribution, so let's say you were in $180,000 and you contributed $20,000, so your tax returns showed the adjusted gross of one 60 for financial aid purposes, under the old rules, that'd be 180K. You with me? They would add back that $20,000 deduction. Type "Yes," if you understand what I'm saying.
I don't think that's in the weeds too much, but I'm trying to do third grade arithmetic here. So you had income of 180,000 you contributed $20,000, your adjusted gross was 160,000, but for financial aid purposes, 180,000.
Now under the new rules, it's going to be that lower number, 160,000. They're not going to penalize you for contributing to your retirement income, which is pretty good, 'cause it used to be, I guess the theory was you can't double dip. You can't improve your eligibility for financial aid and get the tax benefit.
Well, now the Department of Education is throwing us a bone here for doing that, so I think that's pretty cool. Another benefit, and this is still in that grandparent category, (holds up index card) is everyone impressed by these? The penmanship is calligraphy quality. I just want you to follow me here too. I'm going to try to be succinct.
“Grandparent 529” Account. There's a question on the FAFSA about assets, many questions. Actually, one of them is about your 529s. So under the old rules, you would only have to report 529s that were owned either by the parent or the child. The typical setup is the parent owns a 529 and the child is the equivalent of the beneficiary. But many families have 529s set up where the grandparent, grandpa or grandma owns the 529 and the student is the beneficiary. Under the old rules, that wouldn't appear anywhere on the FAFSA. So maybe you're wondering, "Well, why am I bothering to tell you that?"
Well, under the old rules, keep in mind what I just told you before, once the money from that 529 was used to pay for college, then that would affect the kid's eligibility the following year. In fact it would be counted as income to the kid. If it's $20,000 then the eligibility the following year is reduced by 10,000 bucks.
So now that is no longer a penalty for the income side, but just to carry out that logic, if mom or dad has a 529 with a decent amount of money in there and they want to do something to a strategy to shelter, not hide, "shelter," double air quotes those funds, then what mom and dad should consider doing is transferring ownership, not the beneficiary, but the ownership of that 529 to grandma or grandpa. I guess you can do somebody else, but I'm just going to stick with the grandma grandpa example here.
So what that does is remove that 529 from your financial aid balance sheet. Is that going to be a really big deal? Potentially not so much because parent assets are penalized at roughly 5%, 5.64%. So if you have a $100,000 529, then you're going to improve your eligibility by 5,000 bucks. You're going to save potentially $5,000 per year potentially by doing a strategy like this. There are other strategies that are still valid for sheltering money. I'm going to talk about those momentarily. But that is a potential new loophole that just opened up. You're hearing that first here live on the most exciting FAFSA changes webinar that you've attended all September. The most exciting and non-refundable webinar on financial aid changes you've attended all September.
Divorced Families. Okay, next. Next low budget sign, CGI. Same joke. Okay. Well, we have a low budget for new comedic material too, it's not just signage. So divorce families, this is a bad change. I'm not going to pull punches here. I don't like this change at all. Here's the deal.
Under the old rules, the parent who should file the FAFSA was the custodial parent. That means the parent that the kid lived with the majority of time the previous year. It had nothing to do with income taxes, who takes the kids, is a dependent or whatever. That is gone. The new rules are more aligned with the IRS rules. So now the parent that supports the kid, meaning, almost every time, the parent that takes the dependent deduction in a divorce situation, that's the person who should be filing the FAFSA.
So just to go overbroad and be extremely sexist, and I know I'm going to offend people, but what do you expect from a cisgender college advisor whose pronouns are “I don't give a crap?”
In a common divorce situation, the mom would have the low income and the dad would have the high income 'cause many moms stay home. You choose to stay home and take care of kids. They sacrifice their careers. So it worked out better in that situation when the mom could say, "Well, the kid lives with me. I should be filing the FAFSA."
Now, under the new rules she doesn't get the benefit. It's going to be the high income dad, who usually takes the deduction for the child in this common scenario, just to paint that picture for you. So that's going to render a lot of families ineligible for financial aid. In divorced family situations, it's probably going to result in more fighting, if I had to guess between exes who already might have some tension between them. I think it's really unfortunate.
Child Support. There's one saving grace that I'm not really sure how important this is, but under the old rules, any type of child support that came to one of the parents, typically the mom in my example, used to be considered income and penalized at close to 47% of that amount.
So if a mom got $50,000 in child support, then her income for financial aid purposes under the old rules would be almost $25,000.
Under the new rules, that income is not penalized 47%, it's penalized at 5% and change. So her eligibility would only be affected by like 2,500 bucks. So that's good in a vacuum, but like I said before, I'm not sure if she's going to be the one filing. It's going to be the higher income parent filing.
So here's another tip, you switch things up in terms of which parent takes the kid as a deduction and therefore, is the one who supports the child more and files the FAFSA.
But what you have to look at is what are you giving up in terms of the tax benefit for the higher income ex-spouse filing versus the potential financial aid benefit for now the lower income ex-spouse declaring the child as a dependent. It's probably going to vary from family to family, ex-spouse to ex-spouse.
Formal Separation. Last thing I want to point out quickly before we leave this topic is that you used to be able to say if people were separated without a formal written agreement, now you need a formal court-approved agreement in order to claim that you're separated. Okay, I see a lot of questions coming in. Pearl, are you doing your best here?
Okay, Pearl is clarifying/correcting, tactfully.
Rough Ride Ahead. Okay, A little bit more final tips here before we go to the Q&A. First of all, I've been talking about changes for people applying to school, there's going to be a crap load and a cluster you know what of stuff happening behind the scenes at colleges because they are not getting these new rules and regulations till the end of December.
Same thing with us, by the way, and they're going to be scrambling to implement these things and update the software for the first time in 40 years. I'm not telling you this to make you feel sorry for them that they have to work harder, but you probably should. What I'm telling you is to set your expectations that this is not going to be a smooth process. This is going to be really, really messy. There's going to be delays. You're not going to be able to get anyone on the phone. It's bad in a normal year, it's going to be even worse this year.
Colleges seriously can't afford to staff up and hire more people and train them for these changes. That was one of the suggestions by Richard Cordray, the head of the Department of Education. But the reality is that colleges, even though they charge a lot of money, don't or can’t allocate it in this area. So it's got to be a long bumpy ride. You need to understand that and set your expectations that way.
Don’t Panic. Here's my final cue card. Don't panic. Just 'cause things don't seem to be going right doesn't mean that's the way they're going to be resolved totally. I just want to reiterate a couple of things. Number one, you can always appeal a crappy financial aid award. I actually wrote a book on that a couple of years ago (How to Negotiate Your Crappy Financial Aid and Merit Aid Award, on Amazon). So there's a lot of strategies there to tell them about new information or extenuating circumstances that they don't know about.
That's basically what the book is about, walking through some of those arguments. Like I mentioned before, it looks like financial aid offices are going to be more open to appeals this year. This is some of the stuff, the raw material that I've appealed before, has not been codified into the rules such as if you've had unusual business losses or investment losses or unusual real estate losses, those are grounds for appeal.
If you've had a severe disability of a parent or student or loss of income, those are appealable also. I would definitely try the number of kids in college at the same time appeal. Even though they may not fit a box, I think that's worth trying, so don't give up. I want to reiterate that I'm talking only about FAFSA, which is mostly state university colleges in and out of whatever state you live in.
I am not talking about the CSS Profile colleges, which tend to be the colleges that are A, more generous and B, more expensive, but they're more generous because they discount the most. So far, it doesn't look like there's any major changes pending there, including the sibling discount, including any of this divorce stuff for other reasons. So I think that's okay.
Sheltering Assets. Another point I want to make here in closing is that most of the techniques that we've used in the past for a portion, a fraction of clients specifically sheltering assets, meaning moving money around from places that penalize you to places that are exempt, those strategies are untouched. Those are still valid. So if you have money in your child's name, you're penalized at a really high amount. If you have money in your name, you're penalized at a lower amount. If you have a penalty in one of our legal and ethical shelters like an insurance policy or in some cases, an annuity, those might work.
Tax Scholarships. Those are exempt assets. We'll probably do a whole other webinar on that coming up because it's that season now. So there still are ways, there still are strategies. I talked before about the 529 strategy. I talked before about a few other strategies for business owners, talked about lowballing their business, but there's other strategies. There are other advantages that business owners have to lower their income through what our CPA calls Tax Scholarships, which are provisions in the task code that a lot of accountants know about, but they just blow off 'cause basically, just order takers or scriveners or scorekeepers, as opposed to strategists.
So if you're self-employed, for the most part, your strategies are still out there, strategies to shelter income, which could make you eligible for financial aid all of a sudden, or it could just free up cash from your business that's locked in there as a Tax Scholarship or both in some cases.
Merit Aid. Another beyond final comment I should add: there's actually more merit-based data out there than there is need-based data. So everything I'm talking about right now, FAFSA, CSS Profile, whatever, that's based on your ability to pay your income, your savings, et cetera. However, the majority of funds that are out there are merit-based, and those are not just for the super tippity-top Doogie Howser genius students.
Getting merit aid is a function of what pond you fish in, what colleges you apply to. So for the most part, the private colleges tend, it's not only them, but for the most part, the private colleges tend to offer merit aid and it's not the elite ones, not the Ivy or the Ivy Plus or the near-Ivy schools.
Those are generally need-based colleges, but everything under that tier, for the most part, you'll see that's mostly where you'll find these bargains. The average tuition discount, which includes need-based, but it's primarily merit. The average tuition discount by a private college nationally is more than 56%.
That, again, has nothing to do with anything I've been talking about with the changes and FAFSA or CSS Profile. It's a function of which colleges give money, and number two, which ones will give money to your child. How does he or she stack up compared to the competition?
If you're in the top 10%, 20% in terms of your SAT, ACT, yes, GPA, maybe one or two other areas, you have a pretty good shot at winning substantial merit scholarships, maybe even at that median at 56%, maybe more, maybe less, but certainly you don't have to pay full price.
Paying full price for college is a choice. It's not an obligation.