Changes to the financial aid formula could affect how much you pay for college

Some families applying for college financial aid this year may get less help than in the past, thanks to a little-known change to the underlying formula.

Families who complete the Free Application for Federal Student Aid (FAFSA) for the upcoming academic year will see the Asset Protection Benefit drop to $0, ending a years-long trend of declining asset allowances that have reduced aid eligibility for middle-income families.

Many students (and their parents) recognize the FAFSA as an annual rite of passage to qualify for federal grants and student loans, as well as many college and private scholarships. But few families understand the nuances of how the financial assistance formula actually works.

“For most families, it’s a black box,” says Mark Kantrowitz, a national financial aid expert. “They just know it’s tough, and they think it’s a ridiculous assessment of what they can afford to pay.”

Families have no control over the formula itself. But understanding the basics of it can help them determine whether they will qualify for need-based financial aid or whether they should seek out colleges that offer merit-based aid. This starts with understanding their “expected family contribution,” an indicator of need generated by the FAFSA formula.

Despite the demise of the Asset Protection Allowance, all is not bleak on the formula front: a separate part of the formula – the Income Protection Allowance – has become somewhat more generous. (These behind-the-scenes formula changes are completely separate from the big FAFSA changes now slated for 2024.)

Here’s how the formula changes affect families applying for college financial aid.

This year, the heritage protection allowance has disappeared

There are two types of assets with respect to the federal financial assistance formula: reportable assets and non-reportable assets. Non-declarable assets, like the house you live in and eligible retirement accounts, are fully protected. Reportable assets, such as savings and checking accounts, investment accounts, and real estate, are considered fair game for college bills. (Some colleges also require an additional financial aid form, called the CSS Profile, which counts assets differently.)

Yet, historically, even some of the assets you have to declare were sheltered from the financial aid formula, thanks to what is called the Asset Protection Allowance. Simply put, the Asset Protection Allowance meant that a portion of your non-retirement assets didn’t count towards college. The protected amount was linked to the age of the oldest parent. For people aged 65 and over, the allowance was the highest.

“The formula basically said, ‘hey, these people were closer to retirement, they need to have that money for retirement,'” says Alex Bickford, college finance consultant for Bright Horizons College Coach.

In 2009-2010, the Asset Protection Benefit peaked at $84,000 for parents aged 65 and over in a two-parent household, meaning that only assets above $84,000 were considered for university, as well as your income.

“The asset protection allowance was a significant number,” says Joe Messinger, co-founder and director of college planning at Capstone Wealth Partners.

Since then, the number has continued to decline. In 2020-2021, it was $9,400. For the 2023-24 FAFSA, which families can complete now, it will hit $0 for the first time. The change from 2009 to today represents a reduction in aid eligibility of up to $4,738, according to Kantrowitz.

In other words, compared to a decade ago, today’s families are expected to use their assets more to pay college bills, or as Kantrowitz puts it, “l university is becoming less and less affordable”.

Luckily, assets aren’t factored into the financial aid formula as much as income, so that’s a bit of a relief. Depending on your income bracket, “somewhere between 2.2% and 5.64% of non-retirement assets are counted,” Messinger says. Thus, for every $10,000 of assets, a maximum of $564 is accounted for in college bills.

Families who filed FAFSAs in recent years probably didn’t notice the effect of the year-over-year decline in the asset protection allowance, because it had already dropped so low. Even so, we shouldn’t be happy about it dropping to $0, Kantrowitz says.

The allowance was originally designed to help parents by protecting the equivalent of the cost of an annuity to supplement their social security income in retirement. The Social Security and FAFSA formulas are not directly related, Bickford says, but as Social Security payments have increased, Asset Protection Allowance has moved in the opposite direction.

Bottom line: Even though Social Security payments have increased, many Americans still need income beyond Social Security to retire comfortably, and the FAFSA formula no longer accounts for this need.

Income protection benefit increases

On the other hand, the parents’ income protection benefit has increased, so this is not bad news for your expected family contribution, according to experts.

“Income Protection Benefit is designed to take into account what it costs a family to survive,” says Bickford. “This protection is adjusted for inflation, so we would expect a bigger increase this year and next.” But, he says, the amount protected is “paltry compared to what it should be”.

Yet, since income matters much more to your aid eligibility than assets (ranging from 22% to 47% of your income as available for college bills, depending on your income bracket), increasing l income protection benefit can help you more than eliminating asset protection hurts you. The effect will depend on the individual situation of each family.

On Form 2023-24, $32,610 is protected for a family of four with a college student, up from $30,190 last year. If your income remained the same, having an additional $2,420 protected from the expected family contribution formula means your expected contribution could drop from $532 to $1,137, according to Messinger.

For families with high expected family contributions — meaning they are unlikely to receive need-based financial assistance — a small reduction may not make a difference. But for others, even a small reduction can be significant. This could mean qualifying for more institutional financial aid at a private college or reaching the threshold for a partial or full Pell Grant, work-study, or subsidized loans from the federal government. To qualify for a partial Pell Grant, for example, families had to have a CFE this year of $6,206 or less.

Since the FAFSA is based on your tax return for the previous two years, there is nothing you can do now to reduce your income, such as putting more money into a qualified retirement account, if you file the FAFSA 2023-24.

But you have some control over your assets. If you haven’t filed the FAFSA, you can use your savings to pay off debt or cover any major upcoming expenses, which may lower your expected family contribution slightly, Bickford says. But that’s not always a good idea if you need that money to pay for your education. The value of money in the bank probably outweighs your slightly increased aid eligibility.

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