Big FAFSA Calculation & Application Changes Starting in 2023

Parents that are used to completing the FAFSA application for their children are in for a big surprise for FAFSA Application years 2023+.  Not only is the FAFSA application being completely revamped but the FAFSA calculation itself is being changed which could result in substantially lower financial aid awards for many college-bound students.

A Simplified FAFSA Application

Completing the FAFSA application can be a very frustrating process; tons of questions, unclear wording as to what information FAFSA is actually asking parents to report, and you have to spend a lot of time collecting all of your personal financial documents that are needed to enter the information on the FAFSA application.

Fortunately, in 2020, Congress passed the FAFSA Simplification Act which greatly simplified the FAFSA application in 2023 and years going forward.  The old FAFSA application contained 108 questions, the new FAFSA application is only expected to contain 36 questions.  In addition to cutting the questions in half, the wording of many of the questions were amended to make it easier to understand how to report your financial assets. Two very welcome changes to the application.

EFC (Expected Family Contribution) Calculation Removed

In the past, completing the FAFSA application has resulted in an Expected Family Contribution (EFC) amount which is meant to provide a ballpark amount that a family may have to pay out of pocket before need-based financial aid is awarded to a student.  The term EFC can be misleading because it’s not necessarily the hard dollar amount that parents will be required to pay out of pocket but rather it’s the family’s financial need relative to other applicants.

To remove this confusion, EFC is now be replaced by SAI (Student Aid Index), so now after parents complete the FAFSA application, it will result in an SAI amount.

Financial Aid Awards Reduced For Multiple Children

Parents that have multiple children in college at the same time may be in for an unfortunate surprise when they see the results of the new SAI calculation.  In the past, if a parent completed the FAFSA application and it resulted in an EFC of $30,000, but they had two children in college at the same time, FAFSA would split the $30,000 between the two children, $15,000 each, which would potentially make each student eligible for a higher financial aid award.

Starting the 2024 – 2025 school year, FAFSA no longer provides this EFC (SAI) split for multiple children in college.  If the FAFSA calculation results in a $30,000 SAI, that $30,000 will now apply to EACH student, instead of being split equally between each child, which could result in lower need-based financial aid awards going forward.

Divorced Parents FAFSA Calculation Change

When parents are divorced, and they have a child attending college, the custodial parent is the parent that submits the FAFSA application based on their income and assets.  Historically, the FAFSA definition of the “custodial parent” was the parent that the child lived with for the majority of the 12-month period ending on the day the FAFSA application is filed.   This often times created a very favorable financial aid award if the child was living for a majority of the year with the parent that had lower income and assets.

This will change for years 2023 and going forward. The new FAFSA rules require the parent who provided the most financial support in the “prior-prior” tax year to complete the FAFSA application instead of the custodial parent.   Prior-prior refers to the tax year 2 years ago from the beginning of the college semester.  For the 2025 – 2026 award year, FAFSA will look at the 2023 tax year for this determination.

For example, Joe and Sue got divorced 5 years ago, and their daughter Mary is currently a sophomore in college. Sue is a homemaker,  Mary lives with her mother for the majority of the year, Joe makes $300,000 per year, and pays Sue $25,000 per year in child support and $40,000 per year in alimony.   For the 2023 – 2024, under the old FAFSA calculation, Sue was considered the custodial parent, and completed the FAFSA form using her annual income and assets.  Since Joe is not the custodial parent, Joe’s income and assets are ignored for purposes of FAFSA. 

Starting in the 2024 – 2025 school year, under the new rules, that has now changed.  Since Joe is providing a majority of the financial support via child support and alimony payments, Joe would now be the parent required to submit the FAFSA application based on his income and assets.  Since Joe’s income is substantially higher than Sue’s, it could result in a much lower college financial aid award.

There has been some initial guidance, that if there is a “tie” as to which parent provided the majority of the financial support, the ties are broken based on whichever parent has the higher adjusted gross income.

Changes to Pell Grants

One of the largest sources of need-based financial aid from the federal government is awarded via Pell Grants. Starting in the 2024 – 2025 school year, the maximum Pell Grant amount was increased but they have changed how the Pell Grant is calculated.   The Pell Grant takes into account both the SAI result (new EFC) and the applicant’s adjusted gross income. Since the calculation of the SAI has changed, for reasons that we have already discussed, it could impact the amount of the Pell Grants awarded to students.

As a new benefit, parents will now be able to determine if their child will be eligible for a Pell Grant award based on income and family size before they even complete the FAFSA form.

Grandparent 529 Penalty Removed

A positive change that they made was eliminating the restriction associated with distributing money from a 529 account owned by a grandparent for the benefit of the grandchild.  Previously, if distributions were made from a grandparent owned 529 accounts, those distributions were considered “income of the student” in the FAFSA calculation, which could dramatically reduce the financial aid awards in future years. The new legislation removed this restriction and made grandparent owned 529 accounts even more valuable than they were prior to this change.

Income Protection Allowance Increased

The FAFSA calculation has income thresholds that exclude specific amounts of income of both the parents and the child in the calculation of the Student Aid Index.   Those income exclusion allowances were increased starting in 2024.    The income protection allowance for parents was increased by about 20%.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

What is changing with the FAFSA application starting in 2023?
Beginning with the 2023–2024 academic year, the FAFSA is being redesigned under the FAFSA Simplification Act. The number of questions has been reduced from 108 to about 36, and the language has been simplified to make it easier for families to understand and complete the form.

What is the difference between EFC and SAI?
The Expected Family Contribution (EFC) has been replaced with the Student Aid Index (SAI). While both estimate a family’s financial ability to contribute toward college costs, the new SAI formula is designed to simplify the process and remove confusion surrounding the term “expected contribution.”

How will the new FAFSA rules affect families with multiple children in college?
Under the old FAFSA calculation, the EFC was divided among multiple students in college, potentially increasing need-based aid for each child. Starting with the 2024–2025 school year, that split no longer applies—each student will have the same SAI, which may reduce financial aid eligibility for families with multiple college students.

How are FAFSA rules changing for divorced or separated parents?
Previously, the “custodial parent”—the one the student lived with most—was responsible for filing FAFSA. Beginning in 2024–2025, the parent who provided the most financial support during the “prior-prior” tax year must complete the application. This change may increase the reported household income for some families, reducing aid eligibility.

What are the new rules for Pell Grants?
Starting in 2024–2025, Pell Grant eligibility will be determined based on the new SAI formula and household adjusted gross income. While the maximum Pell Grant amount is increasing, the new calculation could alter eligibility for some students. Families will also be able to check Pell Grant eligibility before completing the FAFSA form.

How do the new rules affect 529 plans owned by grandparents?
Distributions from grandparent-owned 529 plans will no longer be counted as student income in the FAFSA formula. This change removes a previous penalty that reduced financial aid eligibility, making grandparent-owned 529 plans more advantageous.

What is the Income Protection Allowance and how is it changing?
The Income Protection Allowance excludes a portion of a family’s income from the aid calculation to protect funds for basic living expenses. Starting in 2024, these thresholds are increasing by roughly 20%, allowing more income to be shielded from the FAFSA formula and potentially increasing aid eligibility.