FAFSA Simplification: How New Rules Will Change the Price of College

(Click here for a larger version of this graph).

The Issue:

Families of college students applying for financial aid for the 2024-2025 academic year will have a significantly different experience than those applying in the past — and potentially obtain an unexpected outcome. Legislation enacted in 2020 will simplify the Free Application for Federal Student Aid (FAFSA), reducing the form broadly used to determine how much families are able to pay towards college from over 100 questions to fewer than 40. But the law also includes provisions that have the potential to substantially change the amount of financial aid some families receive.

While many students will likely benefit, some families with more than one child in college might be facing an unexpected increase in college costs.

The Facts:

• FAFSA provides an indicator of how much students and their families can afford to pay for college. In order to apply for financial aid, enrolled and college-bound students must complete the Free Application for Federal Student Aid (FAFSA) each year. The personal and financial details families provide on the FAFSA are used to make an estimate of how much a family can afford to pay for the student to attend college. Currently, that estimate is called the Expected Family Contribution (EFC). The EFC is used to determine eligibility and awards for federal programs. It is also used by higher education institutions in their calculations for granting financial aid. In practice, the EFC is correlated with the amount a family pays for college, but it does not determine that amount. 
• FAFSA’s estimated affordability calculation is used to determine awards for many forms of financial aid. The difference between the cost of attendance at a university — which includes stated tuition, living expenses, books, etc. — and what families can afford determines a student’s “financial need.” Students receive a combination of federal and institutional grants and loans, as well as federally-subsidized student employment to cover at least part of that need. The Pell Grant program represents the main form of federal aid that does not need to be repaid. Legislation sets a maximum value of the Pell Grant. The actual size of the grant awarded to a family is calculated as the difference between the maximum and the family’s EFC. Whether or not they qualify for Pell Grants or other federal programs, a student may still have “remaining need.” This is particularly true at four-year colleges and universities with higher sticker prices. To fill this gap, many of these institutions also award funds using their own resources based on the student’s EFC. Students with a lower EFC may receive more of such financial aid, but the relationship is typically less than dollar-for-dollar. Those awards are determined based on college policies and finances. 
• FAFSA simplification is based on research that found the existing form was unnecessarily complex and represented a barrier to higher education for those most likely to benefit. In the early 2000s, research by Susan Dynarski and Judith Scott-Clayton showed that much of the variation in EFC can be explained by income and family structure alone. Moreover, past evidence has shown that the complexity of college pricing hinders college enrollment and participation for low-income families. The research findings caught the attention of Congressional leaders. Bipartisan efforts spearheaded by retired Tennessee Republican Senator Lamar Alexander led to the inclusion of the FAFSA Simplification Act in the omnibus spending bill passed in 2020. The new form will become available in December of 2023 for students enrolling in college in 2024-25.
• The underlying formula used to estimate college affordability will change. The FAFSA simplification act renames EFC to the Student Affordability Index (SAI) – but this is not just a change in name alone. Many provisions will mean that the SAI is lower than the current EFC for a lot of families, making them eligible for higher amounts of student aid relative to the current formula. However, there are also changes that will result in families receiving less financial aid. One obvious change in this direction is the elimination of the “sibling discount.” Currently, a student’s expected family contribution is reduced proportionally to the number of that student’s siblings who are enrolled in college (i.e. the EFC is cut in half if two siblings in the family are concurrently enrolled). The new SAI does not take into account how many siblings are attending college simultaneously. There is a view that this change makes the financial aid system more fair — why should aid be greater for a family with two children who are a college senior and a college freshman as compared to a family whose two children are a college senior and a high school senior? The timing of the expenses should not have such a big effect on a families’ overall cost, the thinking goes. Regardless, the transition to this change could create problems for families that had anticipated, and saved for, college costs determined by the current system. 
• Estimates of affordability using the new FAFSA generally will be lower than current estimates except for families with more than one child enrolled in college. The attached figure illustrates the relationship between the amount families are expected to pay for a child in college under the EFC and SAI for dependent students. It is based on simulated data licensed to me from the National Association of Student Financial Aid Administrators (NASFAA). These data show that this relationship strongly depends on the number of siblings a student has in college. Each point in the graph represents the amount a family is expected to pay for a child in college under the current EFC system (the value along the horizontal axis) versus the amount under the new SAI system (the value along the vertical axis). The black 45-degree line shows when there would be no difference between the amounts families are expected to pay. Values above this line indicate that families will be expected to pay more under the new system and below the line they will be expected to pay less. For students with no concurrently enrolled siblings, SAI is more generous than EFC (i.e. under the new formula the student is determined to be able to afford less). A best fitting line between the two shows that SAI is always lower and the gap becomes slightly larger at higher EFC values. For students with one sibling enrolled in college, though, SAI is considerably less generous than EFC.
• The change in the formula will translate into changes in eligibility for financial aid. For those students whose SAI is lower than EFC, their Pell Grants will rise. Note that this will not help students whose EFC is already zero; they will get the maximum Pell Grant anyway. Families with incomes below perhaps $40,000 (and typical assets for that income level) fall into this category, regardless of their sibling status (see here). Students with no siblings in college who had a positive EFC will now face a lower SAI and receive a larger Pell Grant. That accrues to those with incomes roughly between $40,000 and $70,000. They may receive up to $2,500 larger Pell Grants. Families with incomes greater than $70,000 will no longer be eligible for this form of aid, but they are eligible for financial aid provided from institutions. Our calculations indicate that they would be eligible for up to $4,000 more institutional aid until their incomes reach, perhaps, $120,000 at a public institution (for a state resident) or $220,000 at a private institution. Whether these institutions will provide that aid based on greater eligibility is completely at the discretion of the institution, though. 
• Students with siblings in college do not fare as well. Those at the lowest income levels are unaffected. As incomes rise, though, the loss of the sibling discount quickly overtakes the other change that otherwise lower the SAI relative to the EFC. For those students with incomes between, say, $60,000 and $100,000, they will face reduced Pell Grants. Beyond that level, the amount of institutional grant aid to which they will be eligible for could be reduced by thousands, and perhaps tens of thousands of dollars, relative to the current formula. Again, how those changes in eligibility translate to changes in financial aid awards will depend on institutional discretion.