The complication with FAFSA simplification

FAFSA magnifying glass

The goal of the 2020 FAFSA Simplification Act is to make it easier for students to apply for financial aid by significantly reducing the number of questions on the FAFSA (Free Application for Federal Student Aid) form. The law also includes substantive changes in the underlying formula that determines the amount of financial aid for which students are eligible. Those changes will affect the size of students’ Pell Grants and the amount of additional financial aid that higher education institutions can provide (known as “institutional aid”). This report details those changes and their likely impact on the net price of college, after factoring in financial aid, for dependent students attending four-year institutions.

The main provisions of the law that will affect how much students pay for college include:

  • Eliminating the discount students receive when they have siblings enrolled in college
  • Increasing the income cutoff used to automatically award the maximum Pell Grant
  • Increasing the amount of student and parent income that is exempted in determining financial need
  • Reducing parents’ expected payments for students with low incomes

These changes, and others, will have profound effects on students’ eligibility for financial aid. Some students may pay more and others less. How a student’s financial aid eligibility will change with FAFSA simplification depends on many factors, including their family’s financial circumstances, where they attend college, and especially how many siblings they have in college.

These changes, and others, will have profound effects on students’ eligibility for financial aid.

To illustrate the effects of the changes, we provide the interactive below to simulate changes in financial aid eligibility for hypothetical students. Users can move the slider to vary family income (assuming typical asset holdings for a family at that income level) to see how aid eligibility is projected to change. Read the full report for detail about these simulations.

  • The first panel shows the simulated change in Pell Grant eligibility. Pell Grant eligibility directly determines the size of Pell Grant awards, so the figure shows how much more—or less—a student is expected to receive under the new formula.
  • The next two panels show the simulated change in eligibility for institutional aid at a typical public institution for a state resident and at a nonprofit private institution, with assumed costs of attendance (“sticker prices”) of $30,000 and $60,000, respectively. How much institutional aid a student actually receives depends on how much aid they are eligible for and the institution’s financial aid policies. Those policies vary across institutions and may change in response to FAFSA simplification. This means that, in contrast to the numbers reported for Pell eligibility, the change in how much institutional aid a student receives could be different from change in the amount for which they are eligible, which is what is reported in the interactive.

For example, a student from a low-income family (under $30,000) would see no change in Pell eligibility because they would be eligible for the maximum Pell Grant both before and after the change. This would be true regardless of how many siblings the student has in college. This family’s income is low enough that the new financial aid formula would make them eligible for $1,500 in institutional grant aid at both a typical public and private institution. How much additional aid the student actually received will depend on institutional policy.

As family income rises, Pell Grant eligibility recedes but at a slower rate under the new system. At family income levels of around $70,000 (roughly the median), students without siblings in college would have exhausted Pell Grant eligibility under the old formula, but under the new formula they will maintain their eligibility and receive small Pell Grants. Students in this income range will also become eligible for roughly $2,000 more institutional grant aid, at both types of institutions, that they would not have qualified for in the past. Students in this income range with no siblings in college will be the biggest beneficiaries of the law change.

Students with siblings in college in this income range will not fare as well. For them, the sibling discount would have meant they received large Pell Grants under the old formula. But without the sibling discount, their grant would be perhaps a few thousand dollars smaller, with larger changes for students who have two siblings in college. Eligibility for institutional grant aid, though, would be unaffected in this income range, regardless of the number of siblings.

As incomes rise beyond $70,000, students with no siblings become ineligible for Pell Grants, but they are eligible for institutional grants. Through about $120,000, under the new formula students with no siblings in college will be eligible for additional need-based institutional grants of around $3,000 at both public and private institutions. At higher incomes, students attending public institutions do not qualify for institutional aid under the new or old formulas. For students attending private institutions, the increase in the amount of institutional aid students qualify for under the new formula rises with family income, reaching more than $5,000 around $200,000 of family income. For family incomes much above $200,000, students would not be eligible for institutional financial aid before or after the reform.

One clear lesson from the interactive is that students with siblings in college will in many cases be eligible for considerably less financial aid after FAFSA simplification than under the current formula.

Again, students with siblings in college will be eligible for less aid in this income range. Students with family income levels of $90,000 ($110,000) for those with one (two) siblings in college would be eligible for Pell Grants under the old formula but will be no longer. They will also face vastly reduced eligibility for institutional grant aid—upwards of $10,000 at public institutions or $20,000 to $30,000 at privates. The lost eligibility is larger at private institutions relative to public institutions because there is a larger gap between what families are expected to pay and the full cost of attendance to fill in at private institutions with a higher sticker price. The change in eligibility eventually disappears as family incomes rise to the point where the student is no longer eligible for any aid under either the old or new system.

One clear lesson from the interactive is that students with siblings in college will in many cases be eligible for considerably less financial aid after FAFSA simplification than under the current formula. This change could be viewed as penalizing these students unfairly or as eliminating an inequitable subsidy that these students used to receive. Regardless of one’s viewpoint, the transition from one system to another has the potential to create significant hardship for students with siblings in college. For those already in college and likely for those approaching college age, the shock of facing higher prices is one for which they are not prepared.

Read the report here.

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