A new change to the Free Application for Federal Student Aid (FAFSA) could make it easier for caregivers to afford the cost of higher education while simultaneously saving for retirement.
Under a new rule to the FAFSA form, pre-tax contributions to workplace retirement plans will no longer count as income—an alteration the Department of Education says will allocate more aid to students and families in need.
In previous years, FAFSA had asked families about the amount they contribute to employer-sponsored retirement accounts each year and factored it into households’ overall yearly income. Under the Expected Family Contribution (EFC), a formula that the Education Department utilizes to determine the amount of aid given, households could pay a maximum percentage of up to 47% of their yearly income towards college funds, with the average EFC being $10,000.
That’s all set to change this year, however, as the FAFSA Simplification Act (passed by Congress in 2020) will require colleges to transition from the EFC to the new Student Aid Index (SAI) starting in the 2024-2025 school year. The change includes adjusted calculations that focus more on tax returns from the Internal Revenue Service (IRS), but still factors information provided on the FAFSA form.
The FAFSA application will also come with a host of changes—first changing its start date from October to December, and most notably, altering the number and complexity of questions previously asked. The total number of questions will be reduced from 108 in past years to 46, and questions regarding tax-deferred pension payments and qualified retirement plans will be removed.
The changes will be particularly welcomed by parents, guardians, and students alike—many who have long complained about the application’s density, noting that the number of questions, along with its material, were tough for students to interpret.
Households navigating their retirement savings while raising children and affording schooling may also feel some relief, especially for those in the sandwich generation. A previous report by the Society of Actuaries (SOA) found that among those saving for retirement and allocating at least $500 towards college savings, 58% have delayed their retirement to pay for college for a family member or friend instead.
“The challenge of prioritizing different savings goals, including college for family members, has led to families making difficult choices, such as delaying retirement plans,” said R. Dale Hall, managing director of research for the SOA Research Institute, in a statement at the time.
With the new changes to FAFSA, instead of playing catch up with additional contributions later on, these families could allocate more towards their retirement now without jeopardizing the amount of aid received.
SEE ALSO:
- Americans Compromise Retirement Savings for College Education
- Unpaid Caregivers Struggle with Retirement Security
- A Quarter of Caregivers Own Less than $1,000 in Savings
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
