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February 01, 2023 | Financial Planning
Key Takeaways
The legislation landscape has been unusually busy the last few years. One of the many pieces of legislation was the Consolidated Appropriations Act, 2021, a pandemic-era bill that may impact your financial plan, especially for those with college-bound family members.
Considered an ‘omnibus’ spending bill, it combined many different bills into one. Coming in at just over 2,000 pages, many of the provisions in the bill flew under the radar. One being the ‘FAFSA Simplification Act’ which overhauled the Free Application for Federal Student Aid (FAFSA) with the goal of simplifying the process. Whereas the old FAFSA formula focused on annual family cash flow, the new formula prioritizes total wealth.
For those with family members attending college in the fall of 2024 and beyond, these changes will impact them and may create opportunities for non-nuclear family members (e.g., grandparents) to help even more without hurting financial aid.
While the Act includes numerous provisions, here are the key changes:
It is important to note that the Department of Education recently announced some of these changes will not go into effect until the 2024-2025 FAFSA award year, while others, like the question reduction, are now active.
Anyone who has filled out FAFSA is painfully aware how much higher student income is assessed than parent’s (i.e., 50% versus 5.64%!). For example, if a student had income of $10,000, like a gift, it would have reduced the Expected Family Contribution by $5,000, but only by $564 if reported as income by the parent.
Since gifts or distributions from a non-parent 529 Plan (or any other account) counted as student income, it was highly recommended delaying distributions until the spring semester of sophomore year. This is due to FAFSA’s practice of using information pulled from tax returns two years prior (i.e., prior-prior year). In other words, financial aid awarded for the student’s senior year was based on assets and income reported during the year that included their first-year spring semester and sophomore fall semester.
But due to the FAFSA Simplification Act, planning around gifts and distributions from non-parents won’t be necessary beginning in 2023. Not only does this increase the utility of 529 Plans and other custodial accounts, but there are many estate and tax planning benefits with using them.
529 Plans and other custodial accounts (like Roth IRAs) have always been powerful tools to leverage for estate planning, as well as for their tax benefits. A few of these benefits include:
As with most planning techniques, there’s no such thing as a free lunch. Therefore, it’s important to remember that these changes only apply to FAFSA and that some schools, especially highly selective private schools, may use what is called a CSS Profile. It’s another financial aid tool that may consider gifts or distributions as student income, so it’s especially important to check before making them.
We wouldn’t blame you if you have legislation-fatigue by this point but that’s why we’re here, helping you stay abreast of all the changes and understanding how it may impact your financial plan. If you have questions or want to understand how you can potentially take advantage of this recent change, you can schedule a call with us any time to learn more.
Please consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.
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