Jobless Benefits’ Unintended Fallout: Reduced College Financial Aid

Jobless Benefits’ Unintended Fallout: Reduced College Financial Aid

Unemployment benefits have helped millions of people who lost their jobs during the pandemic, but now the payments could throw a wrench in the college’s financial aid process.

The disconnect between a pandemic relief program and colleges seeking financial aid could result in less support for some applicants, student advocates say. Students from families who received unemployment benefits in 2020 — especially if the family filed a tax return in early 2021 — should check with college financial aid offices to see if they will receive the maximum amount.

Here’s what you should know.

To qualify for financial aid, students and their families complete the Free Student Aid Application, known as FAFSA. The form is the portal to need-based Pell grants and federal student loans, and states and colleges use it to award their own grants.

The FAFSA for the 2022-23 academic year became available on October 1 and uses financial information from the 2020 tax year that is normally reported on tax returns filed in 2021.

As a rule, the unemployment benefit is taken into account as income when calculating the entitlement to benefits. But as part of its pandemic relief efforts, the federal government allowed Americans earning less than $150,000 to exclude unemployment benefits of up to $10,200 per recipient from their 2020 taxable income. The measure went into effect March 11, 2021 — after many people had already filed their 2020 tax returns and reported their unemployment benefits as income.

The Internal Revenue Service said it will automatically make corrections for people who had already filed tax returns and will send refunds if necessary. But the potential for confusion with the FAFSA remains, particularly for early taxpayers who also use the IRS Data Retrieval Tool to fill out the form.

The tool allows FAFSA applicants to quickly transfer encrypted tax information into the online financial aid form, and the Federal Student Aid Office encourages students and families to use it. But the tool transfers information from the original returns. Therefore, the data for early applicants who have not applied for unemployment exemption does not reflect lower, IRS-adjusted earnings, said Kalman A. Chany, president of Campus Consultants, a financial assistance consulting firm in Manhattan.

In a notice published online in the fall, the Federal Student Assistance Office said early taxpayers who used the data tool for the FAFSA would have higher reported income, “which could potentially reduce their eligibility for need-based federal assistance.”

And according to the notice, even people who filed their tax returns after March 11, 2021 and excluded unemployment benefits from their income may still have reported their unemployment benefits to the FAFSA as “untaxed income” — which could also reduce potential benefit. (Those affected are most likely applicants who submitted their FAFSA in early October, before the Department of Education clarified that the benefits should not be reported as untaxed income on the form, Mr Chany said.)

In a “warning” updated Feb. 24, the IRS FAFSA filing warns against using the data tool if they’ve filed their 2020 tax returns and haven’t excluded unemployment benefits from their income.

“The concern is, are colleges seeing inflated incomes?” said Brendan Williams, senior director of consulting at uAspire, a nonprofit organization that is trying to break down financial barriers for college.

It is unclear how many students could be affected. Millions of people received unemployment benefits in 2020, but data isn’t available to calculate how many of those are also filing a FAFSA, said Kim Cook, executive director of the National College Attainment Network, a nonprofit group working on behalf of Low works – income and minority students.

The Federal Office for Student Aid has instructed the university’s study grant administrators to fix the problem if they become aware of it. However, administrators may not be able to easily identify affected applications because they don’t typically see a breakdown of family income, said Karen McCarthy, vice president of public policy and federal relations at the National Association of Student Financial Aid Administrators.

Students may not be aware of the issue and don’t know if they can ask about it, Mr Chany said. “No one pats them on the back,” he added.

What should families do?

If you had unemployment benefits in 2020 and filed your tax return before March 11 last year, you should contact your college financial aid office to discuss your concerns and have the unemployment benefit removed from FAFSA income, said Mark Kantrowitz, a Grant Expert . Documents such as the 1099-G form that the government uses to report unemployment benefits or unemployment confirmation letters can show that students or their families received unemployment benefits.

Students should also know that the federal government has encouraged college financial aid offices to use their discretion — “professional judgment” in financial aid jargon — to consider special circumstances, including losing a job during the pandemic, to assess a student’s financial resources maximize help.

In some cases, Ms Cook said, it’s also possible that a family’s income could have been higher in 2020 than it is now due to expanded unemployment benefits during the pandemic.

Students or families receiving unemployment benefits in 2020 “may be surprised” to see Pell grants that are “much lower” than previous years, according to a report by Bottom Line, a nonprofit group representing low-income students and the first generation helps attend college; and SwiftStudent, a free tool that students can use to submit applications for financial aid.

“This is not your imagination,” says the report.

Regardless of the reason, students should inform the study grant offices if their circumstances have changed. “If information about the FAFSA does not accurately reflect your current situation, contact your school,” Ms McCarthy said – the sooner the better.

Here are some questions and answers about FAFSA and study aid:

It could be significant, Mr. Kantrowitz said. A $10,000 reduction in FAFSA income can represent a $3,000 to $5,000 reduction in a student’s expected financial contribution. It could also increase eligibility for need-based financial assistance.

No. It is always best to submit the form as soon as possible after it becomes available each year, as states and colleges have different priority deadlines. However, the deadline for filing a FAFSA for the next academic year is June 30, 2023. (Students can submit the form to retroactively apply for federal aid, but it must generally be submitted by the last day of their academic semester or June and processed 30 – whichever comes first.)

The current payment pause on federal loans is scheduled to be lifted on May 1. It’s unclear if President Biden can extend the freeze again like he last did in December.