The Loophole for Grandparents in the New FAFSA Rules

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The Loophole for Grandparents in the New FAFSA Rules

It's a miserable year to apply for financial aid.

Millions of families likely won't get a final price on college until April due to a series of delays at the Department of Education in rolling out the new FAFSA financial aid form. Students whose parents do not have a Social Security number still cannot complete the online form.

But if you're applying for help and have grandparents who want to help, you might be in luck.

Under the old rules, the FAFSA (Free Application for Federal Student Aid) asked about “untaxed income” and “money received or paid on your behalf.” This was your reason to reveal your grandparents' support.

This assistance was a type of benefit and the assistance formula took it into account when determining the amount you could afford. Once most schools receive the FAFSA data from the federal government, they determine how much of their own aid, if any, they will give you in addition to Pell Grants or subsidized loans from the federal government.

But now, thanks to a 2020 law that took effect this year, those questions about money and income are gone. This means that at most schools, the help of a grandparent no longer counts as your expense.

In other words, what experts once called the grandparent “trap” has now become the “grandparent gap.” It's not clear how many families will benefit from the change, although a gain of several thousand dollars a year is possible.

At first glance, the change seems radically unfair. If you have family money, someone should know about it so you don't get grants or scholarships you don't need, right?

But public policy is often complicated. The 2020 law was part of an effort to simplify the FAFSA. The more questions the form asked, the less likely people were to finish it or even start it. For low-income families in particular, this could mean that students are unable to start studying.

And those who answered these questions might have entered incorrect numbers if they didn't fully understand what the queries were asking for. Unusual entries on the FAFSA can trigger intrusive checks that delay aid. In contrast, the new FAFSA uses data transmitted directly from the Internal Revenue Service, greatly reducing the possibility of errors.

Bryce McKibben, who worked on FAFSA simplification legislation as a Senate staffer and now oversees education policy and advocacy at Temple University's Hope Center, reminded me of another point. Most major federal benefits for individuals also allow family members and others to donate money to program recipients without disclosing it.

In addition, a few hundred schools use a second form, called a CSS profile, which can ask about grandparent and other contributions and then take these into account when providing support. The College Board, which provides the form to schools, maintains a largely complete list of participating institutions on its website. Double-check the accuracy of the list and remember that schools can stop (or start) requiring the form at any time.

People who enjoy bending the rules of the financial system are probably salivating at this point. What if parents saved money and then transferred it to their grandparents? When determining eligibility, the parents' assets are taken into account in the aid formula, so this unusual detail work could protect a large part of their money.

But given human nature, how often will this realistically happen?

“No one has ever come back to me and said they did that,” said Billie Jo Weis, vice president of client services at My College Planning Team, which does educational consulting. “You would have to give up your legal right to the money.”

Almost any change in public policy will have losers, winners, and people who manage to move from losers to winners. But the bet is that people in that last category won't get much new help because of the change. Meanwhile, low-income families who previously didn't get money under the old FAFSA system would gain much more.

If you are a relatively new grandparent, godparent, aunt or uncle, you have no idea what kind of teenager a toddler will become. So how can you best help?

A good strategy is to open a 529 college savings plan. It grows tax-free over time, and you don't pay taxes when you use the money for school, as long as it's used for eligible education expenses. Additionally, you receive a state tax break when you make deposits in over 30 states.

It doesn't take much to really help. If you can manage $50 a month and the money grows at 5 percent each year, you'll be left with about $17,000 after 18 years.

Even if the beneficiary is not entitled to need-based assistance, it is still a great help. Or you can find a way to give away a bunch of money. This way, a student who needs it more than you can find a way to participate.