Key Changes to the 2025-2026 FAFSA: What You Need to Know

Edward Goldstein, CFP |
Categories
College

As we approach the 2025-2026 academic year, significant changes to the Free Application for Federal Student Aid (FAFSA) are on the horizon. These updates aim to simplify the application process and expand access to financial aid. If you’re a student, parent, or guardian planning for college expenses, it’s crucial to understand these modifications. Let’s dive into the key changes and how they might affect your financial aid journey.

1. Student Aid Index (SAI) Replaces Expected Family Contribution (EFC)

The Expected Family Contribution (EFC) is now called the Student Aid Index (SAI). This change, implemented in the previous year, affects how financial need is calculated:

  • The SAI can now go as low as negative $1,500, allowing for better differentiation among high-need students
  • The “sibling discount” for multiple students in college has been eliminated
  • Pell Grant eligibility has expanded, potentially benefiting up to 42.9% of previously ineligible students

2. Changes in Contributor Information

The term “contributor” is now used to refer to individuals providing information on the FAFSA:

  • For dependent students: biological or adoptive parents and their spouses (if applicable)
  • For independent married students: the student and their spouse
  • Grandparents, foster parents, legal guardians, and other relatives are not considered contributors unless they’ve legally adopted the student

3. Automatic IRS Data Transfer

The 2025-2026 FAFSA will require all contributors to consent to the automatic transfer of their federal tax information from the IRS. This change aims to:

  • Reduce errors in reporting financial information
  • Streamline the application process
  • Minimize the need for additional verification

It's important to note that the FAFSA will use "prior-prior" year income information. For example, high school seniors graduating in 2025 will use 2023 income tax information for the 2025-2026 school year FAFSA.

4. FAFSA Submission Summary

After submitting the FAFSA, applicants will receive a FAFSA Submission Summary instead of the traditional Student Aid Report. This summary will include:

  • Submitted FAFSA answers (excluding transferred IRS data)
  • The calculated Student Aid Index (SAI)
  • An estimate of potential federal student aid eligibility

5. Simplified Dependency Status Questions

The FAFSA will now include more straightforward questions to determine a student’s dependency status. This change aims to make it easier for students to understand whether they’re considered dependent or independent for financial aid purposes.

6. Updated Treatment of Child Support

Child support continues to be treated as an asset rather than income. This classification can be advantageous for many families, as it may result in a lower SAI and potentially increase aid eligibility.

7. Elimination of Small Business and Farm Exclusion

A significant change in the 2025-2026 FAFSA is the elimination of the small business and farm exclusion. Previously, certain small businesses and family farms were not reported as assets on the FAFSA. Now, these assets will be included in the financial aid calculation, potentially affecting the aid eligibility for families who own small businesses or farms.

8. Changes in Eligibility for Different Family Structures

The new FAFSA brings changes that will impact different family situations:

  • Income Protection Allowance: The parent income protection allowance will increase by 20%, while the student income protection allowance will increase by 35% for most students
  • Single Parents: Single parents will benefit from a 60% increase in the income protection allowance
  • Middle- and High-Income Families: These families may see decreased aid eligibility when they have multiple children in college simultaneously
  • Divorced or Separated Parents: The determination of which parent should fill out the FAFSA is now based on who provides more financial support in the prior calendar year, rather than where the student lived. This change aims to more accurately reflect the student’s financial situation. 

9. Changes in Reporting and Assessment of Income and Assets

Several key changes have been made to how income and assets are reported and assessed:

  • Cash Support: Cash support is no longer reported as untaxed income on the FAFSA, which may benefit students who receive financial help from relatives or friends.
  • Room and Board for Students Living at Home: Financial aid administrators can no longer zero out room and board costs for students who live at home with their parents. This change recognizes that there are still costs associated with housing and food, even when living at home.
  • Income Threshold for Asset Reporting: The income threshold for ignoring assets has been raised to $60,000. Families with incomes below this threshold may not need to report their assets, potentially simplifying the application process and increasing aid eligibility for some.
  • Asset Protection Exclusion Allowance: The asset protection allowance has been eliminated. This means that all assets, with a few exceptions like primary homes and retirement accounts, will be considered when calculating financial aid eligibility. This change may result in more of a family’s assets being considered in the aid calculation.
  • Retirement Plan Contributions: The new FAFSA no longer requires parents to add back the amount of retirement plan contributions, such as 401(k) contributions

10. Changes in Financial Aid Appeals and Dependency Overrides

The new FAFSA brings important changes to how financial aid appeals and dependency overrides are handled:

  • Financial Aid Appeals: Financial aid administrators are no longer permitted to have a policy of denying all financial aid appeals. This change ensures that each appeal is considered on its individual merits.
  • Dependency Overrides: Once granted, dependency overrides are now assumed to continue for the duration of the student’s entire college enrollment, absent any conflicting information. This change reduces the burden on students who have legitimate reasons for being considered independent.

11. Prohibition of Paid FAFSA Preparation

Under the new rules, paid FAFSA preparation is no longer permitted. This change aims to ensure that all students have equal access to completing the FAFSA without incurring additional costs.

What These Changes Mean for You

1.    Potential for More Aid: The expanded Pell Grant eligibility and changes to the SAI calculation could result in increased financial aid for many students, particularly those from lower-income backgrounds or single-parent households.
2.    Simplified Process: Automatic IRS data transfer and clearer dependency questions should make completing the FAFSA easier and more accurate.
3.    New Planning Considerations: The elimination of the “sibling discount,” small business and farm exclusion, and asset protection allowance may affect financial planning for many families.
4.    Reassessment of Assets: With the changes in asset reporting and assessment, families should carefully review their financial situation and understand how it may impact their aid eligibility.

How to Prepare for the 2025-2026 FAFSA

1.    Gather all necessary financial documents for you and any contributors
2.    Familiarize yourself with the new SAI calculation and how it might affect your aid eligibility
3.    If you own a small business or farm, prepare to report these assets
4.    Understand how your family structure and living situation may impact your aid eligibility
5.    Stay informed about any additional updates or changes to the FAFSA process

Federal Student Aid Estimator

To help you understand your family's financial aid eligibility in the college selection process, we have provided a link to the Student Aid estimator https://studentaid.gov/aid-estimator/ 

This tool, provided by the US Department of Education, can help you understand your options for paying for college or career school by providing an early estimate of how much federal student aid you may be eligible for.

Conclusion: Get Expert Help with Your College Funding Strategy

Navigating the new FAFSA changes and planning for college expenses can be complex. At Financial Life Planning, we specialize in helping families optimize their college funding strategies. We can guide you through the FAFSA process, explain how these changes affect your specific situation, and help you develop a comprehensive plan to meet your educational financial goals.

Don’t let the FAFSA changes overwhelm you. Contact Financial Life Planning today to schedule a consultation and ensure you’re making the most of your college funding opportunities. Let us help you turn your educational dreams into reality.

Remember, early preparation and expert guidance can make all the difference in your college funding journey. Reach out to Financial Life Planning and take the first step towards a solid financial future for your education.