What is the FAFSA and how is it used?

I received the following question recently:

What is the FAFSA, and how is it used?

Chances are you have heard about the FAFSA (Free Application for Federal Student Aid). There is a lot of confusion surrounding this application and how it is used that I would like to clear up here. There also is a NEW FAFSA that is coming out this December (normally in October), and we'll highlight some of the changes here.

What is it?

The FAFSA has become the foundational tool used by most colleges and universities to evaluate your financial standing.  You must complete the online application during the spring of your student’s high school senior year, and again during the spring of each year in college. The information you enter on the FAFSA is based on information you file on the prior prior year’s taxes (so your 2022 income for the 2024-2025 FAFSA). 

Your FAFSA, EFC SAI, and COA

The FAFSA produces a number (previously called Expected Family Contribution or EFC, now the Student Aid Index or SAI), which is used by the federal government, state government, and individual colleges to determine your financial situation and ability to pay. Each college then has their own Cost of Attendance (COA) which is a number based on the tuition, fees, room and board, food, transportation, and book costs to attend that school. Each school then takes your SAI, subtracts your Cost of Attendance, and the resulting difference is what is known as your demonstrated financial need. As you can see, this number will be different for each school based upon their own COA. 

How is it used? 

Your demonstrated financial need is used to determine how much you are awarded in federal loans, work study, state grants, university grants, and some scholarships. You receive a Student Aid Report (SAR) from the government detailing what your SAI is, and then individual financial reports from each school with details on what need-based financing you are eligible for. Contrary to its name, the FAFSA is used for much more than federal student aid, and is utilized by most colleges and universities to determine scholarship and grant awards.

What is taken into consideration?

The FAFSA takes into consideration several factors from your prior prior year's taxes (no, that's not a typo), including: 

• Income (taxed and untaxed)
• Assets 
• Benefits
• Farm net worth (under new FAFSA)
• Number of children in college (not counted on the new FAFSA)
• Savings (excluding retirement)
• Small business net worth (under new FAFSA)

You might be wondering, “if they take savings into consideration, does that mean saving for college decreases my financial need?” Sort of. Savings, including college saving plans such as a 529, do decrease your eligibility for financial need. However, they only plan on you putting a set percentage towards college each year (which varies based on age of the parents), and an allowance is deducted automatically from the calculation. Ultimately the impact is relatively small, so don’t let this deter you from saving.

We'll take a deeper look at the FAFSA in future videos, but for now this gives you a general overview. Subscribe to the blog on the right-hand side of the page to receive future updates about this and other related topics!