It is a miserable year to be applying for financial aid.
Millions of families probably won’t get a final price tag for college until at least April, because of a series of Education Department delays in rolling out the new FAFSA financial aid form. Students with parents who do not have a Social Security number still can’t complete the online form.
But if you’re applying for aid and have grandparents who want to help, you may be in luck.
Under the old rules, the FAFSA, or Free Application for Federal Student Aid, asked about “untaxed income” and “money received, or paid on your behalf.” That was your cue to disclose assistance from a grandparent.
That help was a kind of benefit, and the aid formula included it when figuring out what you could afford to pay. Once most schools get the FAFSA data from the federal government, they determine how much of their own aid to give you, if any, on top of any Pell Grant or subsidized loans from the federal government.
But now, thanks to a 2020 law that went into effect this year, those questions about money and income are gone. That means that at most schools, help from a grandparent will no longer count against you.
In other words, what experts once referred to as the grandparent “trap” has now become the “grandparent loophole.” It’s not clear how many families will benefit from the change, though a gain of several thousands of dollars per year is possible.
At first glance, the change seems radically unfair. If you’ve got family money, somebody ought to know about it so you don’t get grants or scholarships that you don’t need, right?
But public policy is frequently complicated. The 2020 law was part of an effort to simplify the FAFSA. The more questions the form asked, the thinking went, the less likely people were to finish it or even begin it. For low-income families, in particular, that could keep students from starting college.
And those who did answer those questions might enter incorrect figures if they didn’t quite grasp what the inquiries were getting at. Unusual entries on the FAFSA can set off intrusive audits that delay aid. The new FAFSA, by contrast, uses data directly transferred from the Internal Revenue Service, greatly reducing the possibility of errors.
Bryce McKibben, who worked on the FAFSA simplification legislation as a Senate staff member and now does education policy and advocacy work at the Hope Center at Temple University, reminded me of another point. With most major federal benefits for individuals, there are opportunities for family members and others to give money to program recipients without disclosing it.
Moreover, a few hundred schools use a second form, known as the CSS Profile, that may ask about grandparent and other contributions and then take that into account when doling out assistance. The College Board, which offers the form to schools, maintains a mostly complete list of participating institutions on its website. Double-check the list’s accuracy, and keep in mind that schools could stop (or start) requiring the form at any point.
People who enjoy bending the rules of financial systems are probably salivating at this point. What if parents save money and then transfer it to the grandparents? Aid formulas assess parental assets when determining eligibility, so this fancy footwork could shield a big chunk of their money.
But realistically, how often will this happen, given human nature?
“Nobody has ever come back to me and said that they did this,” said Billie Jo Weis, vice president of client services at My College Planning Team, which does education consulting. “They would have to give up the legal rights to the money.”
Nearly any public policy change will have losers, winners and people who manage to turn themselves from losers into winners. But the bet here is that people in this last category won’t get a lot of new help because of the change. Meanwhile, low-income families who used to get no money under the old FAFSA system would gain a lot more.
If you’re a relatively new grandparent, godparent, aunt or uncle, you have no idea what sort of teenager a toddler will turn out to be. So what is the best way to help?
One good strategy is to open a 529 college savings plan. It grows free of taxes over time, and you don’t pay any when you use the money for school, as long as it goes toward eligible educational expenses. Plus, in over 30 states, you get a state tax break when you make deposits.
It doesn’t take much to be of some real help. If you can manage $50 a month and the money grows at 5 percent each year, you’ll end up with around $17,000 after 18 years.
Even if the beneficiary doesn’t qualify for any need-based aid, that’s still a big assist. Or you can find a way to give a pile of money away. That way, a college-going student who needs it more than you can find a way to attend.
