How the FAFSA Calculates Your Student Aid Index
The FAFSA is still a few months away, so now is a good time to familiarize yourself with it. I'll go into more details on each element in the coming weeks; for now let's get started with the big picture of how the FAFSA calculates your Student Aid Index.
First and foremost, the FAFSA is not the tooth fairy. The FAFSA serves two purposes:
It is the application for federal student aid, both need-based and non-need-based. Need-based federal student aid includes Pell grants, work-study and subsidized student loans. Non-need-based aid is unsubsidized federal student loans and Parent PLUS loans.
It is a tool that allows colleges to evaluate all students' ability to pay on a consistent set of metrics.
Submitting it is a requirement to get financial aid; however, just submitting it isn't enough. Colleges are under no obligation to meet your financial need. That means that if you have a low Student Aid Index, identifying and applying to colleges that meet financial need is just as important as filing the FAFSA.
That was my TED Talk; now let's get into the calculation. The FAFSA considers four "buckets" in calculating your Student Aid Index:
Parent income
Parent assets
Student income
Student assets
Parent Income is usually the biggest element in the FAFSA calculation. The FAFSA uses "prior-prior" year income, which means that when you file the FAFSA, you use the income from your most recently submitted tax return. If you're filing in fall of 2024, you're using 2023 income. (If that just sounds like prior year income, know that you're filing for the school year starting in 2025.) It also means that you don't have any income planning opportunities for the current FAFSA.
The FAFSA only uses tax return information now in calculating income, not W-2 information, but it does include all income on your tax return, whether taxable or not. Income for FAFSA purposes is your Adjusted Gross Income (line 11 of your tax return), plus untaxed income on your tax return. Untaxed income includes pre-tax IRA and HSA contributions, pre-tax contributions to self-employed retirement plans if reported on your tax return, distributions from Roth IRAs, and tax-free interest. A detailed list of what is and isn't income is available here.
You get a few subtractions, too: your federal tax liability including income and payroll taxes, and an Income Protection Allowance based on your family size.
The FAFSA adds and subtracts to come up with your "Available Income" and then assesses that income at progressive rates-- like tax brackets-- with the highest being 47%. Sadly, unlike tax brackets, where a married couple would need $731,200 of taxable income to be in the top bracket, it only takes about $42,000 of Available Income to get into the FAFSA's top bracket.
Parent Assets are, for most families, a much smaller element in the formula. An exhaustive list of assets that the FAFSA does and does not count is here; the quick summary is, assets include the net value of almost everything you own besides your primary residence and your retirement savings accounts. Bank accounts, investment accounts, businesses, and your student's 529 (but not their sibling's) all count as parent assets. 401ks and IRAs do not.
The good news about assets: they only count at 5.64% of their value. That means that every $1,000 of assets only increases your Student Aid Index by $56.
Student Income also got streamlined pretty dramatically under the new FAFSA formula. Like parent income, student income is now only income that is reported on a tax return. Students who do not file taxes do not need to report income on the FAFSA. In the same vein, students no longer have to report distributions from a 529 owned by someone other than their parent(s) as income. Students also get an Income Protection Allowance; for the 2024-25 school year that was $11,130, meaning that unless their income was more than $11,130, it didn't count against them in the formula. Like parent income, student income is prior-prior year.
Student Assets tend to get overlooked, but they can have a big impact in the formula. That's because student assets are assessed at a higher rate than parent assets: 20% of their value, instead of 5.64%. So $1,000 in the student's account adds $200 to their Student Aid Index.
What's a student asset? Bank accounts, Robinhood accounts, crypto accounts, UTMA accounts-- any non-retirement asset the student owns. (529s are considered an asset of the parent, not the student.) And it's not unusual for students to have fairly significant sums of money in their accounts, especially with the average hourly wage for a teens topping $17 this summer. A student who worked 20 hours per week during the summer might have several thousand dollars in their bank account come FAFSA filing time, which would add hundreds of dollars to their ability to pay.
Want to get an estimate of your Student Aid Index? Try the federal Student Aid Estimator on the Department of Education website.
Here's another tip: the FAFSA *should* become available Oct. 1. There is still a FAFSA on the Department of Education website which you could fill out. However, that is last year's FAFSA so completing it now is not a good use of your time.
Want to get a head start on your college planning-- not just the FAFSA but how to find scholarships, plan your budget, talk with your student about college choices, and so much more? Check out my College Financial Plan masterclass. Use the discount code BTS50 for $50 off!
