If you are applying for financial aid to pay for a college education, then you may be wondering how your family’s income affects your eligibility to receive need-based financial aid. The U.S. Department of Education utilizes the Federal Methodology, and corresponding Free Application for Federal Student Aid (FAFSA), to determine the degree to which applicants’ incomes reduce financial aid eligibility. Here we will cover how income is treated by Department of Education using the FAFSA’s Federal Methodology.
The Federal Methodology is heavily weighted toward income. The FAFSA collects income information that is self-reported and also from tax return documents from a prior year. For purposes of completing the FAFSA, income is reported for the year that is two years prior to the school year for which financial aid is being requested. (For example, if you are applying for financial aid for the 2019-20 school year, then you are obligated to provide your 2017 tax information.) The FAFSA considers student income in addition to parent income (for dependent students) or spousal income (for married, and therefore independent, students).
For parents and students, the FAFSA utilizes the Adjusted Gross Income (AGI) figure from the relevant tax return as a starting point for income-related calculations. The FAFSA requires self-reporting of “income earned from work” for the purpose of granting allowances for FICA taxes (Social Security and Medicare taxes), state and other taxes, and employment expenses. Applicants who were not required to file a tax return in the relevant tax year may utilize the “income earned from work” figure in place of AGI.
Income, Expenses, & Tax Benefits Excluded from FAFSA Reporting
Certain types of income, expenses, and tax benefits are always excluded by the FAFSA, and are deducted from your reported AGI by the FAFSA methodology. These include:
Any taxable portion of scholarships;
Any taxable portion of combat pay;
Child support paid (for children not included in household size).
The following types of income are not included in your AGI as reported to the IRS and also not reportable as income on the FAFSA:
Employer contributions to pension plans, retirement savings plans, and health benefits;
Involuntary employee contributions to pension plans;
Employer-provided tuition assistance;
Supplemental Security Income and other untaxed Social Security benefits;
Tax exemptions such as the Foreign Earned Income Exclusion;
Welfare benefits such as those provided by the Temporary Assistance for Needy Families program, the Supplemental Nutrition Assistance Program, and the Special Supplemental Nutrition Program for Women, Infants, and Children;
Assistance received for care of dependents (up to $5,000);
Income earned from cooperative education programs;
AmeriCorps living allowances;
Veterans’ Administration education benefits;
Foster care benefits or adoption assistance payments;
Home heating assistance; and
Rent subsidies received by low-income housing residents.
Additionally, dependent students need not report as income on the FAFSA any cash support received from custodial parents, and married independent students need not report as income any cash support received from spouses.
Non-Taxable Income Included in FAFSA Reporting
Certain types of income that are not taxed by the IRS and not part of your AGI are still counted as income by the FAFSA methodology. These types of income include:
Child support payments received for all children, excluding foster care or adoption payments;
Voluntary payments to tax-deferred retirement savings plans, whether paid directly or withheld from earnings;
Voluntary contributions by federal employees to Thrift Savings Plans;
Income received in the form of housing, food, other living allowances, other cash income, or the cash value of other benefits (excluding the value of on-base military housing or a basic military allowance) for military personnel and members of the clergy;
Veterans’ Administration-provided educational work-study allowances and veterans’ noneducation benefits such as Disability, Death Pension, or Dependency & Indemnity Compensation; and
Other untaxed income not reportable to the IRS, such workers’ compensation or disability benefits.
In addition to the above, students who receive cash support from family members, family friends, or non-custodial parents, other than as part of a legal child support agreement, must report the monies received as income for purposes of the FAFSA.
Income Protection Allowances on the FAFSA
The FAFSA’s Federal Methodology permits certain portions of parent and student income to be excluded from consideration for the Expected Family Contribution (EFC). The student income protection allowance is $6,660 for the 2019-20 school year. The parent income protection allowance for the same year ranges between $18,580 and $39,430, depending on the size of the household and number of family members in college.
Some families are eligible to have the entirety of their incomes excluded from consideration by the FAFSA methodology. For families with annual incomes below $26,000, who received one or more federal welfare benefits and filed a 1040A or 1040EZ tax form (before 2018 when these forms were eliminated), zero income is counted on the FAFSA.
Impact of Income on the Expected Family Contribution
Now that we’ve covered which types of income are reportable on the FAFSA, and how much and under which conditions income is protected or ignored entirely, we can consider the effects of parent and student income on the Expected Family Contribution. A full fifty percent of eligible student income and between 22 and 47 percent of eligible parent income are included in the Expected Family Contribution. The percentage of eligible parent income that is included in the EFC is determined based on a sliding scale that increases in proportion with income.
Want More Information?Find out how parent and student assets are treated on the FAFSA; we’ve also got the scoop on how income is treated on the CSS Profile.
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