Important Changes in College Financial Aid Rules

By Ben Dolan, CFP®

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Driving around Charlotte this time of year is great fun. Young kids are exuberant at the end of another school year, pools are filling up, and yard signs celebrating high school graduation are everywhere. I especially enjoy attending high school graduation parties and hearing about what is on the horizon in the fall for these young adults. The kids are always excited to chat about their matriculation and their academic/social interests.

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Often, a parent or two will engage me on the topic of funding higher education, which I always enjoy. Less enjoyable is the process many of these parents went through to ensure their students receive aid/scholarship dollars from the universities applies to (the Free Application for Federal Student Aid, or FAFSA, has been subject to terrible delays and technical glitches in recent years). Even worse, some of these parents, it turns out, are unknowingly leaving thousands of dollars on the table by not taking a few basic steps.

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One comment repeated often by parents is that they make too much money and therefore won’t qualify for student aid, so there is no reason to complete the Free Application for Federal Student Aid (FAFSA). While it may be true that need-based financial aid may not be available to families with high income and sizeable assets, it is also true that many schools require a FAFSA to be completed to receive merit-based scholarships (aka non-need based scholarships). Merit-based scholarship amounts range from $1,000 per year to $10,000+.

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The FAFSA is also used as a point of reference when unfortunate life events occur. Job loss, divorce, and death all have an enormous impact on annual income and overall financial health. Should you experience a significant life event, the school at which your child is enrolled will work with you to adjust aid expectations mid-year, but only if a FAFSA is on file.

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As noted in the JP Morgan 2025 College Planning Essentials Guide, you’ll want to consider the following rule changes to Federal Financial Aid when planning for higher education:

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NEW RULES THAT COULD INCREASE AID

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529 education plans

• Withdrawals from accounts owned by grandparents and other non-parents no longer reported as student income
• Only accounts in student’s name reported as parental assets (previously had to include siblings)

Income and asset reporting

• Pre-tax contributions to employer retirement plans, worker’s compensation benefits and other income sources not reported
• Child support received treated more favorably as an asset instead of income
• More income excluded from eligibility formula

Other changes

• Expanded Federal Pell Grant eligibility for lower-income families
• More opportunities to appeal a college’s financial aid decision

NEW RULES THAT COULD DECREASE AID

Families with multiple college students

• Expected to pay more for each child enrolled (family contribution previously divided by number of college students to increase aid eligibility)

Small business owners and farmers

• Must report net worth of business or farm regardless of size (previously only if 100+ employees)

Divorced or separated parents

• Parents providing the most financial support to students must apply, using their income and investments
• No income reduction for child support paid

Residents of high-tax states

• No income reduction for state taxes paid

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Preparing for higher education funding can be daunting, especially given the constant rule changes and FAFSA delays. But with a strong understanding of the new rules of the road, you can limit the financial burden for you and your child.