How To Hack The FAFSA And Maximize Financial Aid

The FAFSA Simplification Act introduced significant changes to the financial aid formula, eliminating the sibling loophole, small business exclusion, and asset protection allowance. Despite these changes, several strategies remain — and new ones have emerged — for maximizing need-based financial aid eligibility.

You just have to know what to do and where to look before you file the FAFSA.

New strategies involve contributions to certain types of retirement plans, exclusion of grandparent-owned 529 plans, exclusion of sibling 529 plans, rollovers from a 529 plan to a Roth IRA and exclusion of gifts to the student.

Retirement Plan Contributions

The treatment of retirement plan contributions has shifted under the simplified FAFSA:

• Pre-Tax Contributions to 401(k) and 403(b): Previously, all retirement contributions were added back to income. Now, contributions to 401(k) or 403(b) plans are excluded since they don’t appear on federal tax returns. Increasing pre-tax contributions during the base year (the prior-prior year) can reduce reportable income and boost aid eligibility.
• Traditional IRAs and Similar Plans: Contributions to traditional IRA, Keogh, SEP-IRA, and SIMPLE plans still count as income because they are reported on tax returns.
• Retirement Distributions: Distributions from any retirement plan, including an untaxed return of contributions from a Roth IRA and the untaxed portions of IRA, pension and annuity distributions, are still included in total income on the FAFSA.

Retirement plan balances are NOT reported on the FAFSA as an asset.

529 College Savings Plan Reporting

FAFSA Simplification made several changes regarding how 529 plans are treated:

• Grandparent-Owned 529 Plans: Qualified distributions from grandparent-owned 529 plans no longer count as untaxed income to the beneficiary. They are also not reported as assets on the FAFSA. Accordingly, these plans are now fully excluded from FAFSA calculations and do not have any impact on eligibility for need-based financial aid. Non-qualified distributions, however, continue to be included as part of adjusted gross income (AGI). Families may consider changing the account owner of a parent-owned 529 plan to a trusted grandparent or other relative. If the 529 plan does not allow a change of account owner, you may be able to rollover the funds to a new 529 plan in the same state with the same beneficiary but a different account owner.
• Sibling 529 Plans: Sibling 529 plans are now excluded from FAFSA calculations, even if the parent is the account owner, thereby increasing aid eligibility. Families with multiple children should consider setting up separate 529 plans for each child, enabling more tailored investment strategies, potentially larger tax benefits and greater contribution limits. One can also temporarily change the beneficiary to a sibling before filing the FAFSA and then change the beneficiary back to the student before taking a distribution.
• Rollover to a Roth IRA: Families may roll up to $35,000 from a 529 plan to a Roth IRA for the beneficiary, subject to conditions like a minimum 15-year holding period and annual Roth IRA contribution limits. It can take up to five years to fully rollover the $35,000 lifetime limit.
• CSS Profile Considerations: While the FAFSA no longer considers grandparent-owned 529 plans and sibling 529 plans, the CSS Profile — which less than 200 mostly private colleges use — still does. CSS Profile schools include all 529 plans listing the student as a beneficiary, regardless of ownership. Families applying to such schools should account for these differences.

Gifts To The Student

Gifts to the student are no longer reported as untaxed income to the student because the cash support question has been eliminated. So, grandparents can give gifts to their grandchildren without worrying that the money will be treated as income on the FAFSA.

However, unspent gift amounts must still be reported as an asset on the FAFSA, which may reduce aid eligibility by 20% of the net asset value.

Other Changes And Tips

Here are some other tips:

Sibling Loophole

Although the sibling loophole has been eliminated on the FAFSA, a version of the sibling loophole remains on the CSS Profile form. The CSS Profile reduces the parent contribution when there are two or more children in college. When there are two children, the parent contribution is reduced by 40%. When there are three children, the parent contribution is reduced by 55%. When there are four children, the parent contribution is reduced by 65%. 

Although the number in college question remains on the FAFSA, it no longer affects the Student Aid Index (SAI). One can appeal when one has an unusual number of children in college, but college financial aid administrators are unlikely to make an adjustment in response to the financial aid appeal. They are more likely to make an adjustment when the parents are enrolled in college (e.g., subtracting the paid bursar’s bill from parent income).

Divorce And Separation

The FAFSA now bases reporting on the parent who provides the most financial support during the 12 months ending on the date the FAFSA is filed, rather than the parent with whom the student lives. The living accommodations and meals provided by the parent to the student can be considered to be in-kind support.

Other children must live in the household and receive more than half support from the parent to be counted in family size. Previously, the child just had to receive half support, but now they must also live in the household. This means that a stepparent cannot count children from a prior marriage unless they live with the stepparent. (Graduate students must also live with the family. However, temporary absences for school, illness, business, vacation or military service do not affect whether the child lives with the family, if there is a reasonable expectation that the child will return to the home.)

The Tax Cuts and Jobs Act of 2017 changed the reporting of alimony on federal income tax returns for new and modified divorces starting in 2019. Alimony is no longer subtracted from the payer’s income and added it to the recipient’s income. If the recipient is the parent responsible for completing the FAFSA, this may yield lower income, increasing the likelihood that the student will qualify for the Federal Pell Grant.

Related: How To Fill Out The FAFSA For Divorced Families

Assets

The Asset Protection Allowance (APA) is now zero, so assets are no longer sheltered based on the age of the older parent.

However, some applicants are exempt from asset reporting. There are three circumstances in which assets will be disregarded on the FAFSA:

• The student qualifies for the maximum Federal Pell Grant.
• The parents’ adjusted gross income (AGI) is less than $60,000 and the parents satisfy the type of tax return test. (This can also apply to independent students.) The type of tax return test requires the taxpayer to have not filed Schedule A, B, C (for more than +/- $10,000), D, E, F or H.
• Someone in the household received a means-tested federal benefit in the last two years. Eligible federal benefits include SNAP, EITC, Federal Housing Assistance, Free or Reduced-Price School Lunch, Medicaid, QHP, SSI, TANF and WIC. Depending on the benefit, eligibility ranges from 50% of the poverty line to 200% of the poverty line.

Child support is reported as an asset, as opposed to income, because assets have less of an impact on aid eligibility than income. This change is purely for the side effect.

Income Thresholds 

The Income Protection Allowance (IPA) increased significantly under FAFSA Simplification, sheltering more income from being counted.

For example, dependent students now have an IPA of $11,510, while married independent students with dependents have $56,430 for a family of three, plus $10,860 for each additional household member.

The following IPA figures for the 2025-26 FAFSA depend on whether the student is a dependent or independent student, whether they have a spouse, and whether they have dependents other than a spouse.

• Dependent Student: $11,510
• Unmarried independent student without dependents: $17,890  
• Married independent student without dependents: $28,690
• Dependent student’s parents: $28,530 for a family of two plus $6,840 for each additional household member
• Married independent student with dependents: $56,430 for a family of three plus $10,860 for each additional household member
• Single independent student with dependents: $53,710 for a family of two plus $12,880 for each additional household member

Eligibility for the Federal Pell Grant now may depend on a secondary formula, which compares income to a multiple of the poverty line.

• 175% of the poverty line (225% of the poverty line for single parents) for the maximum Pell Grant.
• 275% of the poverty line (325% of the poverty line for single-parent dependent students, 350% for independent students with dependents and 400% for single-parent independent students) for the minimum Pell Grant.

Old Tips Still Apply

Several tried-and-true strategies remain effective:

• Avoid realizing capital gains during the base year or offset them with losses. Also avoid exercising stock options.
• Avoid taking distributions from retirement accounts, even a tax-free return of contributions from a Roth IRA.
• Use cash to pay down debt, reducing reportable assets.

Final Thoughts

FAFSA Simplification introduced significant changes, but savvy families can still maximize aid eligibility by leveraging new strategies and adapting old ones. Understanding the nuanced treatment of income, assets, and savings plans is key to navigating these changes effectively.