Good FAFSA news: There's a loophole for grandparents

It's a miserable year to apply for financial aid.

Millions of families likely won't get a final price tag for college until April, due to a series of delays at the Department of Education in rolling out the new FAFSA financial aid form. Students with parents who do not have a citizen service number still cannot be completed the online form.

But if you apply for help and have grandparents willing to help, you might 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 reveal a grandparent's help.

That assistance was a benefit of sorts, and the assistance formula included this in order to figure out what you could afford. Once most schools receive the FAFSA data from the federal government, they determine how much of their own aid, if any, to give you on top of any Pell Grant or subsidized loans from the federal government.

But now, thanks to A Law 2020 that came into effect this year, which ask about money and income are gone. That means that in most schools, a grandparent's help will no longer count against you.

In other words, what experts once called ' grandparent “val' is now the 'grandparent subterfuge.” It is not clear how many families will benefit from the change, although gains of several thousand dollars per year are possible.

At first glance, the change seems radically unfair. If you have family money, someone should know about it so you don't get grants or scholarships you don't need, right?

But government policy is often complicated. The 2020 law was part of an effort to simplify the FAFSA. The more questions the form asked, the more thought that went into it, the less likely people were to complete it or even start it. Especially for low-income families, this could deter students from attending college.

And those who did answer these questions might enter incorrect numbers if they didn't fully understand what the questions were about. Unusual entries on the FAFSA can trigger intrusive audits that delay assistance. The new FAFSA, on the other hand, uses data transferred directly from the Internal Revenue Service, greatly reducing the chance of errors.

Bryce McKibbenwho worked as a Senate staffer on the FAFSA simplification legislation and now does education policy and advocacy 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.

In addition, a few hundred schools use a second form, the so-called CSS profile, who can ask about grandparents' and other contributions and then take this into account when providing assistance. The board of directors, which offers the form to schools, enforces this a largely complete list of participating institutions on its website. Double-check the accuracy of the list and keep in mind that schools can stop (or start) requiring the form at any time.

People who enjoy circumventing the rules of financial systems are probably salivating right now. What if parents save money and then transfer it to grandparents? Aid formulas assess parental wealth when determining eligibility, so this fancy footwork could protect a big chunk of their money.

But how often will this realistically happen, given human nature?

“No one has ever come back to me and said they did this,” he said Billie Jo Weis, vice president of customer service at My College Planning Team, which provides educational consulting. “They would have to give up legal rights to the money.”

Almost any change in public policy will have losers, winners, and people who manage to turn themselves from losers to winners. But the bet here is that people in the latter category won't get much new help from the change. Meanwhile, low-income families who didn't get money under the old FAFSA system would earn much more.

If you're a relatively new grandparent, godparent, aunt or uncle, you have no idea what kind of teen a toddler will become. So what's the best way to help?

A good strategy is to open a 529 college savings plan. Over time, it grows tax-free, and you pay nothing for it if you use the money for school, as long as it goes toward eligible education expenses. Moreover, inside more than 30 statesyou will receive a tax benefit from the state when you make deposits.

It doesn't take much to really help. If you can manage $50 a month and the money grows 5 percent each year, you'll end up with about $17,000 after 18 years.

Even if the beneficiary doesn't qualify for any need-based assistance, that's still a big help. Or you can find a way to give away a pile of money. That way, a student who needs it more than you can find a way to attend.