Now, on to the FAFSA

The FAFSA isn’t here yet, but the Department of Education has published its Student Aid Index and Pell Grant Eligibility Guide for the 2027-28 school year. This is the FAFSA formula, aka how the sausage gets made. The Guide is available for download below, but first a little context and explanation.

Here’s the most important thing to know about the FAFSA: having a low Student Aid Index does not guarantee you need-based financial aid at the college of your choice. Filing the FAFSA does guarantee access to all federal student aid programs for which you’re eligible, including Pell Grants and unsubsidized student loans. It also allows colleges to evaluate all students’ ability to pay on a consistent set of metrics. It does not require them to meet student financial need.

The FAFSA underwent a major overhaul for the 2024-25 school year. Since then, the FAFSA formula has remained relatively unchanged except for annual inflation-related adjustments. The formula still considers four elements in calculating your SAI:

• Parent income
• Parent assets
• Student income
• Student assets

There are in fact three FAFSA formulas: one for dependent students (Formula A), one for independent students without dependents (Formula B), and one for independent students with dependents (Formula C). Everything in this article refers to Formula A: dependent students.
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Parent Income

For the vast majority of students, this is the biggest factor in the formula. The FAFSA uses prior-prior year income, so you'll be using your 2025 tax return when filing the FAFSA in the fall of 2026 for the 2027-28 school year.

Parent income is tax return income only; you no longer have to add back untaxed W-2 income, nor is child support or nontaxable alimony included as income. However, it is all of your tax return income—taxable or untaxed.

The formula starts with your Adjusted Gross Income (line 11 of your 1040), then adds the following items:

• Deductible retirement contributions from the tax return (those made to traditional IRAs or self-employed retirement plans such as SEPs, SIMPLEs and individual 401ks)
• Tax-exempt interest income
• Untaxed portions of IRA distributions and pensions (money withdrawn from a Roth IRA, for example)
• Foreign Income Exclusion reported on tax return

Then parents get some Income Offsets which are subtracted from the above. These include any taxable college scholarships or grants or work-study income (received by the parents) and education tax credits claimed.

Then come Allowances Against Parents’ Income, which are also subtracted:

• Federal Income Tax (not state)
• Payroll Taxes
• Income Protection Allowance based on family size
• Employment Expense Allowance, which is the lesser of 35% of the parents’ combined earned income or $5,200

These are totaled to determine the Parents’ Available Income (PAI).
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Planning Opportunities

Parents filing the FAFSA this year have no income-related planning opportunities because 2025 income is set, though you can plan for future years. Parents of students who are currently juniors can lower their income by increasing pretax contributions to employer retirement accounts or HSAs (make sure to make those contributions through payroll so they’re subtracted from income).

Additionally, since income taxes paid are subtracted, reducing itemized deductions in FAFSA income years will lower your SAI.
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Parent Assets

Parent assets include:

• Bank accounts (checking, savings, money market, CDs)
• Investments, including the student’s 529 accounts (but not their siblings’ 529s), non-retirement investment accounts including crypto accounts or holdings, bonds (including I Bonds), investment real estate, vacation homes, trusts including any for which the parent is the beneficiary
• Adjusted net worth of businesses or farms. The formula provides a calculation to determine the value for FAFSA purposes of the business, with smaller businesses being 40% of their stated value, with progressive brackets—much like taxes—at which higher values are assessed
• Child support received in the previous year

Assets are totaled, then multiplied by the Asset Conversion Rate of 0.12 to determine the Parent Contribution from Assets (PCA).

Next, the PAI and PCA are added, then assessed at progressive rates up to 47% to calculate the Parents’ Contribution. (If you’ve heard me say before that assets only count at 5.64% of their value, that’s 0.12 x 0.47.)
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Planning Opportunities

Keep in mind that every $1,000 of parent assets removed from the FAFSA will only lower your SAI by $56. That means that it takes a lot of removal to make a difference. Making retirement contributions, making purchases you would make anyway (and paying the bill if they’re paid by credit card), and waiting to file the FAFSA until after you’ve paid your big bills for the month (mortgage, rent, etc.) are all helpful. Moving cash to accounts that don’t count—siblings’ 529s or 529s owned by grandparents—is also beneficial.

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Student Income

Students report income whether or not they filed a tax return. Student income receives the same Additions, Offsets and Allowances as parent income.

Students also receive an Income Protection Allowance of $12,220, meaning that if their income is less than $12,220, none of it counts. All income above $12,220 is assessed at 50%, meaning 50 cents of every dollar is considered available to pay for college.
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Student Assets

This is an area that trips families up, especially with minimum wage being rather high and the FAFSA being completed in the fall, right after many students have worked all summer.

Student assets count at 20% of their value. This includes bank accounts, UTMAs, crypto, Robinhood accounts, you name it. Every $1,000 the student has adds $200 to their Student Aid Index.
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Planning Opportunities

Moving student assets to accounts that don’t count as much can be very helpful. Money that’s intended for college can be moved to the student’s 529 where it’s assessed at more favorable parent rates. Likewise, UTMA funds can be transferred to a 529, but watch for taxable capital gains that might increase income on a future year’s FAFSA. (Contact your 529 custodian for instructions for converting a UTMA to a 529, as it’s not as simple as taking the money out and putting it into the parent-owned 529.) Students with earned income can also fund a Roth IRA up to the lesser of actual income or $7,500 this year.