The new FAFSA form for the 2024-25 academic year has undergone simplification, resulting in the elimination of questions concerning grandparent contributions. This adjustment has effectively created a loophole for grandparents to fund their grandchild's college education without affecting the student's financial aid eligibility. Middle-income families who have saved for college will particularly benefit from this change, according to Michael Green, a financial advisor at Apollon Wealth Management.

The streamlined FAFSA now utilizes the "Student Aid Index" to estimate a family's ability to pay for college, pulling federal tax information directly from the IRS and reducing the number of questions from 108 to less than 50. Previously, assets in grandparent-owned 529 college savings plans were not reported on the form, but distributions from these accounts were counted as untaxed student income, potentially reducing aid by up to half of that income.

Financial expert Mark Kantrowitz highlighted the significant penalty under the old FAFSA rules, emphasizing the positive impact of the new formula on middle-income families who have the means to save for college expenses. Green advises families to consider opening a 529 plan for their grandchildren to assist with college funding goals and leverage the loophole for financial aid eligibility.

While the simplified FAFSA form offers advantages to families, there are considerations to be aware of, such as the grandparent owning and controlling the account, potentially impacting Medicaid eligibility. Despite the loophole, financial aid consultant Kalman Chany notes that colleges may still consider grandparent contributions for nonfederal institutional aid via the CSS profile.

529 plans remain a recommended method for college savings, with recent expansions allowing for broader educational expenses. The ability to roll over unused funds from 529 plans to Roth individual retirement accounts tax-free from 2024 further supports families in saving for college. Experts believe that encouraging families to save more for college is a positive step, with Kantrowitz highlighting the importance of expanding 529 plan capabilities.

The changes in the FAFSA form aim to boost college savings and financial planning for families, ultimately providing more opportunities for students to access higher education without financial constraints.