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Some families applying for college financial aid this year may qualify for less help than in the past, thanks to a little-known change to the underlying formula.

Families filling out the Free Application for Federal Student Aid (FAFSA) for the upcoming academic year will see the asset protection allowance drop to $0, capping off a years-long trend of shrinking asset allowances that have reduced aid eligibility for middle-income families.

Many college students (and their parents) recognize the FAFSA as an annual rite of passage for qualifying for federal grants and student loans, as well as many college and private scholarships. But few families understand the nuances of how the financial aid formula actually works.

“For most families, it’s a black box,” says Mark Kantrowitz, a national financial aid expert. “They just know it’s harsh, and they think it’s a ridiculous assessment of what they can afford to pay.”

Families have no control over the formula itself. But understanding the basic principles of it can help them determine whether they will qualify for some need-based financial aid or whether they should look for colleges that offer merit aid. That begins with understanding their "expected family contribution," an indicator of need generated by the FAFSA formula.

Despite the disappearance of the asset protection allowance, it’s not all doom and gloom on the formula front: A separate part of the formula — the income protection allowance — has gotten a little more generous. (These behind-the-curtain formula changes are completely separate from the big FAFSA changes now slated for 2024.)

Here’s how the formula changes affect families applying for college financial aid.

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This year the asset protection allowance disappeared

There are two types of assets when it comes to the federal financial aid formula: reportable assets and non-reportable assets. Non-reportable assets, things like the home you live in and qualifying retirement accounts, are completely protected. Reportable assets, like savings and checking accounts, investment accounts and real estate holdings, are considered fair game for college bills. (Some colleges also require an additional financial aid form, called the CSS Profile, which counts assets differently.)

Yet historically, even a portion of the assets you have to report were shielded from the financial aid formula, through what’s called the asset protection allowance. In simple terms, the asset protection allowance meant a portion of your non-retirement assets wasn’t counted for college. The sheltered amount was tied to the older parent’s age. For those 65 and up, the allowance was highest.

“The formula was essentially saying, 'hey, these people were closer to retirement, they need to have this money for retirement,'” says Alex Bickford, college finance consultant for Bright Horizons College Coach.

In 2009-10, the asset protection allowance peaked at $84,000 for parents age 65 and up in a two-parent household, meaning that only assets above $84,000 were counted toward college, along with your income.

“The asset protection allowance used to be a meaningful number,” says Joe Messinger, co-founder and director of college planning at Capstone Wealth Partners.

Since then, the figure has been dropping steadily. In 2020-21, it was $9,400. For the 2023-24 FAFSA, which families can fill out now, it will hit $0 for the first time. The change from 2009 to now represents a reduction in aid eligibility by up to $4,738, according to Kantrowitz.

In other words, compared with a decade ago, families today are expected to use more of their assets to pay college bills, or as Kantrowitz puts it, “College is becoming less and less affordable.”

Luckily, assets aren’t counted as heavily in the financial aid formula as income, so that’s a small relief. Depending on your income bracket, “somewhere between 2.2% and 5.64% of non-retirement assets are counted,” Messinger says. So for every $10,000 in assets, a maximum of $564 is counted toward college bills.

Families filing FAFSAs in recent years likely didn’t notice the effect of the year-to-year decline of the asset protection allowance because it had already dropped so low. Even so, we shouldn’t be happy about it plummeting to $0, Kantrowitz says.

The allowance was originally designed to help parents by shielding the equivalent of the cost of an annuity to supplement their Social Security income in retirement. The Social Security and FAFSA formulas are not directly entwined, Bickford says, but as Social Security payments have increased, the asset protection allowance has moved in the opposite direction.

Bottom line: even though Social Security payments have gone up, many Americans still need income beyond Social Security to retire comfortably, and the FAFSA formula no longer takes that need into account.

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The income protection allowance is rising

On the upside, the parent income protection allowance has been increasing, so it’s not all bad news for your expected family contribution, experts say.

“The income protection allowance is designed to take into account what it costs a family to survive,” Bickford says. “This protection is inflation adjusted, so seeing a larger increase this year and next would be expected.” But, he says, the amount protected is “paltry compared to what it should be.”

Still, because income counts so much more heavily toward your aid eligibility than assets (ranging from counting 22% to 47% of your earnings as available for college bills, depending on your income bracket), the rising income protection allowance may help you more than the elimination of the asset protection hurts you. The effect will depend on each family's individual circumstances.

On the 2023-24 form, $32,610 is sheltered for a family of four with one student in college, up from $30,190 last year. If your income stayed the same, having an additional $2,420 protected from the expected family contribution formula means your expected contribution could drop anywhere from $532 to $1,137, according to Messinger.

For families with high expected family contributions — meaning they’re unlikely to qualify for any need-based financial aid — a small reduction may not make a difference. But for others, even a small reduction can be meaningful. It could mean qualifying for more institutional financial aid at a private college or meeting the threshold for a partial or full Pell Grant, work-study or subsidized loans from the federal government. To qualify for a partial Pell Grant, for example, families this year needed to have an EFC at or below $6,206.

Because the FAFSA is based on your tax return from two years before, there’s nothing you can do now to reduce your income, such as putting more money into a qualified retirement account, if you’re filling out the 2023-24 FAFSA.

But you do have some control over your assets. If you haven’t filed the FAFSA, you could use savings to pay down debt or cover any significant upcoming expenses, and that may slightly reduce your expected family contribution, Bickford says. But that’s not always a wise idea if you’ll need that cash to pay for college. The value of cash in the bank likely outweighs your slightly increased aid eligibility.

More from Money:

How to Apply for FAFSA

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FAFSA Tips: These 7 Moves Could Help You Score More Financial Aid