New FAFSA to Impact Family Farm + Small Business Owners

Navigating the financial aid process to pay for postsecondary education can be daunting for students and their families. The Free Application for Federal Student Aid (FAFSA) often serves as a roadblock to accessing crucial funds due to the overall complexity of completing the form. During the past decade, policymakers and education advocates have proposed various strategies to simplify the process.

In response, Congress passed, and former President Donald Trump signed the FAFSA Simplification Act in December 2020. This act introduces provisions that reduce the number of questions in the FAFSA, modify the federal needs analysis formula that determines aid eligibility and renames the Expected Family Contribution (EFC), a measure that determines the amount students and their families can pay for college, to be the Student Aid Index (SAI). These changes are scheduled to take effect for the 2024-25 application cycle. Traditionally students would begin to use this form on October 1. Unfortunately, the U.S. Department of Education (ED) recently announced that the form will be delayed until December 2023. While the FAFSA Simplification Act aims to streamline the financial aid application process, it also introduces a significant change in the treatment of family farms and small businesses that could impact aid eligibility for students from entrepreneurial communities and agricultural states such as Iowa.

Under the current federal needs analysis formula, the net worth of family farms and small businesses with fewer than 100 employees are excluded from consideration. This approach protects individuals’ livelihoods while still ensuring that investment farms and larger businesses are subject to reporting their assets. However, the FAFSA Simplification Act alters this approach, requiring families to report the net worth of their family farm or small business on the FAFSA and treating it as an asset in the calculation of the SAI.

This change raises concerns among higher education stakeholders, organizations and policymakers, who fear that many individuals will appear to have high asset wealth that is not financially liquid, leading to an inaccurate representation of their financial situation. According to the Congressional Research Service, the median net worth for family farms in the U.S. was approximately $1 million in 2020. Specific to Iowa, research from Iowa State University demonstrates that the average net worth of Iowa farms with sales of over $100,000 was closer to $1.9 million in 2021. Consequently, some FAFSA filers may be deemed ineligible for need-based financial aid.

Potential Ramifications for Iowa Families

My colleagues at Iowa College Aid (Dr. Meghan Oster and Todd Brown) and I have been researching the potential ramifications of treating family farms and small businesses as assets in the SAI calculation. Simulations reveal scenarios where students from middle-income families who report net worth values for their family farm or small business would experience a significant increase in their SAI compared to the existing needs analysis formula. For example, a dependent student from a family of four, with a parental income of $60,000, and a reported net worth of $1 million for their family farm or small business, would see the expected amount to pay for college increase from $7,626 to $41,056 under the new formula.

However, our research does suggest that if the net value of family farms and small businesses were excluded from the SAI calculations, as defined under the current formula, middle-income students remain eligible for need-based financial aid, which is the intention of the new simplified FAFSA. The exclusion of these assets would still accurately reflect the financial circumstances of these individuals and acknowledges that the net worth of such assets does not translate into readily available funds for education expenses.

Congress is taking steps to address this issue, but legislative action needs to take place before the FAFSA application opens in December 2023. In March, Democrat and Republican Senators sent a letter to ED, warning of the potential impacts of the FAFSA Simplification Act on need-based financial aid. Both Representative Mann and Senator Ernst have also introduced bipartisan bills that would exclude family farms and small businesses from the formula. In the absence of legislative action, more guidance from the U.S. Department of Education on the treatment of family farms and small businesses is needed, especially as the implementation date for the new FAFSA approaches.

For family farm and small business owners in Iowa, including these assets should not deter you nor your family members from going to college. I encourage you to complete the FAFSA and seek assistance from the financial aid office at the college you or your family member will attend in Fall 2024. But recognize that the treatment of your family farm or small business within the formula will alter your ability to pay for college. That is why policymakers must address these concerns and work toward a solution that does not unfairly penalize family farm and small business owners.

The Partnership's Public Policy team engages with local, state and federal officials to create public policy that generates economic growth, business prosperity and talent development in Greater Des Moines (DSM). The Partnership is a nonpartisan organization.