Why Are the 2024-25 Asset Protection Allowances Zero?

The following is from NASFAA's February 1, 2024, Today's News article, NASFAA Deep Dive: Why Did the SAI Inflation Adjustments Reduce the Asset Protection Allowance to Zero?:

The U.S. Department of Education (ED) announced on Tuesday that it will adjust tables and values used in the 2024-25 student aid index (SAI) formula to account for inflation, as required by Congress in the FAFSA Simplification Act. ED’s early drafts of its 2024-25 SAI and Pell Grant Eligibility Guide did not include such adjustments and it was not clear if ED would make these adjustments until Tuesday’s announcement.

NASFAA has received a number of inquiries from members who noticed the values for the asset protection allowance (APA) are $0 in the final guide, while the draft guide included values for those figures. The short answer: the zeroes are correct. For a longer explanation, read on.

Inflation adjustments are required by the FAFSA Simplification Act for the income protection allowance (IPA), adjusted net worth of a business or farm, APA, and assessment of available income tables, as well as to the employment allowance. The inflation adjustments have been widely understood to be more generous to students and families, protecting more of a family’s income and assets from assessment in the SAI formula, resulting in lower SAIs and consequently, more financial need as compared to the draft SAI formula.

Indeed, IPAs are increased significantly from the draft formula due to the inflation adjustments. The employment expense allowance increases by $700 across the board, more of a family’s business or farm net worth is assessed at lower rates, and more of a family’s adjusted available income is also assessed at lower rates than were included in the draft SAI formula.

Many financial aid administrators were surprised, though, to see that asset protection allowances (APAs), which had ranged from $100 to $3,900 for unmarried individuals and $400-$10,500 for couples in the draft SAI formula, were now all decreased to $0 in the final formula, leading them to wonder whether this was an error and whether the APA table changes could negate the other inflation adjustments and result in higher SAIs (less need) for families as a result of the inflation adjustments.

What Is the APA and How Is It Calculated?

It is important to look first at what the APA is and how it is calculated. The APA is an allowance against assets for parents of dependent students and for independent students. It is intended to account for the amount an individual or family would have to have saved on their own, based on their current age, to supplement their future Social Security retirement benefits in order to attain a moderate family income (as calculated by the Bureau of Labor Statistics) upon retirement. Both the Higher Education Act (HEA) and the amendments in the FAFSA Simplification Act require ED to update asset protection allowances, as well as the other tables and values noted above, annually for inflation.

Unlike the annual updates to other tables and values however, the relationship between the APA values and inflation is not a direct one, where the rate of inflation is applied against the values in the table. Rather, the APA adjustment is dependent upon whether and by how much Social Security retirement benefits and the moderate family income are adjusted for inflation by the Social Security Administration (SSA) and the Bureau of Labor Statistics (BLS), respectively.

There is no single measure for the rate of inflation, and ED, SSA, and BLS all use different rates. This means the gap between average Social Security retirement benefits and the moderate family income standard will shift year to year. Because the APA is intended to fill that gap it, too, will shift from year to year.

There has been a downward trend in APAs over the past several years, with APAs finally reaching $0 in 2023-24 and now, again, for 2024-25. This is because the rate of inflation the SSA is using to increase Social Security retirement benefits is higher than the rate of inflation the BLS is using for its moderate family income standard. When it comes time to adjust the APA each year, Social Security retirement benefits have been getting closer to meeting the moderate family income standard, hence, the SAI formula assumes families don’t need to save as much for retirement and reduces APAs accordingly, finally reaching $0 in 2023-24.

Note that the APAs in 2024-25 draft SAI and Pell Grant Eligibility Guide served as little more than a placeholder because they were simply copied from the baseline APA figures established in the FAFSA Simplification Act, which specified they applied to the 2021-22 aid year and needed to be adjusted for inflation (the most recent APAs in place at the time the legislation was passed in December 2020).

Is the SAI More or Less Generous After the Inflation Adjustments?

So, are the inflation adjustments to the SAI formula really more generous, despite the fact that APAs are $0? First, it is important to consider what makes the formula more generous starting in 2024-25. Inflation adjustments to SAI tables and values are not new for 2024-25. ED has always been required to update expected family contribution (EFC) tables and values for inflation. The reason the inflation adjustments for 2024-25 are especially important is because:

1. The FAFSA Simplification Act established new, higher baseline values for IPAs, and 

2. Inflation has been particularly high since the FAFSA Simplification Act passed in December 2020.

Second, the SAI formula is largely an income-driven formula, meaning that changes to income (or allowances against income) have a larger impact on the SAI than changes to assets or allowances against them. Because only 12% of net assets go in to a family’s Adjusted Available Income (AAI), and then an assessment rate of between 22% to 47% is applied to the AAI to arrive at the SAI, any increase to assets (higher net worth or lower allowances against assets) results in a corresponding increase to the SAI of somewhere between 2.6% and 5.6% of the amount by which assets increased.

Comparing the draft SAI guide — where the highest possible APA was $10,500 — with the final guide using an APA of $0, the result would be an SAI increase of about $275 to $600. Remember, though, that the decrease in APAs has been happening for years, and the APA reduction to $0 first occurred in 2023-24, not in 2024-25. Families have already experienced the impact of that change. If there is any impact at all on SAIs from the recent APA adjustment, it will be to institutional modeling for 2024-25, not in the real world.

As for how that modeling would change between the draft and final 2024-25 SAI formulas, the lowest income students are not impacted by the $0 APA because they either qualify for an automatic -1500 or automatic 0 SAI, and/or they are exempt from asset reporting altogether. Most others should see a lower SAI using the final 2024-25 SAI formula versus the draft formula due to the inflation adjustments to the income allowances and assessment rates in the formula, which are more impactful than the APA adjustments by nature of the formula’s design. It is, however, possible that a family with a low or negative income and positive net assets, and who does not qualify for the automatic maximum Pell Grant or for the asset reporting exemption could see a small increase to the SAI when comparing the draft formula to the final formula. Those amounts would be relatively small as noted above and, again, this would apply only to modeling for 2024-25 comparing the draft and final SAI formulas, not when comparing actual 2023-24 EFCs to 2024-25 SAIs.

The bottom line: The $0 values for the APA in the final SAI and Pell Grant Eligibility Guide are correct. Any observed negative impact of the inflation adjustment to the APA will be limited to institutional modeling comparing the 2024-25 final SAI formula to the draft formula, and will have small impacts in terms of numbers of students affected and dollar amount decreases to the estimated SAI.