Jobless Benefits’ Unintended Fallout: Reduced College Financial Aid

Unemployment benefits helped millions of people who lost their jobs in the pandemic, but now the payments may throw a wrench into the college financial aid process.

The disconnect between a pandemic relief program and colleges that are figuring out financial aid could result in less aid for some applicants, student advocates say. Students from families that received jobless benefits in 2020 — particularly if the family filed a tax return early in 2021 — may want to check with college financial aid offices to make sure they are getting the maximum amount.

Here’s what to know.

To qualify for financial aid, students and their families fill out the Free Application for Federal Student Aid, known as the FAFSA. The form is the portal to federal need-based Pell grants and student loans, and states and colleges use it to award their own aid.

The FAFSA for the 2022-23 academic year became available on Oct. 1 and uses financial information from the 2020 tax year, which is typically reported on tax returns filed in 2021.

Normally, unemployment benefits count as income when calculating a student’s eligibility for financial aid. But as part of its pandemic relief effort, the federal government allowed Americans earning less than $150,000 to exclude jobless benefits of up to $10,200 per recipient from their 2020 taxable income. The measure took effect on March 11, 2021 — after many people had already filed their 2020 tax returns and reported their jobless benefits as income.

The Internal Revenue Service said it would automatically make corrections for people who had already filed tax returns and send refunds if necessary. But the potential for confusion on the FAFSA lingers, especially for early tax filers who also use the I.R.S. Data Retrieval Tool to complete the form.

The tool lets FAFSA filers quickly transfer encrypted tax information into the online financial aid form, and the Federal Student Aid office encourages students and families to use it. But the tool transfers information from the original returns. So the data for early filers who didn’t claim the unemployment exemption won’t reflect the lower, I.R.S.-corrected income, said Kalman A. Chany, president of Campus Consultants, a financial aid advisory firm in Manhattan.

In a notice posted online in the fall, the Federal Student Aid office said early tax filers who used the data tool for the FAFSA would have a higher reported income, “which may potentially reduce their eligibility for federal need-based aid.”

And, according to the notice, even people who filed their tax returns after March 11, 2021, and excluded jobless benefits from their income may still have reported their unemployment benefits as “untaxed income” on the FAFSA — which could also reduce potential aid. (Those affected are most likely applicants who filed their FAFSA in early October, before the Education Department clarified that the benefits shouldn’t be reported as untaxed income on the form, Mr. Chany said.)

In an “alert” updated on Feb. 24, the I.R.S. warns FAFSA filers not to use the data tool if they filed their 2020 tax return and didn’t exclude any jobless benefits from their income.

“The concern is: Are colleges looking at inflated income?” said Brendan Williams, senior director of consulting at uAspire, a nonprofit organization that seeks to reduce financial barriers to college.

It’s unclear how many students may be affected. Millions of people received jobless benefits in 2020, but data isn’t readily available to calculate how many of them are also filing a FAFSA, said Kim Cook, chief executive of the National College Attainment Network, a nonprofit group that works on behalf of low-income and minority students.

The Federal Student Aid office has instructed college financial aid administrators to fix the problem if they become aware of it. But administrators may not be able to easily identify affected applications because they don’t typically see a breakdown of a family’s income, said Karen McCarthy, vice president of public policy and federal relations at the National Association of Student Financial Aid Administrators.

Students may be unaware of the issue and won’t know to ask about it, Mr. Chany said. “No one is tapping them on the shoulder,” he added.

What should families do?

If they had unemployment income in 2020 and filed their tax return before March 11 last year, they should contact their college financial aid office to discuss their concerns and have the jobless benefits removed from income on the FAFSA, said Mark Kantrowitz, a financial aid expert. Documents like Form 1099-G, which the government uses to report unemployment income, or unemployment verification letters can help show that students or their family received jobless benefits.

Students should also know that the federal government has encouraged college financial aid offices to use their discretion — “professional judgment” in financial aid lingo — to take into account special circumstances, including the loss of a job in the pandemic, to maximize a student’s financial aid.

It’s also possible in some cases, Ms. Cook said, that a family’s income may have been higher in 2020 than it is now because of expanded jobless benefits during the pandemic.

Students or families that received unemployment benefits in 2020 “may be surprised” to see Pell grants that are “much lower” than in previous years, according to a report from Bottom Line, a nonprofit group that helps low-income and first-generation students attend college, and SwiftStudent, a nonprofit that provides free tools to help students file financial aid appeals.

“It’s not your imagination,” the report said.

Regardless of the reason, students should let financial aid offices know if their circumstances have changed. “If information on the FAFSA doesn’t accurately reflect your current situation, reach out to your school,” Ms. McCarthy said — the sooner, the better.

Here are some questions and answers about the FAFSA and college aid:

What is the impact on my financial aid of mistakenly reporting unemployment income for 2020?

It could be significant, Mr. Kantrowitz said. A $10,000 reduction in income on the FAFSA can mean a reduction of $3,000 to $5,000 in a student’s expected financial contribution. It could also increase eligibility for need-based financial aid.

Is it too late to file the FAFSA for next school year?

No. It’s always best to file the form as soon as possible after it becomes available each year because states and colleges have varying priority deadlines. But the final deadline to file a FAFSA for the next academic year is June 30, 2023. (Students can file the form to seek federal aid retroactively, but it generally must be filed and processed by the last day of their academic term, or June 30 — whichever comes first.)

Has the freeze on federal student loan payments been lifted?

The current pause on federal loan payments is scheduled to lift on May 1. It is unclear if President Biden may extend the freeze again, as he last did in December.