We updated this Electronic Announcement on October 15, 2021, adding a provision to remove untaxed unemployment benefits from the applicant’s (or the parents’ or spouse’s) AGI or untaxed income on the FAFSA. We also deleted the sentence that encouraged FAAs to use professional judgement to remove untaxed unemployment benefits from AGI because we consider that change a correction. The Secretary waives the requirement to report those untaxed unemployment benefits as untaxed income as authorized under the Higher Education Relief Opportunities for Students Act of 2003 (HEROES Act).
The American Rescue Plan (ARP) Act was signed into law on March 11, 2021. The ARP made the first $10,200 of unemployment benefits non-taxable for each taxpayer with incomes less than $150,000. The untaxed portion of unemployment benefits increases to $20,400 for applicants who have a tax filing status of married-filing-jointly (if both tax filers received benefits). FSA expects to see an issue with aid eligibility determination for some 2022–23 Free Application for Federal Student Aid (FAFSA®) filers as well as Income Driven Repayment applicants for whom loan payment amounts are based on 2020 tax information, even if the IRS DRT was used in either circumstance.
Tax filers who received unemployment benefits in 2020 and filed taxes prior to March 11, 2021, will have a higher Adjusted Gross Income (AGI) on their original tax record compared to those who filed (or amended) after the enaction of the ARP.
Potential Impact to Student Aid Eligibility for 2022–23 FAFSA form cycle:
FAFSA filers who meet the conditions above and use the IRS DRT for the 2022–23 year will have a higher AGI, resulting in a higher EFC which may potentially reduce their eligibility for federal need-based aid. Also, tax filers who filed taxes after March 11 and reduced their taxable unemployment benefits by the allowable amount might have included that amount in untaxed income on the FAFSA.
Therefore, when financial aid administrators become aware that an applicant's FAFSA/ISIR includes untaxed unemployment benefits either in the applicant’s (or the parents’ or spouse’s) AGI or in untaxed income, those benefits should be removed. The Secretary waives the requirement to report those untaxed unemployment benefits as untaxed income as authorized under the HEROES Act.