How Unemployment Benefits From 2020 Are Affecting Financial AidMay 4, 2022
Submitting the Free Application for Federal Student Aid (FAFSA) is a critical first step to getting college grants and student loans. But when it comes to the FAFSA, unemployment income can have an unexpected impact on your eligibility for aid.
According to the Center on Budget and Policy Priorities, as many as 46 million people received unemployment benefits in 2020. Since the FAFSA uses tax return information from two years prior, those completing the FAFSA for the 2022-2023 academic year may be worried about how their unemployment benefits affect their aid.
A new provision was put into place that allowed Americans earning under $150,000 to exclude portions of their unemployment benefits from their 2020 taxable income. However, those who submitted their tax returns before the provision was put into place may have issues qualifying for all the aid they’re entitled to unless they take additional steps.
How Unemployment Benefits Usually Affect the FAFSA
Normally, the FAFSA requires you to include all unemployment benefits you received as part of your modified adjusted gross income (AGI) as reported on your federal income tax return.
If you received unemployment benefits during the tax year, it could impact your ability to qualify for some forms of financial aid. In general, the larger your AGI, the less aid you’ll be eligible for from the government or school.
For example, Pell Grants are a form of federal financial aid intended for low-income college students. Qualifying students can receive up to $6,895 for the 2022-2023 academic year. However, if your unemployment benefits were too high, you may not qualify for Pell Grants, or you may only get a reduced amount.
Changes to the FAFSA for Unemployment Income
Millions of people received unemployment benefits in 2020, which can have serious repercussions for FAFSA completion for the 2022-2023 academic year. As a result, the government passed the American Rescue Plan in March 2021. The plan included a special exemption for federal tax filing that allowed individuals that earned less than $150,000 to exclude up to $10,200 in unemployment benefits on their taxes.
If you’re married and both you and your spouse received unemployment compensation, you can both exclude up to $20,400 in combined unemployment benefits.
If your AGI is above $150,000, you’re not eligible for the exemption, and all of your unemployment benefits must be reported as income on your tax return. Notably, this exemption only affects 2020 tax returns.
What to Do If You Received Unemployment in 2020
Although the American Rescue’s Plan exemption can be helpful, there are some hiccups within the system. If you filed your 2020 tax return before the American Rescue Plan was passed, you might find that the exemption isn’t included when you pull your information from the IRS Data Retrieval Tool within the FAFSA form. It may show a higher income than is accurate due to the exemption, affecting your eligibility for aid.
If that’s the case, here’s what you can do:
- Reach Out to the Financial Aid Office: If you received unemployment benefits in 2020 and the IRS Data Retrieval Tool is showing a higher AGI than it should, contact the college financial aid office. Financial aid administrators can make corrections to students’ AGI for the exempted unemployment compensation. And if your financial situation has changed, they can also adjust your financial aid package to include additional scholarships or student loans.
- Search for Outside Aid: While Pell Grants are issued based on the FAFSA from two years ago, there are gift aid opportunities that have different requirements. Grants and scholarships are available from non-profit organizations and companies and, unlike student loans, don’t have to be repaid. Search for available gift aid on CareerOneStop and The College Board’s Scholarship Search Tool.
- Consider Less Expensive Options: If your unemployment benefits caused your AGI to be too high for most forms of financial aid, consider less expensive options. Commuting to college instead of living on-campus or attending community college for the first two years and transferring to a four-year school to complete your degree are two ways to dramatically lower your cost of attendance.
- Research Private Student Loans: if you have your heart set on attending a particular college — but didn’t receive enough financial aid to cover the cost — another option is to take out private student loans. With private loans, you can borrow up to the total cost of attendance and have up to 20 years to repay the loan.
If you need to apply for student loans, you can request a rate quote from ELFI and view your loan options without impacting your credit score.*