Published: December 6, 2025
For decades, middle-income families followed a simple rule: save early to reduce the burden later.
In 2026, the new financial aid formulas have flipped that logic.
The 2026 to 2027 Student Aid Index (SAI) is now fully active. While it helps lower-income applicants, it has created a “math trap” for middle-class households with savings.
Financial aid officers describe this trend as a tightening on families who saved responsibly, even as the cost of attendance continues to climb.
The Saver’s Penalty Is Real
Under the old methodology, families had an Asset Protection Allowance that shielded a portion of their savings from the formula.
In the 2026 cycle, that protection has effectively disappeared for most age groups.
The Student Aid Index now assesses liquid assets, including cash, savings, and non-retirement investments, at a steep rate. This creates a paradox.
A family with $50,000 in the bank may receive significantly less aid than a family with identical income who spent that money paying down consumer debt.
In practice, the formula treats liquidity as a liability.
The Sibling Discount Is Gone
The most painful shift for the Class of 2026 is the permanent removal of the sibling divisor.
Previously, if a family had two children in college, their expected contribution was divided accordingly. That adjustment has been eliminated.
A family with two students enrolled at the same time now faces an SAI that is essentially double what it would have been under prior rules.
This tightening mirrors broader restrictions introduced throughout the higher education and loan systems over the past year.
The New Parent PLUS Cliff
One of the most concerning changes is the movement toward capped Parent PLUS borrowing.
OBBBA legislation introduced annual borrowing caps that many institutions are preparing for, with most modeling annual limits near $20,000 .
This replaces the long-standing rule that allowed parents to borrow up to the full cost of attendance.
If these trends hold, a middle-income household with a high SAI and a $60,000 cost of attendance faces a substantial gap.
Federal loans will no longer cover the difference, pushing families toward private financing where interest rates are typically higher.
The W-2 and Business Owner Divide
An uneven landscape has emerged following regulatory updates finalized in mid-2025.
The Department of Education reinstated the asset exclusion for small businesses and family farms.
This means a business owner with significant company assets may show $0 in the FAFSA asset section.
Meanwhile, a W-2 employee with a modest college savings account must report every dollar. The result is a sharp contrast between “sheltered” and “non-sheltered” asset types.
The Geography Problem
The 2026 SAI formula uses a national baseline for living expenses, which does not adjust for regional cost differences.
The Income Protection Allowance was raised, but it applies equally to households in low-cost and high-cost areas.
For families in cities with elevated housing costs, the formula overstates their discretionary income.
A $150,000 salary in New York City is treated the same as in a low-cost region, reducing aid eligibility despite lower real-world spending power.
The Grandparent Loophole
One of the few positive developments is the update to grandparent-owned 529 plans.
Previously, when a grandparent paid for college, it counted as untaxed student income. This could reduce aid eligibility by up to 50% in the following year.
The redesigned FAFSA no longer asks this question.
Grandparents can now contribute without affecting the student’s aid calculation, creating a rare win for multigenerational planning.
What Families Are Doing
Many middle-income households are adjusting their strategy for the 2026 filing year. Some report losing thousands in eligibility even with no change in income.
- Debt Paydown: Families are reducing consumer debt before filing, which legally decreases reportable assets.
- Merit Movement: There is a noticeable shift toward institutions offering merit scholarships that allow stacking opportunities.
- Appeals: More families are submitting Professional Judgment requests to document medical costs or job changes not reflected in the standard formula.
The 2026 aid landscape rewards those who understand the system, not necessarily those who saved the most.Families comparing projected costs can use the Federal Student Aid Estimator to understand how the 2026 changes may affect their expected contribution.
School Aid Specialists provides independent reporting on national education trends. We are not affiliated with or endorsed by the U.S. Department of Education. For specific calculations, refer to the Federal Student Aid Estimator.
Sarah Johnson is an education policy researcher and student-aid specialist who writes clear, practical guides on financial assistance programs, grants, and career opportunities. She focuses on simplifying complex information for parents, students, and families.
