The Department of Education (ED) this week issued guidance to financial aid administrators on awarding Title IV aid to student athletes who have received compensation under name, image, and likeness (NIL) contracts.
In a Dear Colleague Letter, ED detailed how it will treat student athlete compensation following a landmark Supreme Court ruling that prompted an interim policy change from the NCAA that opened the door for student athletes to receive compensation for NIL.
The interim policy change gave collegiate student athletes the opportunity to profit from autograph sales, sponsored social media posts or ads, personal YouTube/Twitch streaming channels, training lessons and camps, speaking engagements, personal merchandising, endorsement deals, and more.
Compensation and Estimated Financial Assistance
The guidance makes clear that the Internal Revenue Service (IRS) treats NIL compensation as taxable income and any NIL compensation reflected on a student’s 1099 tax form should be reflected in the student’s adjusted gross income (AGI) for the applicable base year (prior-prior year) on their FAFSA.
ED noted as an example that NIL compensation a student receives that is reported on their 2021 tax return will end up being reflected in the AGI reported on the 2023-24 FAFSA.
“This delay in the consideration of a student’s recent income in the calculation of a student’s financial need is normal and expected given the use of prior-prior year tax and income information in the current expected family contribution (EFC) formula,” FSA added.
Additionally, the Dear Colleague Letter states that NIL compensation is not considered estimated financial assistance (EFA). A given resource, whether NIL-related or not, factors into the determination of either EFC or EFA but not both, unless specifically excluded by statute.
“If the award is considered wages and is not based on need, then it is not EFA and is instead considered income to be reported on the FAFSA in the applicable base year,” the letter reads.
The guidance goes on to make a distinction between compensation and other resources that may be provided to student athletes. Confirming long standing guidance, ED states that “resources that a student receives because of postsecondary enrollment and that are not considered wages for non-need-based employment must be counted as EFA.” This would include, but is not limited to, athletically related scholarships, academic or graduation incentive awards, as well as complimentary room and board given to athletes.
Resolution of Conflicting Information
ED also noted that it is an institution's responsibility to identify and resolve conflicting information that would affect a student’s eligibility for Title IV assistance. If an institution is reasonably informed that a student received NIL compensation but does not see it reported as part of the student’s AGI on their FAFSA for the applicable year, the institution is tasked with resolving that conflicting information.
Due to the fact that a majority of those receiving NIL compensation are student athletes and may even be public figures, institutions may be more aware of the existence of NIL compensation than they would be of other sources of income, ED added. If any office at an institution has been provided with documentation outlining a student’s NIL contract, such as the athletic department, then the institution’s financial aid office is considered equally informed, even though the NCAA interim policy does not require students to report NIL activities to an institution. This is consistent with ED’s standard guidance related to conflicting information.
“We do not, however, expect institutions to search actively for the existence of NIL contracts that were not reported to the institution or to use anecdotal evidence and/or hearsay to establish the existence of this type of income,” the letter reads.
The long-awaited guidance from ED should bring some clarity to financial aid offices that were left wondering how the Supreme Court ruling that prompted a NCAA rule change would impact aid offices. While the massive shift in the world of college athletics may not have a major impact on how aid administrators do their jobs on a day- to- day basis, there were several unaddressed questions from aid offices that were seeking clarity from the Department of Education (ED).
Many of the questions raised by aid administrators, including conflicting information and the treatment of various benefits, were addressed by the letter.
One major outstanding question from aid administrators, outside the scope of ED, is how student athletes will be counseled on navigating the new financial landscape and making sound financial decisions.
The letter comes the same week the NCAA released a draft constitution signaling that NIL compensation for student athletes is here to stay, acknowledging that the NCAA will embrace NIL compensation and outline policies surrounding it.
NASFAA will continue to provide coverage as it develops. Stay tuned to Today’s News for updates.
Publication Date: 11/10/2021