Amidst ongoing discussion by lawmakers, student-athletes, and the National Collegiate Athletic Association about the rights of student-athletes to be compensated for use of their name, image, and likeness (NIL), the Department of Education’s Federal Student Aid Office (FSA) has released a new Dear Colleague letter for institutional student aid administrators regarding such compensation.
The purpose of the letter is to highlight that students receiving such compensation will likely be classified by the entities providing it as independent contractors, which may have various tax and aid implications for those students.
The letter explains that under existing IRS law, any compensation for which a student receives a form 1099, including for NIL payments, should be reflected in their adjusted gross income (AGI) for the applicable base year as reported on their Free Application for Federal Student Aid (FAFSA). As such, due to NIL compensation, this may result in a dependent student reporting substantial AGI on their FAFSA, while still maintaining an expected family contribution of zero based on their parents’ financial situation.
The letter also takes the position that NIL compensation specifically should not be considered by aid administrators to be estimated financial assistance (EFA), even while other institutionally provided items like athletic scholarships should still be counted as EFA in a student’s financial aid award package. Finally, the letter makes clear that it expects institutions to make the same efforts to resolve conflicting information regarding a student’s AGI in instances of potential NIL compensation as it would with any other type of income. Which is to say, if an institution is reasonably informed that a student may have received compensation under an NIL contract, but does not see it reported as part of the student’s AGI for the applicable base year, it must take steps to resolve that conflicting information.
The memo, while indicative of the department’s position on this issue, is not legally binding for institutions, and, per the department, is “intended only to provide clarity to the public regarding existing requirements under the law or agency policies.”