Colleges make use of the Free Application for Federal Student Aid (FAFSA) to determine eligibility for educational funding grants and loans. The government calculates your Expected Family Contribution (EFC) based on the financial information inside your child's completed FAFSA. The higher your EFC is, the less likely it's that your child will qualify for educational funding. There are many strategies you can consider to reduce your EFC.
What Is Your FAFSA EFC?
The EFC is the minimum amount of cash that the federal government expects your family to contribute to your child's college expenses. The federal government calculates your EFC according to your earnings and assets.
Each college determines its own educational funding policies. Generally, educational funding eligibility is based on the difference between the school's Price of Attendance (COA) and also the student's EFC. Therefore if your EFC is above or close to the COA, your son or daughter may not be eligible for a educational funding.
Is It Worth Trying to Lower Your EFC?
The answer depends upon your specific circumstances. There are two details to think about:
- What is your EFC likely to be? Use the free Federal Student Aid Estimator to obtain an approximate value.
- Is educational funding a possibility at the child's schools of great interest? Investigate the colleges to discover their COAs and financial aid policies. You can find out what number of students in a particular school receive need-based aid using the College Insights tool.
If it looks like financial aid might be a possibility at any of your child's potential colleges, then it's probably worth it to try and decrease your EFC.
Here's how to begin:
Six Strategies to Decrease your EFC
To lower your EFC, you have to minimize your income and assets. The “base year” the federal government uses to create EFC calculations is the prior-prior year, which means you have to plan in advance. For that 2023-2023 FAFSA, you'd provide tax information from 2023.
The base year is also the entire year you will need to make adjustments to your income, if possible. Changes to assets can be made as much as the day you fill out the FAFSA.
1. Contribute to a Roth IRA in Your Name
One way to reduce your assets would be to contribute to a Roth IRA (assuming that you satisfy the income requirements). The cash in retirement accounts is not considered a good thing for educational funding purposes. Also, since you do not get a deduction for contributing to a Roth IRA (as if you do with a regular IRA or 401(k) contribution), your Roth contribution isn't added back to your income as part of the EFC calculation.
2. Shift Funds and reduce Cash
It's essential to avoid realizing capital gains in your base year or to offset those gains with capital losses. You shouldn't take any retirement distributions or bonuses on your base year.
You can shift assets to minimize their impact in educational funding calculations:
- Contribute to 529 college savings plans owned by grandparents.
- Pay off debt
- Make a big purchase, like a do it yourself project.
Some great news: The FAFSA doesn't assess home equity.
3. Make the Most of a 529
A 529 savings plan allows parents (or grandparents) to save cash for school. There are both pros and cons:
Pros
- Federal tax benefits: Tax-deferred growth and tax-free distributions (for qualified educational expenses)
- State tax benefits: tax-free distributions and income tax credits for contributions (in some states)
- No annual contribution limits
Cons
- Penalties for non-education-related distributions
- Limited investment choices
- High fees
If you've used a 529 plan to save for your child's college, that money may still affect your EFC. The money inside a 529 is counted as a parental asset, even when it's a custodial plan inside your child's name. This is okay because parental assets tight on impact on educational funding eligibility than student assets. However, you can do more to maximize benefits and reduce disadvantages:
- Change the custodial name on the account out of your name to some grandparent's name, therefore the funds will not be counted as parental assets.
- Change 529 plans for siblings (younger than 18) to custodial 529 accounts in which the sibling may be the account owner and beneficiary. When 529 account owners are younger than 18, the assets are still counted as parental assets for educational funding purposes, only for that student who is the account owner. Assets in custodial 529 plans will not be contained in sibling's financial aid calculations.
- Avoid taking distributions from 529 plans outside the immediate family (e.g. a grandparent-owned plan) until the student's sophomore-junior calendar year (the bottom year for that student's senior-year FAFSA).
- The updated FAFSA rules in the CARES Act will require effect starting in 2023. At that time, students does not need to report cash support, so distributions from grandparent-owned 529 plans will no longer negatively affect financial aid eligibility.
When managed correctly, a 529 plan offers many benefits.
4. Lower how much money inside your Child's Name
You need to report your child's income and assets around the FAFSA along with your own. Your son or daughter's assets affect their financial aid eligibility by 20% of the value. A parent's assets only reduce eligibility by 5.64%. For example, every $10,000 of parental assets eliminates $564 of financial aid, but $10,000 of student assets removes $2,000.
Here are some methods to shift assets from your child's name:
- If your son or daughter has money in a Uniform Transfer to Minors Act (UTMA) or Universal Gifts to Minors Act (UGMA) account, transfer it to a custodial 529 account (which is counted like a parental asset).
- Move your child's assets out of their name into another person's name, like a grandparent.
- Have your child start their very own Roth IRA and contribute to it.
Reducing the need for assets inside your child's name can be quite good for lowering the EFC.
5. Reduce Income
Lowering your income within the base year can produce a big impact on EFC calculations. Adjusted gross income can be assessed up to 47% and assets are assessed at just 5.64%, so lowering a parent’s income in the base year can be eight times more efficient in lowering a family's EFC as compared to minimizing parental assets.
There are several possiblity to reduce parental income during the base year:
- If you're self-employed or a business proprietor, defer income and increase deductions.
- Care for any family member using Family Medical Leave Act (FMLA) protections.
6. Organize Your way of life Changes
Some changes in lifestyle can significantly decrease your calculated EFC:
- Consider postponing remarriage. Your significant other's income isn't required on the FAFSA unless you're married.
- If you're divorced out of your child's other parent, consider getting your child accept the lower-earning parent.
- This strategy will only work until upcoming changes to FAFSA are put into position for that 2024-25 school term. With these changes a child's living situation won't modify the EFC (or even the new term, SAI). The higher-earning parent includes their financials around the FAFSA form regardless of where the student lives.
- See if your student qualifies for independent status. The FAFSA doesn't factor in parental income and assets for independent students.
Understanding how lifestyle changes can affect the FAFSA can prevent you from unintentionally increasing your EFC.
An Alternative Approach to Paying for College
You could consider an alternative choice to lowering your EFC: paying off your mortgage early rather than saving for college expenses. Through the elimination of your mortgage, it can save you 1000s of dollars in interest. Plus, if you don't have a mortgage payment by the time your son or daughter starts college, you can use those funds to cover educational expenses.
Increase Your Chance for Financial Aid
College is pricey, and many families rely on educational funding. If there's a chance that the child could be eligible for a educational funding at the school they plan to attend, it's often worthwhile to try and lower your EFC.
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