Colleges use the Free Application for Federal Student Aid (FAFSA) to determine eligibility for financial aid grants and loans. The government calculates your Expected Family Contribution (EFC), now called your Student Aid Index (SAI) for 2024-25, based on the financial information in your child’s completed FAFSA. The higher your EFC/SAI is, the less likely it is that your child will qualify for financial aid. There are several strategies you can consider to lower your EFC/SAI.
What Is Your FAFSA EFC/SAI?
The EFC/SAI is the minimum amount of money that the federal government expects your family to contribute to your child’s college expenses. The government calculates your contribution based on your income and assets.
Each college determines its own financial aid policies. Generally, financial aid eligibility is based on the difference between the school’s Cost of Attendance (COA) and the student’s EFC/SAI. So if your EFC/SAI is above or close to the COA, your child may not qualify for financial aid.
Is It Worth Trying to Lower Your EFC/SAI?
The answer depends on your unique circumstances. There are two main points to consider:
- What is your EFC likely to be? Use the free Federal Student Aid Estimator to get an approximate value.
- Is financial aid a possibility at your child’s schools of interest? Research the colleges to learn about their COAs and financial aid policies. You can find out what percentage of students at a particular school receive need-based aid using the R2C 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 to lower your EFC.
Here’s how to get started:
Six Strategies to Lower Your EFC/SAI
To lower your EFC, you need to minimize your income and assets. The “base year” the government uses to make EFC calculations is the prior-prior year, so you need to plan ahead. For the 2024-2025 FAFSA, you’d provide tax information from 2022.
The base year is also the year you’ll need to make adjustments to your income, if possible. Changes to assets can be made up to the day you fill out the FAFSA.
1. Contribute to a Roth IRA in Your Name
One way to reduce your assets is to contribute to a Roth IRA (assuming that you meet the income requirements). The money in retirement accounts is not considered an asset for financial aid purposes. Also, since you do not get a deduction for contributing to a Roth IRA (like 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 Minimize 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 during your base year.
You can shift assets to minimize their impact in financial aid calculations:
- Contribute to 529 college savings plans owned by grandparents.
- Pay off debt
- Make a big purchase, such as a home improvement project.
Some good 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 money for college. There are both pros and cons:
- 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
- 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 in a 529 is counted as a parental asset, even if it’s a custodial plan in your child’s name. This is okay because parental assets have less effect on financial aid eligibility than student assets. But you can do more to maximize benefits and reduce disadvantages:
- Change the custodial name on the account from your name to a grandparent’s name, so the funds won’t be counted as parental assets.
- Change 529 plans for siblings (younger than 18) to custodial 529 accounts where the sibling is the account owner and beneficiary. When 529 account owners are younger than 18, the assets are still counted as parental assets for financial aid purposes, but only for the student who is the account owner. Assets in custodial 529 plans will not be included 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 base year for the student’s senior-year FAFSA).
- The updated FAFSA rules from the CARES Act will take effect starting in 2023. At that time, students will 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 the Amount of Money in Your Child’s Name
You have to report your child’s income and assets on the FAFSA as well as your own. Your child’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 ways to shift assets from your child’s name:
- If your child 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 as a parental asset).
- Move your child’s assets out of their name into someone else’s name, such as a grandparent.
- Have your child start their own Roth IRA and contribute to it.
Reducing the value of assets in your child’s name can be very beneficial for lowering the EFC.
5. Reduce Income
Lowering your income in the base year can make a big impact on EFC calculations. Adjusted gross income can be assessed up to 47% and assets are assessed at only 5.64%, so lowering a parent’s income in the base year can be eight times more effective in lowering a family’s EFC as compared to minimizing parental assets.
There are several possible ways to reduce parental income during the base year:
- If you’re self-employed or a business owner, defer income and increase deductions.
- Care for a loved one using Family Medical Leave Act (FMLA) protections.
6. Plan out Your Lifestyle Changes
Some lifestyle changes can significantly lower 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 from your child’s other parent, consider having your child live with the lower-earning parent.
- This strategy will only work until upcoming changes to FAFSA are put into place for the 2024-25 school term. With these changes a child’s living situation won’t affect the EFC (or the new term, SAI). The higher-earning parent will include their financials on 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 to lowering your EFC: paying off your mortgage early instead of saving up for college expenses. By eliminating your mortgage, you can save thousands of dollars in interest. Plus, if you don’t have a mortgage payment by the time your child starts college, you can use that money to cover educational expenses.
Increase Your Chance for Financial Aid
College is expensive, and many families rely on financial aid. If there’s a chance that your child could qualify for financial aid at the school they plan to attend, it’s usually worth it to try to lower your EFC.
Use R2C Insights to help find merit aid and schools that fit the criteria most important to your student. You’ll not only save precious time, but your student will avoid the heartache of applying to schools they aren’t likely to get into or can’t afford to attend.
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