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Paying for a college education is a major financial commitment. While much easier said than done, restructuring your finances can help modestly. Student aid is calculated based on a formula called Expected Family Contribution, “EFC.” This is the amount that the government assumes a family can pay for their student to attend college. For a typical household, it amounts to a significant portion of their combined assets and income.
The more money you have, the higher your EFC. The higher your EFC, the less aid you receive. So, for a family with significant assets, it is difficult to get much more in financial aid. The good news is, the $250k in retirement accounts will be shielded assets. Though $500k in a brokerage account is subject to the EFC calculation, there are some strategies you can employ to reduce your expected contribution.
College is expensive and planning early can make a big difference. Talk to a financial advisor to build a tax-optimized plan.
Schools, through the Department of Education, calculate financial aid based on a four-step process.
First, the school estimates a student’s Cost of Attendance (COA) for the year
Second, the Expected Family Contribution (EFC) is calculated
Third, need-based aid is calculated by subtracting the EFC from the COA
Finally, any costs not paid for by need-based aid are eligible for non-need aid
Note that as of the 2024 school year, the “Expected Family Contribution” has been renamed to “Student Aid Index.” However, since the Department of Education has not yet updated its forms or website, we will continue to use the term “EFC” for consistency.
Need-based aid includes programs like Pell Grants, work study and subsidized loans. Non-need aid typically includes unsubsidized student loans and private loans.
There are various approaches to paying for your children’s education. A financial advisor can help you determine the best tools for your goals.
The expected family contribution is calculated using an opaque formula that accounts for a family’s combined income and assets. For students students claimed as a dependent by their parent/guardian, the formula includes both the parent’s assets and the student’s. For students not claimed as a dependent, the formula only accounts for their household’s income and assets.
For dependent students, the EFC is calculated based on a four page worksheet. It tallies up the family’s combined resources, then withholds some for taxes and costs of living, and assumes that the remainder can be spent on educational expenses. The EFC includes both the parents’ and the student’s assets, including:
Total taxable income, determined by each individual’s AGI
Benefits and untaxable income, such as alimony, unemployment and Social Security
Taxable financial assets, such as private portfolios and other investments
Some major assets are exempt from the EFC calculation. Most notably, this includes pre-tax retirement accounts, qualifying businesses, and major personal property such as a car or private residence. Rental and other investment real estate may be included in the EFC based on specific circumstances. Ask a financial advisor if your assets are subject to EFC calculations.
The EFC then subtracts some withholdings and allowances. These include:
Federal income taxes paid
Allowances for state taxes and Social Security
A costs of living allowance based on family size, known as the income protection allowance
Although the income protection allowance is intended to account for a family’s food, housing and other spending for the year, it is very small. For example, in 2023/24 it is set at $32,610 for a family of four with one student in college.
From there, the expected family contribution is calculated based on the family’s various assets after withholdings. The student is typically expected to contribute 50% of their income and 20% of their assets, for example, while the parents are typically expected to contribute between 22% and 47% of their income and up to 12% of their assets. All of this determines the final expected family contribution.
Readers should note that many articles mistakenly report that the parental contribution from assets is capped at 5.64%. Per the Department of Education’s 2023-2024 Federal Student Aid Handbook: “discretionary net worth is multiplied by the conversion rate of 12% to get the parents’ contribution from assets…” (Emphasis original.) Discretionary net worth is a household’s non-income assets less its Asset Protection Allowance. Currently, Table 7 of the EFC Formula Guide lists this allowance at $0.
To increase financial aid, you need to lower your household’s EFC. In general that means you need to reduce your income and eligible assets. Note thatyou should never attempt to hide or shelter assets, nor should you ever knowingly provide false information. In addition to being unethical, this would be a felony.
Reducing your qualifying assets is difficult. For example, take our situation here. While your retirement account is exempted, the FAFSA will include 12% of the brokerage account as “parents’ contribution from assets.” That alone will contribute $60,000 to the EFC calculation based on the $500k brokerage account, and that’s before accounting for household income and other assets.
There are some ways that you can attempt to structure your own income and assets to minimize your EFC contribution. Among these, a few important issues to consider include:
If you have not maximized your contributions to tax-advantaged retirement accounts, do so. This will reduce your household assets (and potentially your AGI) by moving this money into an exempted category.
Your primary residence does not count toward your EFC. Nor will a qualifying small business. If you update your home or invest in a business, this money can still generate value for you while no longer qualifying for educational contributions. You can also increase payments on your home’s mortgage, as this will effectively move your money into the home while reducing your long-term interest payments.
While it is not worth intentionally triggering a capital loss, if you have a money-losing investment it is worth waiting until your child goes to school before selling it. This will reduce your AGI by up to $3,000 per year and, with it, your expected contributions.
A financial advisor can guide you through appropriate tax and investment strategies.
Accounts such as prepaid tuition funds and 529 savings plans are typically considered a parental asset so long as the account is custodial (meaning that the student is the owner and beneficiary) and the student is a dependent. If you hold qualifying accounts, maintain their status. Since a custodial account is attributed to the parents, the FAFSA assigns them a lower expected contribution percentage.
Often, households may put assets in a child’s name. This is done for many reasons, from taking advantage of a lower tax rate to a mistaken attempt to game the FAFSA system. Regardless of the purpose, this will significantly increase the EFC calculation as the student is expected to contribute a much larger share of their assets than the parent is.
If you have done this, make sure to reclaim those assets or move them into a custodial account.
Maximizing financial aid is a terrific goal. To do that, you first need to understand how the Department of Education calculates need-based aid. Then, you need to see if there’s room to restructure your family’s assets around that formula.
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