When it comes to covering the costs of higher education, your Expected Family Contribution (EFC) is one of the biggest factors that comes into play. The U.S. Department of Education describes the EFC as "an index number used to determine your eligibility for federal student aid," and the formula used to calculate it considers your family’s income, assets, and benefits.
Finding out your EFC starts with filling out the Free Application for Federal Student Aid (FAFSA), which should be filed by all college students for every year of school no matter what. After you’ve filled out the FAFSA, schools use the EFC to determine federal aid eligibility and financial aid awards for students.
Generally speaking, families want a lower EFC since that means they can qualify for more financial aid and potentially pay less out-of-pocket for higher education as a result. Fortunately, there are a handful of strategies nearly anyone can use to accomplish this goal.
Keep Your Family Income In Mind
According to student loan expert Mark Kantrowitz, need-based financial aid is based on financial need, which is "the difference between the cost of attendance (COA) and expected family contribution (EFC)."
With that in mind, it can make sense to avoid artificially increasing your family income during the base year for the FAFSA, which is the prior-prior year. For example, Kantrowitz says you can avoid taking capital gains that year or offset them with losses. Also refrain from exercising stock options and defer any workplace bonuses to the extent that you can.
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In the meantime, don't take distributions from retirement plans — not even a tax-free return of contributions from a Roth IRA, he says.
Keep Your Assets In Mind
Kantrowitz also says you should keep any assets you have in mind, as well as how they can impact your ability to qualify for financial aid. Generally speaking, this means minimizing your reportable assets as much as you can.
Examples of steps you can take in this realm include spending down assets to pay off debt you have. For example, you could spend down cash in an emergency fund to pay down high-interest rate credit card debt.
Kantrowitz also says it can make sense to shuffle assets between children and parents in some cases.
"Shift assets from the child to the parent by saving in the parent's name and spending down child assets first," he says.
Be Strategic With Your Investments
Wealth advisor Greg Middendorf, who is also a Certified College Planning Specialist, adds that parents should be strategic in the way they're investing for the future since some parental assets won't count against them when it comes to the EFC.
For example, parents should maximize saving in retirement accounts like 401(k)s and IRAs vs. investing their extra cash into brokerage accounts when they can.
"Unlike money saved in your taxable brokerage accounts, money in your IRAs, 401(k) and other qualified accounts isn't counted towards EFC," he says.
Include Grandparents In The Planning
If grandparents are interested in helping with higher education expenses, it's smart to make sure they do so in a strategic way as well.
For example, Middendorf says you can encourage grandparents to redirect their gifts to college-bound grandchildren to the parents of the college student. This can help lower the family's EFC since the gift is not considered a student asset at that point, which has a greater impact on aid than parental assets do.
"The grandparents could also just deposit assets in a 529, which is assessed at a much lower rate than direct gifts," says Middendorf.
In fact, grandparent-owned 529 plans will soon have no impact on the EFC.
Special Circ*mstances Can Be A Factor
There are additional factors to keep in mind when it comes to getting the most student aid, some of which may or may not apply to your situation. For example, Kantrowitz says that students whose parents are divorced should live with the parent who has a lower income during college. Also consider dependency status since a change in dependency status can also have an impact, he says.
In the meantime, families who are going through special financial circ*mstances should file an appeal for more financial aid, he says. These special circ*mstances could include anything that has changed the family's ability to pay for college, such as a change in income or a job loss, high unreimbursed medical expenses, or high dependent care costs for a special needs child or elderly parent.
Kantrowitz, who is a Forbes contributor and the author of the book How to Appeal for More College Financial Aid, also offers a free tip sheet on this topic.
Double-Check Your FAFSA
Financial advisor Danielle Miura of Spark Financials adds that, no matter what, you should double check all the figures on your FAFSA before you submit it.
Government forms can be complicated, she says, so it may even make sense to have a student loan professional or a high school counselor review your paperwork to see if your information is correct.
That said, you shouldn't dilly dally on submitting your FAFSA either since federal student grants and loans are provided on a first-come, first-served basis.
Families should consider filing as early as possible for this reason, says Miura.
Also never assume you don't qualify for aid, and remember that many universities do not provide academic scholarships without completed FAFSA forms.
Be Aware Of The Upcoming Changes
With all this being said, you should also be aware that some of the strategies families are using to get more aid now may not work in a few years. That's because there are sweeping changes coming to the FAFSA for the 2024-25 school year, including the replacement of the Expected Family Contribution (EFC) with something called the Student Aid Index (SAI).
Changes you can expect when this happens include:
- Expansion of Federal Pell Grants to more students
- Repeal of the lifetime limit for times a borrower can receive subsidized loans of up to 150% of program length
- Removal of the number of family members in college from the calculation
- Allows a minimum SAI of $-1,500
You can read more about the FAFSA Simplification Act and how changes will be implemented on the U.S. Department of Education website.
