How to Lower Your EFC on the FAFSA for Financial Aid

The Free Application for Federal Student Aid (FAFSA) is a form for students seeking federal financial assistance for higher education. It calculates an Expected Family Contribution (EFC), an index representing a family’s financial strength and expected contribution towards college costs. A lower EFC generally indicates greater financial need, which can lead to increased eligibility for need-based federal student aid, such as grants, scholarships, and subsidized loans. Understanding how the EFC is determined helps families navigate the financial aid process.

Strategies for Managing Income

The FAFSA utilizes income data from the “prior-prior year.” For instance, the 2025-2026 FAFSA uses income and tax information from 2023. This allows families to use already-filed tax returns, streamlining the application process. Adjusted Gross Income (AGI), derived directly from federal tax returns, is the primary income component considered.

The FAFSA also requires reporting of certain untaxed income sources. These include child support received, untaxed IRA or pension distributions, workers’ compensation, and tax-exempt interest from municipal bonds. Untaxed income is added to your AGI in the EFC calculation, increasing reported income. Accurately report all untaxed income.

The FAFSA assesses parent income differently than student income. Parent income typically impacts aid eligibility most significantly for dependent students. Student income is assessed at a much higher rate after a small income protection allowance, meaning a greater percentage is expected to contribute to college costs. For example, student assets and income can be assessed at 20%, while parent assets are assessed at a maximum of 5.64% and parent income up to 47%. This disparity makes careful management of student earnings and savings important.

Maximizing pre-tax contributions can reduce reported income for EFC calculation. Contributions to tax-deferred retirement accounts (e.g., 401(k)s, 403(b)s, Traditional IRAs) directly reduce AGI. Contributions to Health Savings Accounts (HSAs) also lower taxable income. Reducing AGI through these contributions can lower the income figure used in the FAFSA calculation, potentially leading to a lower EFC.

Strategic timing of income benefits one-time income events. Consider timing income like large bonuses, capital gains, or severance payments to occur in a year not used for the FAFSA’s prior-prior year calculation. For instance, receiving a significant bonus in the current year might affect the FAFSA submitted two years later. Planning these events can help manage the income reported for aid purposes.

The FAFSA formula includes income protection allowances for both parents and students. These allowances shield a portion of income from the EFC calculation, recognizing that families need funds for basic living expenses. For the 2025-2026 FAFSA, a dependent student may have an income protection allowance of around $11,510, and a family of four could have an allowance of approximately $43,870. These allowances reduce the amount of income counted, but any income above these thresholds contributes to the EFC.

Strategies for Managing Assets

The FAFSA assesses a family’s assets on the day the application is filed. The value of cash, savings, and investments reported should reflect balances on that date. Understanding which assets are included and excluded from the EFC calculation is important.

Countable assets include cash in savings and checking accounts, investments like stocks, bonds, mutual funds, and certificates of deposit (CDs). Real estate equity (excluding primary residence), such as investment properties or vacation homes, is also counted. Parent-owned 529 college savings plans are considered parental assets and included in the calculation.

Conversely, several asset types are excluded from the FAFSA calculation. These include equity in a family’s primary residence and funds in qualified retirement accounts (e.g., 401(k)s, IRAs, pensions, annuities). The cash value of life insurance policies and net worth of small family businesses (under 100 employees) are also not counted.

Historically, an “asset protection allowance” for parents sheltered countable assets from the EFC calculation. However, for 2024-2025 and subsequent FAFSA cycles, this allowance is $0. This means a greater portion of a family’s countable assets will now directly contribute to the EFC.

Managing countable assets before filing the FAFSA involves spending them down. Families can use cash to pay down consumer debt (e.g., credit card balances or car loans). Making large purchases (e.g., a new car or home repairs) before the FAFSA filing date can also reduce countable assets. Paying for educational expenses (e.g., tuition deposits or required books) before FAFSA submission can also strategically reduce liquid assets.

Another strategy shifts funds from countable assets into non-countable ones. For example, contributing more to qualified retirement accounts (e.g., 401(k)s or Traditional IRAs) can reduce countable assets, as these are not assessed by the FAFSA. Paying down a mortgage principal on a primary residence is another method, as home equity is not typically included in the FAFSA calculation.

529 plan ownership can significantly impact the EFC. A parent-owned 529 plan is counted as a parental asset, assessed at a lower rate than student assets. If owned by the student, grandparent, or other relative, its impact on the EFC can differ. Starting with the 2024-2025 FAFSA, distributions from grandparent-owned 529 plans are no longer reported as untaxed income to the beneficiary.

Student assets are assessed at a significantly higher rate than parent assets. Parent assets are assessed at a maximum of 5.64%, while student assets can be assessed at 20%. Therefore, it is more favorable for assets to be held in a parent’s name rather than a student’s name to minimize their impact on financial aid eligibility.

Navigating Special Financial Circumstances

The FAFSA’s “prior-prior year” income data may not accurately reflect a family’s current financial situation. If a family experiences a significant change in financial circumstances after filing, they can appeal for an adjustment to their EFC. These “special circumstances” refer to unforeseen conditions that substantially impact a family’s ability to pay for college costs.

Examples include job loss, significant reduction in income or hours, divorce or separation of parents after FAFSA submission, or the death of a parent. Unusually high medical or dental expenses not covered by insurance also qualify. Significant unreimbursed elementary or secondary school tuition expenses for other children in the family might also be considered.

Contact the financial aid office at each college the student is considering to address a special circumstance. This “professional judgment” process is handled directly by individual schools, not the Department of Education. Financial aid administrators can adjust FAFSA data elements on a case-by-case basis, with adequate documentation, to better reflect the family’s ability to contribute.

To support an appeal, financial aid offices require specific documentation. This includes layoff notices, unemployment benefit statements, medical bills detailing out-of-pocket expenses, divorce decrees, or death certificates. Letters from employers detailing reduced income or loss of benefits are helpful. Thorough and accurate documentation is important for the financial aid office to review the situation.

Families should prepare a clear statement explaining the special circumstance and its financial impact. This narrative should concisely describe how the unforeseen event altered the family’s ability to pay for college. The financial aid office will review submitted information to determine if an adjustment to the EFC is warranted. While the process allows for individual consideration, the outcome can vary by institution and is not guaranteed.