How You Can Reduce Your EFC for College

The Expected Family Contribution (EFC) was an index number used by colleges to assess a family’s financial strength and determine eligibility for federal student aid. While the term EFC is transitioning to Student Aid Index (SAI) with the FAFSA Simplification Act, the underlying purpose remains the same: to provide a standardized measure of what a family can reasonably contribute toward college costs.

The EFC, or now SAI, is not the exact amount a family will pay for college but rather a foundational figure used in the financial aid formula. It considers various factors, including family income, assets, household size, and the number of family members attending college. A lower EFC generally indicates a greater financial need, potentially leading to increased eligibility for need-based grants, scholarships, and federal student loans.

Managing Income for EFC Reduction

A family’s income is a primary component in determining the EFC. The Free Application for Federal Student Aid (FAFSA) utilizes a “prior-prior year” rule, meaning that for a given academic year, income data from two years prior is used. For example, the FAFSA for the 2024-2025 academic year uses income information from 2022.

Maximizing contributions to pre-tax retirement accounts can be an effective strategy to reduce adjusted gross income (AGI), which directly impacts the EFC. Contributions to accounts like 401(k)s, traditional IRAs, 403(b)s, and similar plans are generally excluded from income on the FAFSA, thereby lowering the reported AGI.

One-time income events, such as significant bonuses, severance pay, or substantial capital gains, can inflate reported income for the prior-prior year, potentially increasing the EFC. Families might consider strategies to mitigate their impact, such as deferring bonuses if the timing aligns favorably with the FAFSA’s look-back period. Realizing capital losses to offset capital gains in the relevant tax year can also help reduce taxable income.

The FAFSA distinguishes between taxed and untaxed income sources. While taxed income, like wages and salaries, is a direct input, certain untaxed income, such as child support received, is also included in the EFC calculation.

There is a difference in how parent income and student income are assessed for EFC purposes. Student income is typically assessed at a higher rate compared to parent income. For instance, a portion of a student’s available income may be assessed at 50%, while parent income assessment rates are generally lower, ranging from 22% to 47% after allowances.

Optimizing Assets for EFC Calculation

The FAFSA considers a portion of both parent and student assets when calculating the EFC. Understanding which assets are assessable and which are not can significantly influence financial aid eligibility. Assets are typically reported as of the day the FAFSA is filed, making the timing of asset adjustments a key consideration.

Assessable assets generally include liquid funds and non-retirement investments. This encompasses cash, money in savings and checking accounts, non-retirement brokerage accounts, certificates of deposit (CDs), and certain trust funds. The value of real estate holdings, excluding the family’s primary residence, such as investment properties or vacation homes, is also counted.

Conversely, several asset types are typically not counted in the EFC calculation. These non-assessable assets include the equity in a family’s primary residence, funds held in qualified retirement accounts like 401(k)s, IRAs, 403(b)s, and pension plans, as well as the cash value of life insurance policies and annuities.

Assets held in a student’s name are assessed at a much higher rate (typically 20% to 25%) compared to parent assets (maximum 5.64%). This disparity means that $1,000 in a student’s bank account could reduce aid eligibility by $200-$250, whereas the same amount in a parent’s account might only reduce it by about $56. Consequently, shifting assets from student ownership to parent ownership, if feasible, can be a beneficial strategy.

529 plans and other educational savings accounts receive favorable treatment. When owned by a parent or a dependent student, 529 plans are considered parental assets on the FAFSA, assessed at the lower parental rate. Distributions from 529 plans used for qualified educational expenses are generally not included as income on the FAFSA. Additionally, under recent FAFSA Simplification Act changes, distributions from 529 plans owned by grandparents or other third parties are no longer reported as untaxed income for the student, which was a previous concern.

Assets related to small businesses and family farms may also receive special consideration. For the FAFSA, the net worth of a business or farm is often excluded if the family owns and controls more than 50% of the business and it has 100 or fewer full-time employees.

Timing Your Financial Moves

The FAFSA’s data collection periods for income and assets necessitate a forward-looking approach to financial planning. Understanding these timelines allows families to implement strategies effectively.

Income reported on the FAFSA follows the “prior-prior year” rule. This means that for a student applying for aid for the 2026-2027 academic year, the FAFSA will require income data from the 2024 tax year. Therefore, financial moves intended to reduce reported income, such as maximizing retirement contributions or strategically managing capital gains and losses, must occur in the relevant prior-prior year. For instance, realizing capital losses in 2024 would impact the 2026-2027 FAFSA.

Unlike income, assets are reported as a snapshot in time: specifically, as of the day the FAFSA is filed. This distinction is critical because it allows for last-minute adjustments to asset allocation. Families can strategically reduce assessable assets by paying down consumer debt, making planned home upgrades, or contributing to non-assessable accounts like retirement funds or parent-owned 529 plans immediately before submitting the FAFSA.

The FAFSA typically becomes available on October 1st each year for the upcoming academic year. While the federal deadline for submission is often June 30th of the academic year for which aid is sought, many states and individual colleges have much earlier priority deadlines. Submitting the FAFSA as early as possible after October 1st is often recommended, as some financial aid is awarded on a first-come, first-served basis.

Given the prior-prior year income rule and the asset snapshot date, a strategic planning horizon of at least two years is beneficial. Families can proactively manage income and asset levels well in advance of the FAFSA filing period.