Strategies To Lower Your Expected Family Contribution (EFC)

Quick answer

• Understand the EFC Formula: Familiarize yourself with how the Expected Family Contribution is calculated by the Department of Education.
• Maximize Untaxed Income: Ensure all sources of untaxed income are properly reported and accounted for.
• Strategic Asset Placement: Move assets considered “countable” by the FAFSA into accounts that are not assessed.
• Consider Education Savings Accounts: Utilize 529 plans for college savings, as they are treated favorably in EFC calculations.
• Review and Report All Expenses: Accurately report all eligible expenses, especially those related to dependents.
• Timing of Financial Changes: Plan significant financial moves, like retirement contributions, strategically before the FAFSA is filed.

Who this is for

• Parents of college-bound students: If your child is applying to college and you need to complete the FAFSA, this guide is for you.
• Families aiming for financial aid: You’re looking for ways to reduce your family’s calculated contribution to college costs to increase eligibility for grants and scholarships.
• Proactive financial planners: You want to understand the impact of your financial decisions on college affordability.

What to check first (before you act)

Goal and timeline

Before making any changes, clearly define your college affordability goals. Are you aiming to qualify for specific types of aid? What is your student’s timeline for applying to college? Understanding these will shape your strategy.

• What to check:
• When is the FAFSA deadline for the academic year your student plans to attend?
• What are your student’s target colleges and their typical financial aid packages?
• What is your personal timeline for making financial adjustments?

Current cash flow

Understanding your current income and expenses is crucial. The EFC calculation considers income, but also certain expenses can impact your ability to save or pay for college.

• What to check:
• What is your household’s annual income (both taxed and untaxed)?
• What are your recurring monthly expenses?
• Do you have any significant one-time expenses planned?

Emergency fund or safety buffer

Before reallocating funds for college savings, ensure you have an adequate emergency fund. This is critical for unexpected life events and prevents you from derailing your college savings plan.

• What to check:
• How many months of essential living expenses does your emergency fund cover?
• Is your emergency fund easily accessible but not too liquid that you’d be tempted to spend it?

Debt and interest rates

High-interest debt can significantly impact your financial health and your ability to save. Prioritizing debt repayment can free up cash flow and potentially improve your financial standing.

• What to check:
• What are the balances and interest rates on all your debts (credit cards, personal loans, etc.)?
• Are there any debts with interest rates significantly higher than potential investment returns?

Credit impact

Some financial strategies, like taking on new debt or closing credit accounts, can affect your credit score. While not directly part of the EFC calculation, a strong credit score is vital for other financial matters.

• What to check:
• What are your current credit scores?
• Are there any upcoming financial needs where a strong credit score is essential (e.g., mortgage refinance)?

Strategies To Lower Your Expected Family Contribution (EFC)

Step 1: Gather Your Financial Documents

• What to do: Collect all relevant financial statements from the relevant tax year (which is two years prior to the academic year of enrollment). This includes tax returns, W-2s, 1099s, bank statements, investment account statements, and records of untaxed income.
• What “good” looks like: You have all necessary documents organized and readily accessible.
• Common mistake and how to avoid it: Missing or incomplete documentation. Avoid this by starting early and creating a checklist of required documents.

Step 2: Understand the FAFSA Calculation

• What to do: Familiarize yourself with the Free Application for Federal Student Aid (FAFSA) and how it calculates the EFC. Key components include income, assets, and household size.
• What “good” looks like: You have a general understanding of which financial items are considered “countable” and which are not.
• Common mistake and how to avoid it: Assuming all income and assets are counted equally. Avoid this by reviewing official FAFSA instructions or resources.

Step 3: Report Untaxed Income Accurately

• What to do: Carefully report all untaxed income, such as child support received, housing allowances for clergy, or certain veterans’ benefits.
• What “good” looks like: All eligible untaxed income is reported correctly, with no omissions or misinterpretations.
• Common mistake and how to avoid it: Forgetting to include certain types of untaxed income or misclassifying them. Avoid this by cross-referencing with your tax returns and FAFSA instructions.

Step 4: Optimize “In-School” Student Assets

• What to do: Understand that student-owned assets are assessed at a much higher rate than parent-owned assets. If possible, shift student-owned funds to parent-owned accounts before filing the FAFSA.
• What “good” looks like: Any funds primarily intended for the student’s education are held in parent-controlled accounts.
• Common mistake and how to avoid it: Leaving significant assets in the student’s name. Avoid this by transferring funds to parent accounts well in advance of filing.

Step 5: Strategically Use Retirement Accounts

• What to do: Contributions to tax-deferred retirement accounts (like 401(k)s and IRAs) generally reduce your “Adjusted Gross Income” (AGI), which is a key factor in EFC.
• What “good” looks like: Your retirement savings are robust, and you’re making contributions that positively impact your AGI for FAFSA purposes.
• Common mistake and how to avoid it: Not contributing enough to retirement or contributing after the FAFSA is filed. Avoid this by planning your contributions to align with the FAFSA filing timeline.

Step 6: Consider 529 Plans

• What to do: While parent-owned 529 plans are not considered an asset for EFC calculation, distributions from them for qualified educational expenses are not counted as income.
• What “good” looks like: You have a 529 plan in place, and you’re contributing to it according to your savings goals.
• Common mistake and how to avoid it: Not utilizing a 529 plan or having funds in a student’s name within a 529 plan. Avoid this by opening and contributing to a parent-owned 529 plan.

Step 7: Report All Eligible Expenses

• What to do: Accurately report eligible expenses, such as medical and dental expenses not covered by insurance, and any dependent care expenses that allow you to work or attend school.
• What “good” looks like: You have documented all allowable expenses and can report them accurately on the FAFSA.
• Common mistake and how to avoid it: Forgetting or failing to document eligible expenses. Avoid this by keeping meticulous records of all medical bills, receipts, and dependent care invoices.

Step 8: Adjust Household Size

• What to do: Ensure your household size is reported accurately, including any dependents for whom you provide more than half of their support. This can include elderly parents or younger siblings.
• What “good” looks like: Your household size reflects all individuals you financially support.
• Common mistake and how to avoid it: Excluding individuals who qualify as dependents. Avoid this by carefully reviewing the FAFSA definition of a dependent.

Step 9: Review Business and Farm Assets

• What to do: If you own a small business or farm, there are specific rules for reporting these assets. Small businesses and family farms may be excluded from asset calculations if they meet certain criteria.
• What “good” looks like: You have accurately reported any business or farm assets according to FAFSA guidelines.
• Common mistake and how to avoid it: Misreporting business or farm assets, leading to an inflated EFC. Avoid this by consulting FAFSA instructions for business and farm asset reporting.

Step 10: Plan for Future Income Changes

• What to do: If you anticipate a significant income change (increase or decrease) between the FAFSA filing year and the enrollment year, you may be able to appeal your EFC.
• What “good” looks like: You are aware of potential income changes and know the process for requesting an EFC adjustment.
• Common mistake and how to avoid it: Not addressing anticipated income changes. Avoid this by researching the “special circumstances” or “professional judgment” appeal process at the college’s financial aid office.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Leaving assets in the student’s name	Significantly higher EFC due to higher assessment rate on student assets.	Transfer student assets to parent-owned accounts before filing.
Not reporting all untaxed income	Underreporting income, which can lead to scrutiny or incorrect aid calculations.	Meticulously review all sources of untaxed income and report them accurately.
Forgetting eligible expenses	Higher EFC than necessary because allowable deductions are not taken.	Keep detailed records of medical, dental, and dependent care expenses and report them on the FAFSA.
Not maximizing retirement contributions	Higher AGI and therefore a higher EFC.	Make consistent, planned contributions to retirement accounts, especially before filing the FAFSA.
Misunderstanding business/farm asset rules	Over-reporting or under-reporting business assets, leading to an incorrect EFC.	Carefully review FAFSA guidelines for reporting small business and farm assets or consult a tax professional.
Waiting too long to make financial adjustments	Missing the opportunity to shift assets or make strategic contributions.	Start planning and making financial adjustments at least 1-2 years before your student plans to enroll.
Not considering a 529 plan	Potentially missing out on favorable EFC treatment for college savings.	Open and contribute to a parent-owned 529 plan for college savings.
Failing to account for household size correctly	An EFC that doesn’t accurately reflect your family’s support obligations.	Ensure all dependents for whom you provide more than half of their support are included in your household size.
Not understanding the FAFSA tax year	Using current year financial data instead of the required prior-prior year.	Always use the tax year specified by the FAFSA for the academic year your student is applying to.
Assuming EFC cannot be changed	Missing opportunities for aid if circumstances change significantly.	Explore the “special circumstances” or “professional judgment” appeal process with the college’s financial aid office if needed.

Decision rules (simple if/then)

• If you have significant assets in a student’s name, then shift them to parent-owned accounts because student assets are assessed at a higher rate for EFC.
• If your Adjusted Gross Income (AGI) is high, then consider increasing contributions to tax-deferred retirement accounts before filing the FAFSA because this can lower your AGI.
• If you have dependent care expenses that allow you to work or attend school, then report them on the FAFSA because these can reduce your countable income.
• If you are paying for unreimbursed medical or dental expenses, then report these on the FAFSA because they may be deductible and lower your EFC.
• If your family size has changed or you support additional dependents, then accurately report your household size on the FAFSA because this is a factor in the EFC calculation.
• If you own a small business or farm, then research the specific FAFSA rules for these assets because they may be excluded from asset calculations under certain conditions.
• If you anticipate a substantial change in income between the FAFSA filing year and the enrollment year, then prepare to file a “special circumstances” appeal with the college’s financial aid office because this could lead to an adjusted EFC.
• If you have savings that are not currently in a 529 plan, then consider opening a parent-owned 529 plan because these assets are not counted for EFC purposes, and distributions are favorable.
• If you are unsure about how a specific asset or income source is treated on the FAFSA, then consult the official FAFSA instructions or the financial aid office of the colleges your student is applying to because accurate reporting is critical.
• If you have high-interest debt, then prioritize paying it down before reallocating funds to college savings because reducing debt can improve your overall financial health and free up cash flow.
• If your student is receiving untaxed income (e.g., scholarships not used for tuition/fees), then ensure it is reported correctly on the FAFSA because misreporting can impact aid eligibility.

FAQ

What is the EFC?

The Expected Family Contribution (EFC) is an index number used by federal student aid programs to determine how much financial aid a student is eligible to receive. It represents the amount your family is expected to contribute towards college costs.

How is the EFC calculated?

The EFC is calculated using a formula established by Congress, which considers your family’s income, assets, and household size. It’s important to note that the EFC is not necessarily the amount you will pay for college.

When do I need to file the FAFSA?

The FAFSA typically opens on October 1st for the following academic year. However, deadlines can vary by state and by individual college, so it’s crucial to check with your student’s prospective institutions.

Are 529 plans considered assets for EFC?

Parent-owned 529 plans are generally not considered assets in the EFC calculation. This makes them a favorable savings vehicle for college expenses.

Can I appeal my EFC?

Yes, if your family experiences a significant change in financial circumstances (like job loss, disability, or death of a parent) after filing the FAFSA, you can request a review of your EFC by the college’s financial aid office through a process called “professional judgment” or “special circumstances.”

What is “prior-prior year” income?

The FAFSA uses income information from two years before the academic year for which you are applying. For example, for the 2024-2025 academic year, the FAFSA uses 2022 tax information.

How do student assets impact EFC differently than parent assets?

Student-owned assets are assessed at a much higher rate (up to 20%) than parent-owned assets (up to 5.64%). This is why it’s often beneficial to shift assets from a student’s name to a parent’s name before filing.

What if my student has untaxed income?

Untaxed income received by the student, such as scholarships used for living expenses or certain types of work-study earnings, will be reported on the FAFSA and can increase the EFC.

What this page does NOT cover (and where to go next)

• Specific financial aid eligibility for private colleges: This guide focuses on federal aid calculations. Private institutions may have their own aid applications and formulas.
• State-specific financial aid programs: Many states offer their own grants and scholarships with different eligibility criteria.
• Scholarship search strategies: While lowering your EFC can increase your eligibility for need-based aid, actively searching for merit-based and external scholarships is a separate, crucial step.
• Loan repayment strategies: This article addresses contributing to college costs, not the intricacies of repaying student loans after graduation.
• Detailed tax implications of financial moves: Consult a tax professional for advice on the tax consequences of specific investment or savings strategies.