Freshman and Sophomores – Know your Expected Family Contribution Now
College planning too early can result in fatigue. The best college planning for an underclassman is earning As and Bs in rigorous courses. However, students and parents should evaluate their Expected Family Contribution beginning second semester freshman year.
Calculating your Expected Family Contribution (EFC) and Institutional Methodology (IM)
Your EFC/IM is the number colleges will use to calculate if you are eligible for need grants. You can use the College Board’s Expected Family Contribution Calculator to gain insight into your student’s eligibility for financial aid.
Because the methodology reviews reported income two years prior, the base year calculation includes the income earned during your high school student’s first semester freshman and second semester sophomore year.
Class of 2021 – Income reported in 2019
Class of 2022 – Income reported in 2020
Class of 2023 – Income reported in 2021
Defer receiving employment bonuses until after December 31 of the base year.
Avoid selling investments that will have taxable capital gains or interest, such as mutual funds, stocks, or savings bonds until after December 31 of the base year.
To avoid taking an untimely distribution from an appreciated investment, consider collateralizing the assets instead.
Sell investments that can be taken at a loss during the base year.
Avoid pension and individual retirement account (IRA) distributions in the base year, if possible.
If you are on an expense account, ask your employer to reimburse you directly so that any reimbursement amounts do not artificially inflate your income.
Accelerate necessary expenses before filing the FAFSA. Carve out $4,000 in tuition and textbook expenses to be paid with cash or loans to maximize the American Opportunity Tax Credit (AOTC). Tax-free distributions from a college savings plan cannot be used to qualify for the AOTC.
Asset Positioning – Assets are reported as of the FAFSA/CSS Profile filing date. Assets that are not included in the federal calculation are:
Cash value life insurance
Retirement accounts (401(k), IRA)
Personal items such as automobiles, furniture, and household items
Home equity in a primary residence
The net worth of the family farm
Small businesses owned and controlled by the family (< 100 full-time employees) are not reported
All other assets not mentioned above that a parent or child owns are included in the FAFSA calculation. In order to reduce assets in the base year, families should consider:
Paying all federal and state income taxes due during the base year. This will reduce cash on hand and allow you to deduct the amount paid from your base year’s taxes.
Paying down consumer debt to reduce cash on hand and decrease your assessable assets.
Using the student’s assets for the first year. By reducing the child’s assets in the first year, the family will likely increase its chances of qualifying for more financial aid in subsequent years.
Leveraging the student income limit. The current limit of $6,570 that a student earns is not considered in determining a child’s total income. One might consider only earning up to the allowance or even doing volunteer work after the income limit has been reached.