How to Maximize Financial Aid When Applying to College
This article was written based on the information and opinions presented by Vinay Bhaskara in a CollegeVine livestream. You can watch the full livestream for more info.
College is expensive, and it is important to understand how to apply for and maximize financial aid. For a comprehensive primer on applying for financial aid, read the Complete Guide to Applying for College Financial Aid.
This article summarizes how the Expected Family Contribution (EFC) is calculated and techniques for minimizing financial aid. The EFC is the amount parents and students are expected to contribute from their income and assets to paying for college. By understanding how the EFC is calculated, you can determine how to minimize your EFC and maximize your financial aid award. Please visit the Federal Student Aid Handbook for a formal enumeration of how the EFC is calculated.
Minimizing the Parents’ Contribution
The parents’ contribution is calculated based on the parents’ available income and their assets.
Parents’ Available Income
Available income is the parents’ total income with deductions taken for the amounts paid by the parent for U.S. income tax, state and other taxes, and Social Security taxes, in addition to their household disposable income and employment related expenses.
The calculation for household disposable income is variable, and it depends on the number of members in the parents’ household and the number of college students in the household. There is a small benefit of paying for additional children to go to college since each additional child attending college qualifies for a $3,340 deduction based on the most recent EFC Formula Guide.
The parents’ contribution from assets is calculated by first determining the parents’ net worth (sum of assets), then calculating their discretionary net worth by taking deductions (e.g. the education savings and asset protection allowance in Table 7), and then multiplying the discretionary net worth by 12%.
To minimize parents’ contribution from assets, parents should maximize their contributions to their retirement accounts since “retirement plans (401[K] plans, pension funds, annuities, non-education IRAs, Keogh plans, etc.)” are not included in the FAFSA definition of an asset. Parents aged 50 years and older are also eligible to make “catch-up contributions” and contribute more to their retirement accounts.
A family’s primary residence is not included in the asset calculation and paying off a mortgage can help reduce the parents’ contribution from assets. Relatedly, parents should ensure that all home and property value and property tax assessments are updated to reflect current market conditions.
Minimizing the Student Contribution
The student contribution is calculated based on the student’s available income and their assets. The student’s available income (AI) is their total income minus total allowances, and the student’s expected contribution is 50% of their AI. Allowances include the amounts the student has paid for U.S. income tax, state and other taxes, Social Security taxes, $6,970 of income, and a parent’s negative adjusted available income.
A student’s contribution from assets is calculated similarly to that for parents. One key difference is that a student’s net worth is assessed at the rate of 20% compared to 12% for parents’ assets. Hence, to minimize the student’s contribution, you should remove the student’s name from assets.
Another method for maximizing financial aid is to negotiate with the financial aid office of multiple comparable institutions. You can do this by using one or more financial aid offers as leverage for receiving more financial support from the institution at which you would most like to matriculate.
To be in a position where such negotiation is possible, you need to apply to and receive acceptances and financial aid offers from two or more institutions with a similar profile. Institutions with dissimilar profiles, such as Lewis and Clark College and Yale University, are not likely to engage in financial aid negotiations given their significant differences. For more information, read this article on how to negotiate financial aid and receive more money.