Your EFC is the number colleges will use to calculate your need for financial aid. You can get an estimate of your EFC at the College Board and sophomores should do so before January 1 of your sophomore year to take advantage of all possible opportunities for reducing it.
The Base EFC Year for the class of 2020 is 2018 so developing EFC estimates now is helpful to understand if any strategies can be incorporated next year to lower your EFC.
The tips below are provided from HD Vest Financial Services.
- 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.
Asset Positioning – 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
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
- Using the student’s assets for the first year. In determining federal aid eligibility, the federal government expects a child to contribute 20 percent of his or her assets each year to college costs, whereas parents are expected to contribute a maximum of 5.6 percent of their assets. If assets have been accumulated in a child’s name (individual accounts, UGMAs, UTMAs, etc.), parents may want to consider using these assets to pay for the first year of college, and then use parent-owned accounts like 529s. 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.