The FAFSA is a government form that students complete in order to get financial aid. The FAFSA creates an EFC (Expected Family Contribution) which is the dollar amount sent to colleges. Colleges use the EFC to create financial aid packages. High EFC’s result in weak need-based offers, and a low EFC demonstrates need which can lead to better need-based financial aid packages.
How can you hack the FAFSA to lower your EFC?
“Hacking” requires carefully examining the rules, finding loopholes, and exploitation of those loop holes.
If you are going to hack the FAFSA, you must understand the calculations, and therefore you must go to the source. The document is 36 pages. It’s less crazy complex than tax code, but still kind of a pain to decipher.
I’m going to use a fictional example family of 4, earning $100k per year, with married parents, a high school freshman, and the prospective student who is a HS senior. (This family looks a lot like the JumpStart family in 2016.)
Despite later deadlines, you should complete the FAFSA in Oct or Nov, so that colleges receive your EFC, and can offer you financial aid packages. Some colleges might wait a while to send your aid package, but there is no benefit in postponing the FAFSA filing, and it really isn’t that difficult.
I am going to skip emancipated kid and/or divorce options as strategies. Other than that, I’m attempting to examine the formulas without ethics or emotions.
4 categories are used to calculate the EFC.
Category 1: Parent income.
The student will start college in fall of 2018. The FAFSA is done as early as Oct of 2017 using information from 2016 taxes, which is the spring sophomore and fall junior semesters for the student.
Income that matters is the adjusted gross income (AGI) from the parent’s taxes. The AGI number is followed by a crazy, insane, ridiculous, messy process of adding back some untaxed income (401k contributions), and then subtracting different allowances. An AAI (adjusted available income) number results, and then the following table can be used. The bottom row on the table below is relevant for this example and the parent contribution is $8959 + 47% of AAI over $33,101.
Since our sample family AAI is above the 33,101 threshold, each $1000 in additional income will result in a 470$ increase in the EFC. Typically the parent income category is the dominating factor in the EFC, and our sample family contributes about $17,000 to the EFC from parent income alone.
If you felt cheated that I didn’t explain the messy calculations, then here are a few more details. The AGI from the tax form is slightly less than total actual income at $90,000. After $4,500 (Virginia), $6900 (Social security), and $28,200 (4 in household, 1 in college) deductions, the sample AAI is about $50,000. That’s $17000 bigger than $33,000. Our parent income will add $8959 + $7990 (47% of $17000) for a grand total of $16,949.
Comment before we proceed to the next category.
If the standard $5500 Stafford loan is added onto the $16,949 family contribution, this family can “afford” a college with a cost of attendance of over $22,000, and their financial needs are met. We haven’t even dealt with the next 3 categories yet, and those categories can only increase the EFC. Colleges can “gap” financial need and not meet it, or close the gap with work study. Loans must be repaid with interest, and work study must be worked.
Category 2: Student income.
The timing is the same. Income from 2016 taxes matters for 2018/19 school year. Typical high school students don’t earn enough to impact their EFC. A minimum of $6570 is exempt. FAFSA never makes anything that straight forward, and in the process of earning $6570, the student will qualify for some more exemptions that vary based on state. After the final exemption amount of income is reached, 50% of additional income is added onto the EFC.
Category 3: Parent assets.
The timing of assessment of assets is totally different than income, and actually has some flexibility. Assets are tallied on the day the FAFSA is filed. Assets could be strategically rearranged or spent the day before filing the FAFSA.
There is an allowance for parents, and in our example at age 44, the number is $19,300. After that 5.6% of assets are added to the EFC. The table below determines the allowance.
Assets that count.
- Savings account and checking account.
- Stocks, bonds, and other investment funds.
- Equity in vacation home, second home, and rental properties.
- 529’s in parent name (Beneficiary doesn’t matter, and sibling 529’s do count.)
Assets that don’t count.
- Home equity.
- Pensions, 401k’s, traditional IRA’s, and Roth IRA’s.
- Cars, boats, trailers, tractors, tools, jewelry, electronics, and collectibles.
- Accounts in sibling’s name. (Remember that 529’s are usually in the parent’s name.)
Category 4: Student assets.
The timing of the assessment of student assets is the same, but the expected contribution percentages are different. There is no student allowance for assets. Student assets will raise the EFC by 20% of their assets.
The rules for which assets count and don’t count are the same.
Now that we know the calculations, we can devise strategies to hack the FAFSA. It all comes down to reducing each of the four categories.
Methods to reduce income.
Lowering your EFC is as simple as lowering your income in the appropriate tax years. Don’t earn money from work, profit from stock sales, real estate sales, or accept valuable documented gifts. Any earnings over 100,000 will limit need based aid at state schools, and all you can expect is the standard Stafford $5500 loan.
The student is free to earn about $7k with no consequences.
Strategies to lower or limit income.
- Quit working/earning.
- Take a sabbatical.
- Take a mini-retirement.
- Differ compensation to another tax year.
- Get paid off the books.
- Don’t sell stocks for a profit.
Strategies to reduce assets
There are 2 general methods to reduce the impact of assets.
- Blow/lose/hide assets.
- Transfer assets from high % categories that low % or and exempt categories.
- Move $5500 from checking to Roth IRA each year.
- $5500 to Dad, Mom, and kid Roth in Dec. Repeat in Jan. File FAFSA. Total of $33k sheltered.
- Use savings to pay down home mortgage.
- Use checking account to buy a boat.
- Spend all your cash on tacos.
- All your stocks could be sold to buy exotic pets.
- All your rental properties could be sold to buy clothes.
The last two examples creates future issues. A real estate/stock sale today creates income that will be taxed, and must be included on the FAFSA in 2 years, which affects the junior year financial package.
Do not confuse any of the examples or methods with advice. I am simply examining the formulas.
It never makes sense to sell stock and buy snakes.
Most cars, boats, and kitchens lose money.
Tacos taste great.
If you are a software designer making $150k per year, it would probably be easier to give $25k to your kid, and live off of $125k (or a lot less). Keep the high paying job.
Remember that lying on the FAFSA is a serious crime called fraud. There is a verification process initiated for a significant portion of filers. FAFSA verification is more common and likely than IRS audits.
My family strategy to hack the FAFSA.
My initial hacking instinct was to attempt to rearrange my assets and lower my EFC. After a lot of thought, I’ve come to the realization that it isn’t worth the hassle, and I won’t hack the FAFSA. I could sell stocks, pay off my mortgage, refinance our vacation house, and move money around, but in the end, there would be huge tax consequences. All the maneuvering might be futile, and not give us any more aid than the standard Stafford loan.
Our only realistic and impacting change would require quitting both our teaching jobs, which would be insanely idiotic, considering our pensions are 7 years out.
I will continue to fill out the FAFSA each year, but expect our EFC will be higher than the cost of attendance. The government will continue to offer Stafford loans, and hopefully we’ll continue to decline them.
Our current goals include growing our net worth despite helping finance our kids’ educations. Hopefully our net worth keeps rising, and the resulting larger EFC just doesn’t matter.