There are four components of EFC: parent income and assets, and student income and assets. Each is assessed slightly differently in the formulas. Since parents generally have substantially more income and assets than students, their portion of the EFC gets considerably more attention. Let’s look at the student side because it can cause unexpected additions.
Students have a flat income protection allowance of $6,420 for the 2017-2018 FAFSA (the one you’re filling out now). That’s roughly equivalent to likely earnings from an after school and summer job. Anything above that is assessed at 50%. So a student who earned $6,000 in 2015 would have a contribution from income of $0; a student who earned $7,000 would have a contribution of $290, and every additional dollar adds 50 cents.
There’s another factor in student income, though: Any money that anyone else gives the student—funds from a grandparent’s 529 plan, money from a non-custodial ex-spouse, etc.—also counts as student income. What that means is, for aid-eligible students, these income sources should be reserved for later years of college to the extent that, combined with the student’s income, they exceed $6,420. This is especially true now that the FAFSA is using prior-prior year income data: now a student can access this type of money beginning January of junior year of college (assuming graduation in 4 years) without having to report it on the FAFSA.
What about student assets? There is no asset protection allowance for students, and those assets are assessed at 20%. Compare that to a parent’s assets and you’ll see a big difference: $5,000 in the parents’ checking account yields no increase in EFC (assuming no other assets, or $282 if they’ve exceeded the asset protection allowance), but the same $5,000 in the student’s increases EFC by $1,000. And assuming that a student just finished a summer job and hasn’t spent all their money, they will get dinged in the formula for having those earnings. But remember, having $5,000 increases EFC by $1,000 so the student is still ahead by $4,000.
What can you do with student income that’s now sitting in the bank (i.e., it’s now an asset) to avoid having it assessed in the aid formulas? First, remember that assets are assessed on the day that you file the FAFSA, so you need to act fast. There are a few possibilities:
- Open a Roth IRA and fund it. That allows the student to retain the money but not have it count. Students can contribute the lesser of $5,500 or their total earnings.
- On the assumption that parent assets are more advantageous than student assets, have the student pay some of their own costs this fall and reimburse them after filing the FAFSA. Even small purchases like yearbook orders, activity fees and school supplies can add up quickly.
- Deposit the money into the student’s 529 account. Most states allow anyone to contribute to a parent-owned 529 account. This preserves the money’s immediate availability for college and makes it a parent, not a student, asset and therefore subject to preferential treatment. Even better, the student might receive a state tax deduction for the contribution, depending on the plan.
And of course, remember what counts and for whom:
- Retirement accounts don’t count
- 529 accounts are parent assets
- 529 accounts owned by someone other than the parent don’t have to be reported as assets, but when money comes out they are reported as student income
- UTMA or UGMA accounts are student assets