This is a quick refresher on how the FAFSA works. The most important part of how it works is this: The FAFSA calculates your Expected Family Contribution. It is not the tooth fairy. The schools to which you apply use your EFC to determine your aid package. The FAFSA does not obligate them to meet your need; however, for purposes of Title IV funds (federal student aid), it does obligate schools to use standard criteria in packaging aid awards. The second most important part is this: much like preparing your taxes, you could complete the FAFSA without knowing anything about it, but you might get better results with some understanding of how it works.

The FAFSA looks at four “buckets” to calculate your EFC:

  • Parent Income. This is almost always the biggest factor in your EFC. The EFC looks at all income, including untaxed and unearned income. Several allowances are applied against income, one of which is an allowance for actual federal taxes paid and a calculation for state and Social Security taxes paid. There is also an income protection allowance based on family size and number of college students in the household. “Available Income” is then assessed in various brackets– like taxes– starting at 22% and going up to 47% for Available Income above $33,600. That means that every incremental dollar of income is likely to increase your EFC by 47 cents.
  • Parent Assets. These generally receive the most favorable treatment in the FAFSA. Assets above the Asset Protection Allowance (which can range from $700 to $18,900 this year) are assessed at 5.64%. That means that every incremental dollar of parent assets increases EFC by no more than 5.64 cents. Parent assets include checking and savings accounts, 529s, taxable investment accounts, and illiquid investments such as rental properties. Consumer debt does not subtract from assets. Retirement accounts, insurance and home equity don’t count in the FAFSA.
  • Student Income. Students receive allowances for taxes paid and an income protection allowance of $6,660 this year to compute Available Income. Available Income is assessed at 50%. Although this is higher than the parent rate, it’s unusual for a student to earn more than $6,660 so it tends to be moot except in unusual circumstances.
  • Student Assets. Students do not receive an Asset Protection Allowance, and student assets are assessed at 20%. That means every dollar in a student’s checking, savings or UTMA account increases the EFC by 20 cents.

The other factor to remember with the FAFSA is that the income bucket comes from prior data– 2017 income and taxes will be used for the 2019-2020 FAFSA– whereas assets are calculated based on current account balances. Families who are planning for this year’s FAFSA can really only move the needle on the asset side of the equation, with the biggest bang-for-the-buck coming from reducing student assets. Families with a few years to go have more planning options.