FAFSA Basics

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.

3 thoughts on “FAFSA Basics

  1. Hello. Thank you for your help. I have 2 questions.
    1. I have about 23k in a brokerage account, the rest are retirement accounts Roth ira. is it a good idea to turn anything above our asset protection limit (for us a lousy 13k)
    in this brokerage account into something else, like a roth or other option? and if so? would I ever be able to access it as emergency funds once it IS a roth?

    2. There is a question on the fafsa (not the AGI question) that I do not know how to answer in my husbands case:
    How much did your Parent 1 (father/mother/stepparent) earn from working (wages, salaries, tips, etc.) in 2017?

    He is a sole proprietor, not an employee. He had a loss of -12,545
    how do I enter this to answer such a question? it is phrased as though it is for employees only.

    Thank you so very much.

    1. If you are going to make 2018 retirement contributions anyway, do it now (from the brokerage account) to get those assets out of the formula. However, once you make the retirement contributions, they’re in the retirement account. Technically you could do a “correction” and take them out next year, though. And you do have some access to Roth funds. Remember though that your assets are only assessed at 5.64%, so if you and your husband each took $5500 for Roth contributions, you’re only reducing your EFC by $620, and you have $11,000 less available to spend for college (or anything else). Re negative income, you should enter it as negative although word on the street is it takes some jiggering to get the FAFSA to accept a negative number– your best bet may be to call the help line for assistance on that.

      1. hi and thank you! Yes I was on the phone with Fafsa help today, and they really could not help me very much with that question about “earned income – and they do not give very good specific information about that that figure actually “means” or how to source it setting aside a simple w2 type employee work – It is literally on my tax return as (-12000) which was prepared by my accountant. I may possibly enter zero? It is an odd question I feel on the form considering the AGI is required, to then break down which one of earned what. His business expenses at the moment have exceeded his income from it, its has been really hard supporting our family plus his losses. I will likely call back and ask them again. I can update you with how they advise me.

        As for the brokerage account, I haven’t made any ira contributions in many many years, nor to the brokerage account! Made those years ago when we were young before children came along. The brokerage accounts are in my husband’s name one is 8837, the other 24098.
        It is unbelievable to me that the protected asset limit for us is 13K, and that would cover 2.5 – months expenses! Last year the protection would have been 23k…..I read the explanations about how this is calculated, but it still makes no rational sense to me at all. A better formula would be an average of american family household expenses, multiplied by 6 months (recommended rainy day fund). As if education costs aren’t hard enough, the policies of late make it so much harder, instead of easier, and it absolutely baffles me (and also you I am sure). It is kind of you to allow us overwhelmed parents to seek you out. Truly it is and I thank you!

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