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Expected Family Contribution De-Mystified (Part 2)

By
Matt Meline

, CFP®

Founder and CEO

Wednesday, June 8, 2022

Estimated family contribution, or EFC, is the amount of money a family is expected to pay for their child’s college. This number is often much higher than parents expect, but don’t panic, there are ways to lower your EFC and increase the amount of financial aid your student may receive.

Taking the steps required to lower your EFC arrive earlier than many parents anticipate. In part 1 of this series, we talked about the base year for filing the FAFSA. This is the year of your student’s high school sophomore-junior year. Working to lower your EFC during this base year will be the most effective in lowering your EFC.

For most families, the primary factor determining your EFC is the taxable parental income. While assets are included in the EFC equations, it is weighted much less than parental income, which can surprise families. This is also an important planning component. Many of our clients avoid saving for college assuming these investments will hurt their chances for financial aid. Income is a much greater determinant than assets so save, save, save!

To lower your reported parental income for the FAFSA, it takes more than simply increasing pretax contributions to retirement plans like 401ks or IRAs. FAFSA requires these additions to be added back to your income, so FAFSA doesn’t recognize these contributions. While it’s generally a good idea to make these contributions, it will not decrease your income in a meaningful fashion.

Roth IRAs or Roth 401ks may be a better option. When contributing to Roth accounts, you do not get a tax deduction on the amounts invested from your income. However, all of the capital gains, dividends, etc. grow tax free in these accounts. Contributions to Roth’s are not added back to your income for the FAFSA.

Some families will use these contributions to fund post-secondary education. Check with your advisor on how this may work for your family.

For other creative strategies one can use to pay for college, please visit our website at pfwplanning.com/college-planning to learn more. Also, check out our book, Empty Nest Full Pockets for a comprehensive look at emotionally and financially preparing your family for the future.

“Registered Representative of Sanctuary Securities, Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory Services offered through Sanctuary Advisors, LLC, an SEC Registered Investment Advisor. PrairieFire Wealth Planning is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.”
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Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. PrairieFire Wealth Planning is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.