Please confirm I am understanding how EFC is calculated

Paying for College
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<p>Thanks to all that have posted great resources here. I (think) I have learned a lot. Am I correct in understanding that the following will impact EFC:
1) as the parent of a rising junior, 2015 will be the first tax return included in the FASFA form,
2) the family farm we inherited is best left as acreage that is leased since the value of it is not an asset for FAFSA purposes but if we sell it, all that cash is assessed as a parent asset (5.6% max). We have the option to sell a few acres as needed or mortgage/line of credit to cover costs as need arises.<br>
3) The rental income from that farm will be assessed as well (5.6% max)
4) maxing out 401k contributions this year reduces cash on hand which increases chance for aid later (better option than putting in 529 this year)
5) in 2015 it is best to put any retirement contributions in a Roth option,
6) it is best to pay cash for that 3rd car we plan to add to the family rather than borrow, even at a low or zero rate, and plan on paying it off over the next 4 years, again to reduce cash on hand or in 529.</p>

<p>I have not seen any info on how HSA contributions impact EFC. Comments on that are appreciated also. </p>

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<p><<<
The rental income from that farm will be assessed as well (5.6% max)
<<<<</p>

<p>I’ve never heard that. why wouldnt it be treated like any other rental income?</p>

<p>since most schools dont meet need, be wary of tying up too much cash.</p>

<p>the schools that give the best aid use CSS profile and they dont treat homes and farms the same way as FAFSA.</p>

<p>having a lowered efc means little to most schools…You may be thinking that if you have a low EFC then schools will give you more money…in most cases…NO.</p>

<p>efc is from a federal calculation. It cant force schools to give you money (that they usually do not have anyway).</p>

<p>fed aid isnt much. federal grants are small and for low incomes.</p>

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<p>Like mom2collegekids said:

See <a href=“Paying for College: How the Financial Aid Formulas Work”>http://www.forbes.com/sites/baldwin/2013/02/28/college-aid-formulas-fafsa-profile-and-consensus/&lt;/a&gt;&lt;/p&gt;

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<p>I’m not sure it is worth it to rearrange your retirement funds from year to year. If you switch to Roth contributions, you are going to have higher income and taxes in that year; 401k you are going to have lower income for tax purposes and in either case you add back in the amount you contribute. Do what makes sense for YOU.</p>

<p>A HSA also gets added back in, so if you have $2500 withheld pre-tax, you have to add that back in on FAFSA. It’s a tax vehicle for savings, but a wash for FAFSA.</p>

<p>Are you going to get the EFC down far enough to qualify for Pell grants? Otherwise most of this isn’t worth it. My EFC would have been about $40k but since I have 2 kids it’s ~$20k. The only thing that does is make the Stafford loans subsidized, but we’re not taking those out. Unless you are talking about getting the EFC down to $3000 or so, it’s probably not worth all that, and if you are talking about a farm and a third car? I don’t think all this juggling is going to help you that much.</p>

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<p>DS is not interested in consensus schools. </p>

<p>You are correct about rental income. We put it the 529 each year so I was thinking of it more as savings than as rental income. </p>

<p>I do understand that low EFC does not always mean greater aid. However I am curious if I am understanding how one could impact EFC. Thanks for the info!</p>

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<p>5) It’s a wash. With a Roth 401k you have a higher AGI. With a traditional 401k you have a lower AGI but the contributions for the year are added back in. </p>

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<p>The equity in the family farm that you own is considered an asset regardless of whether it is leased…or not. The rental income is considered income, not an asset.</p>

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<p>At one point, I ran this form, to see what components do what in the Fafsa EFC calculation. <a href=“http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf”>http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf&lt;/a&gt; </p>

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<p>the rental income that is saved will get counted as income…and also as an asset…just like any other income for the year that is also saved.</p>

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<p>what she means is…her total efc is still 40k, but for each child it is 20k.</p>

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<p>Thanks for all of the responses. This all just reinforces what I have felt for a long time. My best strategy is to get him to prepare enough for PSAT/ACT/SAT to qualify for merit aid. I was hoping for something a little easier to control ;-). </p>

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<p>^^^</p>

<p>That is best anyway, because without strong stats, he wouldnt likely get into the schools that give good aid anyway.</p>

<p>without strong stats, he’d likely get into a good school, but given no aid if his efc exceeds 6000, which is likely anyway. so, you could get your efc down to 10k, and the school may cost $35k, but you may still get nothing, but loans</p>

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<p>There are two good threads with stick pins at the top of this section.</p>

<ol>
<li><p>Automatic full tuition/full ride scholarships</p></li>
<li><p>Schools that cost <$25,000 a year (that is part of the title).</p></li>
</ol>

<p>Read those too.</p>

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<p>“1) as the parent of a rising junior, 2015 will be the first tax return included in the FASFA form,”
Yes, your first FAFSA will be the 2016 FAFSA for the Fall 2016-Spring2017 school year which uses info from the 2015 IRS 1040 series, in particular the AGI on that form with any qualified plan (401K, IRA, HSA) contributions added back to your 1040 AGI</p>

<p>“2) the family farm we inherited is best left as acreage that is leased since the value of it is not an asset for FAFSA purposes but if we sell it, all that cash is assessed as a parent asset (5.6% max). We have the option to sell a few acres as needed or mortgage/line of credit to cover costs as need arises.”
Unless that family farm is also your primary residence, it is a family asset assessed at 5.6%. If you outright borrow against it and put the loan proceeds into a protected plan (HSA, 401K,IRA, ) or pay off your bills, or spend it otherwise, it is an asset, any market value in excess of the borrowed amount spent, or sold. </p>

<p>“3) The rental income from that farm will be assessed as well (5.6% max)”
The rental income from that farm is assessed just like any other income. If it’s in your 1040 AGI, it’s income.</p>

<p>“4) maxing out 401k contributions this year reduces cash on hand which increases chance for aid later (better option than putting in 529 this year)”
Putting money into the 401K or other such qualified plans does decrease your asset value, but the year you make those contributions, they DO NOT reduce income for that year as stated in 1). They are added back to your AGI the year you make the contributions. But, yes, for that year and future years, those amounts sitting in a qualified plans are not included in the assets reported for FAFSA.</p>

<p>“5) in 2015 it is best to put any retirement contributions in a Roth option,”
As others have said, it can be a wash ans the contribution amounts are added back to the AGI that year. In fact because you get a tax deduction for regular IRA contributions, you pay less tax which means your income is higher when you have that tax deduction since the FAFSA income used does deduct the income taxes paid. You should probably make the decision on whether you want an IRA or ROTH based more on other factors than the FAFSA implications</p>

<p>“6) it is best to pay cash for that 3rd car we plan to add to the family rather than borrow, even at a low or zero rate, and plan on paying it off over the next 4 years, again to reduce cash on hand or in 529.”
Again, decisions like that should be made with the whole picture in mind, though, YES, cash on hand is assessed at about 5.6% after the allowance for parents, so if you pay cash for a $30k car which means that much less in cash assets you have, that reduces your EFC by about $1600.</p>

<p>I have not seen any info on how HSA contributions impact EFC. Comments on that are appreciated also.
HSA contributions are treated just like IRA, 401K contributions. The contributions are added back to income the year they are made, but the amounts in the accounts are not included as assets. For HSAs, any qualifed withdrawals are not counted as income. whereas withdrawals from regular IRAs and 401Ks are which can make them a double whammy. You don’t get to deduct them the year you make the contribution but you have to include the withdrawals as income for FAFSA purposes the year you take them out. For Roths that would not be the case except for amounts that are attributed to gains/interest since you do not have to report them for tax purposes, the year you withdraw, other than those earnings.</p>

<p>Your FAFSA EFC represents the minimum amount you will have to pay before getting any federal funds such as subsidized loans, SEOG, workstudy. Most schools also use that amount as the minimum you have to pay before kicking in anything from their own funds in terms of financial aid. So the lower, you get that threshhold, the lower that base will be for you. However, I don’t know a single school that guarantees to meet full need as defined by FAFSA. Those schools that make such guarantees use PROFILE or ask for additional info and may use percentages other than those FAFSA uses, when they come up with their own expected contributions. Many will add back depreciations and deductions on things like rental property, businesses and will also include the primary residence as an asset, something FAFSA does not do. </p>

<p>In addition, to running a FAFSA EFC estimator, I suggest you run the NPCs for a number of colleges that you might have in mind, and also some different types of schools and see what a variety of them calculate as your expected contribution.Some states have funds for financial aid (usually for instate schools only) that also use the FAFSA EFC (California, NY, Colorado as examples, maybe more) that can even double the PELL amount for a zero EFC so that a student with that zero can be getting as much as $12K a year in grants as entitlement based on that FAFSA. But that is with a ZERO EFC. It rises accordingly. </p>

<p>Also be aware, that when a student gets financial aid AND merit awards, the merit money will reduce either the need or the the award, depending upon the school. The more generous school will replace the awards, starting with the self help first; some will also allow it to go to unmet need as defined by EFC, but there is some integration in most all cases. Remember that you have to pay that EFC before getting any federal aid. So, as you can see if you read through some situations on this board, it is entirely possible for a student getting a, say, $10K need based school grant, simply have that replaced by scholarship or other merit award the student gets in the same amount. It’s galling when it happens, but it can and does. </p>

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<p>I want to add, that if you sell while your student is in school and “make money”, that realized gain is considered income the next year, and will reduce your EFC and any need your student might have, so if that is a factor, do consider it. </p>

<p>With college costs as high as they are these days at private colleges, many middle income families are finding themselves qualifying for a bit of financial aid, especially at school with costs exceeding $60K. An EFC of, say $50K, still means the possibility of getting some aid from a school, and at some schools that have merit within need or need within merit, could mean getting a nice grant. You DON"T want to lose even that by doing something that could have been done earlier or later and bringing that EFC up, by simply selling something or cashing in something that comes back to haunt you the next year. I’ve seen families do this without thinking. You sell that piece of property, yes, the realized gain on it gets hit at the marginal rate in terms of EFC. </p>

<p>Also bear in mind that student assets are assessed at 20% (and sometimes more at various PROFILE schools and often carried over for all 4 years the minute they are “caught”), so better your student reimburses your for his/her expenses rather than having it sitting in an account with student name and SSN primary to it. It’s a parental asset, if sitting in a joint account with someone else’s name and SSN primary on it.</p>

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<p>Just remember…even with a LOWISH EFC, you are not guaranteed the aid YOU think you should have. </p>

<p>Most colleges do NOT meet full need for all accepted students. And even if they do, they use their formula to compute your family contribution and need. </p>

<p>The very vast majority of colleges do NOT guarantee to meet full need for all…and they don’t. Your EFC per FAFSA should be viewed as the MINIMUM you will be expected to pay.</p>

<p>And lastly, the EFC is heavily weighted towards income, with assets being next in line. You might be trying these financial gymnastics for no benefit if your income is such that your EFC would be high anyway.</p>

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<p>Just to note that some schools ask in the CSS Profile about cars- as both a discretionary use of your funds and as assets. Same for boats, vacations, costs of private schools k-12, etc. </p>

<p>Many of us held our breaths while waiting for the first year aid for the first kid to come through. if you run the Fafsa estimator (fafsa4caster) you can play with some numbers. Same with the Ifap worksheet. Some say the only real “protection” is money already in retirement funds. </p>

<p>The first real step is to have an idea of what you can pay. And then what extra you could possibly add to that, if needed. I don’t think OP said anything about running the EFC down to 0 or low levels for Pell. We don;t know what income level, other sibs or assets OP has. or very much at all.</p>

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<p>Thank you for all your responses. They are very helpful. 2014 will be our last chance to file a return that will not be reported on FAFSA for at least 10 years so I was trying to see what, if anything , I could do now to put us in the best possible position. Clearly my options are limited and, since I am not ready to sell the farm yet, all I can really do is max out 401k this year and hope for the best. Let’s hope that money is well invested since I will likely be contributing money more towards college than retirement for the next 10 years. I hope they at least go to a school that has colors I like since I will be proudly wearing the sweatshirt regardless! </p>

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<p>Do a search here for posts by a poster named Curmedgeon. He also owned a farm. It most definitely impacted need based aid. But the good news is that his kiddo got some excellent merit awards for undergrad which really helped in terms of easing the finances. His posts might be helpful to you.</p>

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<p>Yes, Curmudgeon didnt qualify for any aid because of his farm/ranch. His D got a full ride to Rhodes College for undergrad and is now in med school.</p>