Financial Aid Strategy: How Your Income Affects Your Child's Aid

The FAFSA determines how much you're expected to contribute to your child's education. Understanding how the formula works, and what it counts, can legally improve your aid eligibility by thousands of dollars. Planning should start years before your child's senior year.

How the FAFSA Formula Works

The FAFSA calculates your Student Aid Index (SAI), formerly called Expected Family Contribution (EFC). This number represents what the government believes you can afford to pay. The difference between college costs and your SAI is your financial need.

Your SAI is calculated from parent income (weighted heavily), parent assets (weighted less), student income, and student assets.

What Counts (And What Doesn't

Counted in the FAFSA:

• Parent income (from tax returns)
• Parent assets: savings, brokerage accounts, 529 plans owned by parents
• Student income and assets (weighted more heavily than parents')
• Real estate investments (not primary home)
• Business assets (for larger businesses)

NOT counted in the FAFSA:

• Retirement accounts: 401(k), IRA, Roth IRA balances
• Primary home equity
• Life insurance cash value
• Annuities
• Small business assets (under 100 employees, family-owned)

The Income Assessment

Income is the biggest factor. The FAFSA looks at your income from two years prior (called the "prior-prior year"). For a student starting college in Fall 2026, the FAFSA uses 2024 income.

Assessment rates:

• Parent income above a protection allowance: assessed at 22-47%
• Student income above ~$7,000: assessed at 50%

Strategic implication: Planning income two years ahead of college matters. If you have discretion over when to realize income (bonuses, stock sales, Roth conversions), timing can significantly affect aid.

The Asset Assessment

Parent assets (after an asset protection allowance based on age) are assessed at up to 5.64%. Student assets are assessed at 20%.

Strategic implication: Minimize assets in the student's name. UGMA/UTMA accounts count against the student at the 20% rate.

Legal Strategies to Improve Aid Eligibility

Strategy 1: Maximize Retirement Contributions

Money in retirement accounts isn't counted. Max out your 401(k), IRA, and HSA, especially in the years used for FAFSA calculation. You're building retirement savings while reducing countable assets.

Strategy 2: Pay Down Your Mortgage

Primary home equity isn't counted. Using savings to pay down your mortgage reduces countable assets while building equity. (Caution: this reduces liquidity.)

Strategy 3: Time Large Income Events

If you have discretion over when to realize income (stock options, capital gains, bonuses), consider timing around the FAFSA years. Realize income in non-FAFSA years when possible.

Strategy 4: Spend Down Student Assets

Use student assets (UGMA/UTMA, savings in student's name) for legitimate expenses before filing FAFSA. A student's computer, car, or other needed purchases can come from these accounts.

Strategy 5: Keep 529s in Parent's Name

Parent-owned 529s are assessed at the lower parent rate (5.64%). Grandparent-owned 529s used to be problematic but no longer count as income under new FAFSA rules starting 2024-25.

The CSS Profile: A Different Formula

About 200 colleges (mostly private, selective schools) require the CSS Profile in addition to FAFSA. The CSS Profile is more comprehensive:

• Counts home equity
• Asks about non-custodial parent income
• Considers small business assets
• Looks at siblings' college costs

If your child is targeting CSS Profile schools, strategies differ. Home equity reduction helps less, and you need to plan for both parents' finances in divorce situations.

Common Mistakes to Avoid

Assuming you won't qualify: Many middle-income families assume they won't get aid and don't apply. Always file the FAFSA. It's free and required for most aid, including unsubsidized loans.

Saving in child's name for tax reasons: The "kiddie tax" savings are often outweighed by the 20% FAFSA assessment. Keep college savings in parent's name.

Timing Roth conversions poorly: Roth conversions count as income. A large conversion in a FAFSA year can devastate aid eligibility.

Not comparing net costs: A school with a higher sticker price might have a lower net cost after aid. Compare award letters carefully.

Timeline for Planning

2-3 years before college:

• Start tracking income for FAFSA years
• Accelerate retirement contributions
• Consider asset repositioning

1 year before college:

• File FAFSA as soon as it opens (October)
• Gather required documents
• Research school-specific requirements (CSS Profile)

Senior year:

• Compare award letters
• Appeal inadequate offers (especially if circumstances changed)
• Understand the difference between grants (free) and loans