Paying For College 101: When Your Hard Work Works Against You

The point of working hard and saving for college shouldn’t be having your efforts work against you, yet that is exactly what can happen when you diligently work and save without understanding how the FAFSA works. In a previous post, I described how the Estimated Family Contribution (EFC) is impacted by your income and where you maintain your savings. In this post I’ll discuss…

You may know that approximately 5.65% of the assets held in non-qualified mutual funds, CDs, bank accounts, 529s, brokerage accounts or similarly “included” asset classes are expected to be used towards college cost. This means that for every $100,000 of savings in these categories, you will receive approximately $5,650 less financial aid, and this is before the family income and demographics are added to the calculation. What you may not know is that if these same funds are in the student’s name, that percentage calculation can be as high as 20% with an additional levee of 50% on interest income. That is a minimal hit to your EFC of $20,000 for every $100,000 of savings in the student’s name. Let’s take a look at two students—John and Steve—to illustrate how this concept works.

Let’s say that Steve worked thru high school, saved $50,000 for college, put the money into a savings account and did everything academically to go to the school of his choice. John, Steve’s freshman roommate, has an almost identical home life – except for the work ethic. John didn’t save a penny!

Imagine Steve’s surprise when he finds out that John is getting more financial aid than him. Because John has fewer assets set aside to pay for school and has less money earned, he has a lower EFC. The lower EFC means that more aid is needed based on the FAFSA calculations. The school’s financial aid office will help John supplement his lack of savings and income through the Federal, State and Institutional grants and aid programs. Steve’s earnest effort essentially caused his EFC to be higher. The school interprets this as he needs less aid, and thus he pays more.

That may not seem fair, but that is exactly what happened to a diligent young man going to a well-known North Carolina University this past fall. Fortunately, not all hope is lost for those hard working savers among us. Here are some steps you can take to make certain your hard work doesn’t work against you:

    • Look at how your accounts are set up. If you maintain an account in the student’s name, can you transfer it to someone else with minimal tax implications?
    • Pre-pay for college related expenses from accounts in the student’s name. Such things as computers, car, clothing or other non-perishable items are best paid for before completing your FAFSA. If you are going to spend it, do so before you have to report the asset on the FAFSA.
    • Watch the student’s income. Students may earn up to $4,500 without being assessed. Above that 50% of every dollar earned is included and added to the EFC calculation.
    • Work-study income is not included in the income calculation. If you need to work, consider the benefit of work-study programs.
    • Business owners have some advantages when setting up income deferral programs to minimize their family EFC. There are some quality college planning services that can help in these matters.
    • Move your assets to an investment that is not assessed by FAFSA. The use of an investment professional with experience at college funding and tax matters is essential on this step as investment changes can have cost or negative consequences if you do not consider all relevant matters.

The bottom line is that your efforts do not have to be a detriment to your college funding options if you take the time to understand how to position your hard work. The key is to learn as much as possible and if working with a financial professional, make certain he has the experience or resources to understand this somewhat complex area.

Todd Rhine is the owner of Todd Rhine Planning ( He sports an impressive roll of financial certifications (including CWC, CFP®, RFC®, CLU, ChFC, IAR), and we asked him to write a series of articles related to financing college after seeing some of his results.