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Money Moves To Make Before You File the FAFSA

Each year, families across the country navigate the Free Application for Federal Student Aid (FAFSA), a crucial step in securing financial aid for college. The FAFSA —a gateway to scholarships, grants, loans and work-study funds from the federal government and individual colleges — is a pivotal element in making higher education accessible and affordable.

When you file the FAFSA, you must answer questions about your income and financial assets. These questions play a role in determining your eligibility for need-based financial aid.

You may be able to increase your eligibility for need-based aid by making certain money moves before completing the FAFSA. With recent changes to the FAFSA process and criteria, approaching this application thoughtfully and strategically is more important than ever.


Recent FAFSA Changes

Recent updates to the FAFSA process streamlined the application, reducing the number of questions and altering how financial information is gathered and assessed.

One change is the shift from Expected Family Contribution (EFC) to the Student Aid Index (SAI). This change is primarily a rebranding to clear up confusion because many students thought the EFC was what they were expected to pay.

However, the SAI, like the EFC that preceded it, is simply a figure colleges use to calculate how much aid a student is eligible for. A negative SAI indicates the student has a higher financial need.1


How the SAI Is Calculated

The SAI takes into account both a parent contribution (if the student is a dependent) and a student contribution and combines them. While the formula is complicated, it essentially works like this:2


Step 1: Calculate the Parent Contribution

The parent who provided the most financial support for the student over the last 12 months must be the FAFSA contributor, regardless of who the student lived with.

To calculate the parent contribution:

1. Calculate the Parent Available Income (AI). Parent AI includes:

  • Start with total annual income. This information can be found on the parent’s most recently filed federal tax return. It includes the adjusted gross income (AGI) shown on the tax return but adds back certain deductions and income sources that aren't taxable, such as deductible IRA contributions, tax-exempt interest income, untaxed portions of retirement account distributions, and excluded foreign income.
  • Subtract parent income offsets. Some income on the tax return isn’t included in the SAI calculation, including grants and scholarships reported as income, education credits and income from federal work-study programs.
  • Subtract allowances against parent income. Allowances include U.S. income tax paid, a payroll tax allowance, an income protection allowance (i.e., money needed to cover living expenses), and an employment expense allowance (i.e., extra expenses when both parents work, such as housekeeping services, transportation, and meals away from home). If both parents work (or in one-parent families), it's 35% of their combined income, or $4,000, whichever is less. If only one parent works in a two-parent family, then the employment expense allowance is zero. The formula doesn't differentiate between working part time or full time, or working away from home versus working from home.

    Other than the income tax paid, these allowances are determined by a table and based on income and family size.

2. Calculate the Parent Contribution from Assets (PCA). PCA includes:

  • Total parent assets. This includes all cash, money in savings and checking accounts, real estate, investments and the value of businesses owned. It does not include the primary home or retirement accounts.
  • Less an asset protection allowance. The asset protection allowance is based on the age of the older parent. It sets aside some assets for emergencies.
  • Multiply the current total by 12%. The formula allows most of the parents' remaining assets to be left out of the calculation.

3. Calculate Parent Adjusted Available Income (PAAI). Add Parent AI to the PCA to determine the PAAI.

4. Calculate Parent Contribution. Insert the PAAI into a table to calculate the parent contribution.

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Assets owned by the child count against you more than assets owned by parents, so consider having your child pay more expenses from their savings.

Step 2: Calculate the Student Contribution

To calculate the student contribution:

1. Calculate the Student’s Contribution from Income. This includes:

  • Start with total annual income. This information can be found on the student’s federal tax return (if any). It includes their AGI plus deductible payments to IRA accounts, tax-exempt interest income, untaxed portions of retirement account distributions and excluded foreign income.
  • Subtract student income offsets. Offsets include grants and scholarships reported as income, education credits and income from federal work-study programs.
  • Subtract allowances against student income. Allowances include income tax paid, a payroll tax allowance, an income protection allowance (i.e., money needed to cover living expenses) and an allowance for negative parent income. Other than the income tax paid, these allowances are determined by a table and based on income and family size.
  • Determine Student’s Contribution from Income. Take 50% of the resulting figure to determine the student’s contribution from income.

2. Calculate the Student Contribution from Assets. This includes:

  • Start with total student assets. This includes all cash, money in savings and checking accounts, and investments.
  • Multiply the current total by 20%. Multiply total student assets by 20%.

3. Calculate Student Contribution. Add the Student Contribution from Income to the Student Contribution from Assets to get the Student Contribution.

Step 3: Calculate SAI

Add the Parent Contribution to the Student Contribution. The resulting sum is the family’s Student Aid Index. Colleges will use this number to determine how much financial aid to offer your family.


Strategic Money Moves

You may be able to maximize your eligibility for need-based financial aid by considering certain financial strategies. Here are a few ideas to discuss with your financial advisor.

  • Minimize reportable assets. Certain assets, such as IRAs and 401(k)s, are not reported on the FAFSA while checking and savings accounts are. Before filing, consider maximizing non-reportable categories. For example, you might max out your retirement contributions.3
  • Make planned home upgrades. The net value of the family’s principal residence isn’t included in reportable assets on the FAFSA. If you're planning significant renovations, paying for them before filing the FAFSA can reduce your reportable cash assets. This doesn't mean spending recklessly but rather timing necessary expenses to align with your FAFSA preparation.
  • Lower your reportable income. Strategies such as avoiding taking extra distributions from retirement accounts or deferring bonus payments can temporarily lower your reported income, potentially increasing aid eligibility.4
  • Pay down consumer debt. The FAFSA does not offset income or assets by unsecured consumer debt. Using extra money to pay down outstanding credit card debt can make the money disappear for FAFSA purposes while saving money on interest.5
  • Pay down your mortgage. The FAFSA doesn't consider equity in your family home, so using extra cash to pay down your mortgage can maximize your financial aid.6 This strategy doesn't work for vacation homes or investment properties, though, as these assets are considered part of your available assets in financial aid calculations.
  • Spend down the child’s savings. Since assets owned by the child count against you more than assets owned by the parent, consider having your child pay more expenses from their savings. This can include car payments, insurance premiums, clothing, etc.

Remember that the FAFSA income calculations are based on the “base year,” which is two years before the start of the academic year for which you are requesting aid.7 For example, the 2024-2025 FAFSA relies on your 2022 tax return; 2022 is the base year.

Asset calculations are determined at the time of application. It’s important to time these strategies right to maximize your financial aid eligibility.

The key is to start thinking about the FAFSA early and work with a financial advisor who can help you identify strategies that fit your unique circumstances and long-term goals. With thoughtful preparation, you can open the door to valuable financial aid opportunities for your child's education.

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information. Diversification does not ensure against loss.

  1. U.S. Department of Education, “What Is the Student Aid Index (SAI)?” accessed May 6, 2024. Back
  2. Meredith Clement, “Here’s How Colleges Calculate Your SAI,” Massachusetts Educational Financing Authority, accessed May 6, 2024. Back
  3. Montgomery County Public Schools, “Student Aid Secrets: Minimize the Impact of Assets,” accessed May 6, 2024. Back
  4. Ingrid Case, “FAFSA Tips: These 7 Moves Should Help You Score More Financial Aid,” published October 1, 2021, accessed May 6, 2024. Back
  5. The Princeton Review, “How to Represent Your Family’s Assets on the FAFSA,” accessed May 6, 2024. Back
  6. Ingrid Case, "FAFSA Tips: These 7 Moves Could Help You Score More Financial Aid," Money, published October 11, 2021, accessed May 6, 2024. Back

  7. FinAid.org, “Maximizing Your Aid Eligibility,” accessed May 6, 2024.

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