Education · Financial Aid

Financial Aid: Student’s Contribution

The FAFSA’s Expected Family Contribution (EFC) for college expenses has two components. I dug previously into the Expected Parental Contribution (EPC) and how to minimize it. Today, we’ll look at the second component, the Expected Student Contribution (ESC). Obviously, the expectation for how much a student contributes to their own education is higher than for the parent. By understanding the ESC, we can start to see strategies for how to reduce the expectation, as well as potential mistakes that could reduce a student’s access to financial aid.

Dependent and Independent Students

There are three types of students to consider when calculating the ESC:

  • Dependent students
  • Independent students no dependents, other than a spouse
  • Independent students with dependent(s), other than a spouse

Any of the following conditions will classify the student as independent:

  • Older than 24 years of age
  • Married
  • Graduate student
  • Active duty US Armed Forces (other than training)
  • Veteran
  • Dependent children
  • Orphaned after age 13
  • Emancipated minors
  • Homeless or unaccompanied youth

Most undergraduate students applying for financial aid are dependent students, but not always. As an example, my wife and I were both students when we got married, making it unnecessary to continue to harass our parents for FAFSA details.

The following starts with the assumption that the student is a dependent student. I interject the ways that an independent student will differ from the dependent students, when necessary.

Expected Student Contribution: Income

A student’s Total Income includes:

  1. Adjusted gross income from the student’s 2019 tax return (assuming they filed). This is also known as the “prior, prior year”, or PPY. If the student didn’t file, then this is what would have been reported, had they filed.
    • Independent students include their spouse’s income in their AGI.
  2. Untaxed income and benefits. It’s probably unlikely, but this includes contributions to tax-deferred plans made in 2019 (e.g. 401(k), deductible traditional IRAs, etc.), tax exempt interest, bills paid on the student’s behalf, etc.
    • Independent students report 529/Coverdell ESA distributions made on their behalf.
    • Withdrawals from the student’s Roth IRA for school are included here.
  3.  

A student can deduct the following from their Total Income:

  • American Opportunity Tax Credit or Lifetime Learning Tax Credit reported on the student’s tax return (this generally applies only if the student is supporting themselves)
  • Child support paid because of divorce or a legal requirement
  • Money earned from Federal Work-Study programs or cooperative education programs
  • Taxable college grant and scholarship money reported to the IRS as income

Like the parental contribution, student contributions have an Income Allowance, which includes:

  1. Total income tax (less credits) paid by the student in 2019.
    • Independent students include any tax paid by their spouse.
  2. State and other tax allowance. This depends on the student’s home state and is a percentage multiplied by total income. In general, the percentage used in the ESC is equal to or lower than the percentage used in the EPC. For example, in Virginia, the EPC multiple is as high as 6%, while the ESC percentage is only 4%.
    • Independent students with dependent(s) other than a spouse use the EPC percentage
  3. Social security taxes
    • Independent students include social security taxes paid by their spouse.
  4. Income protection allowance of $6,970.
    • Independent students with no dependents other than a spouse: if the spouse is working, the allowance is $17,380; if the student is single, separated/divorced/widowed, or the spouse is also enrolled as a student, the allowance is $10,840.
    • Independent students with dependent(s) other than a spouse have an income protection allowance similar to the EPC, but with slightly higher values.
    • One-parent families and married students where both are working, receive an additional allowance of up to $4,000.
  5. If the parents’ Adjusted Available Income was negative, include it here as a positive number.

The student’s Available Income is Total Income – Income Allowance. 50% of a student’s available income is expected to go for their education expenses.

Now let’s take a look at the impact of student-held assets.

Expected Student Contribution: Assets

Student assets are similar to parental assets, including:

  • Checking and savings accounts
  • Investment accounts, including: taxable brokerage, trust funds, UGMA/UTMA, money market funds, CDs, stocks, bonds, etc. Retirement account balances aren’t included.
    • 529s/Coverdell accounts owned by dependent students are included as parent assets, not student assets.
  • Real estate, excluding the student’s home
  • Business and/or farm values.

To compute the Contribution from Assets:

  1. Sum up cash, savings, and checking accounts
  2. Add net worth of investments and real estate
  3. Add business and/or investment farm values
    • Independent students have an asset protection allowance, similar to what’s used in the EPC
  4. Multiple the result by 20%
    • Independent students with dependent(s) other than a spouse, multiple by 7%

You now have the total Contribution from Assets.

Total Expected Student’s Contribution

To determine the final Expected Student Contribution, add Available Income to Contribution from Assets.

  • Independent students with dependent(s) other than a spouse, use the same formulas as the EPC. This depends on how much your income and asset contribution. It varies from -$750 at the low end, to 47% if the income and assets exceed $35,100.

Ta-dah! You now know your Expected Student’s Contribution!

Double Accounting

If you’re not careful, money can be counted as both Available Income and Available Assets. This happens if a student has earned income that is then stored as an asset. The income is assessed both at the 50% rate of income, and also at the 20% rate as an asset. For this reason, I’ll be encouraging my daughter to make her 2021 Roth IRA contribution before we fill out the FAFSA application. This removes the money from the asset category for this year, as well as for future years. She could immediately withdraw the contribution from her Roth IRA without needing to report it as income on her next FAFSA.

Grandparent 529s and Parental 529s for Independent Students

529s generally receive favorable treatment. As parent assets, they are assessed no higher than 5.65%, even if the owner is the dependent student. However, if the account owner is a grandparent, distributions are treated as untaxed student income and assessed at 50%. Because the untaxed income won’t hit the FAFSA until two years later, it’s better to use grandparent 529s after January 1st of the student’s junior year, assuming a typical 4-year plan.

Summer School

The EFC calculation assumes that a student will attend school for no more than nine months of the year. If a student decides to attend more, say taking classes during summer term, then the EFC contributions are roughly multiplied by 4/3. There are some additional income allowances that apply, as well.

Observations

  • As with the EPC, contributions to tax-deferred retirement accounts count against your aid eligibility. I suspect the rationale is that if you’re a student, retirement savings should come second to school. Unlike with the EPC, I can get behind this rationale.
  • Timing is important when paying expenses, and can vary based on the account owner. Use parent- and student-owned 529s first, then grandparent 529s. Pay expenses up front with student assets (assessed at 20%), then reimburse the student after filling out the FAFSA from 529s and parental assets. 
  • A student can work some, but only to a point without adversely affecting aid in a significant way. I hope to cover this in a future post.

Conclusion

I hope digging into the student contribution was helpful.

How much do you expect your student to contribute to their own education expenses? Have any good stories or ideas about the student contribution? Leave me a comment.

Hasta luego!

6 thoughts on “Financial Aid: Student’s Contribution

  1. This makes my head spin. I’ve bookmarked it for when we inevitably cross that path.

    I’ve probably shared this story before, but my brother and his wife got married near the FAFSA deadline for the prior academic year (maybe July). I have a picture of them filling out the FAFSA in my parent’s house in their wedding tux & dress. Pretty hilarious. It paid off though, since they got Pell grants for the prior academic year.

    Remind me again. Are you currently getting aid? If so, in what form? Or is this series of posts more of an exploratory exercise?

    1. No aid. We qualify for unsubsidized loans but haven’t taken them yet. Things might change next year with two kids in college, but probably not. The university’s COA is so low that there is no “need” at this point. This is definitely exploratory on my part, making sure I understand it all.

  2. I think we’re hosed. I made a mistake of putting a lot into a UGMA thinking the tax advantage would be helpful. But the distributions from these fund (another mistake of not investing them in tax efficient ETFs) meant I needed to pay a good bit of taxes on them anyways. And now they count as child vs parent assets for aid calcs. On top of that, between stuff we have in 529 and parent taxable accounts, the numbers push us into the range of needing to pay full freight on our own. The prepared (despite some mistakes) get no help, which I guess is fine.

    1. Depending on the university your child heads to, you may think you won’t get aid because there is no “need” but you still might get non-need aid.

      I’m curious about the UGMA approach you took. It seems from a previous comment that you were against making a matching Roth contribution, but it seems like it’s pretty much the same, gifting resources to your child. The Roth does require the child to actual earn money, but it has none of the tax consequences that a UGMA can have.

      1. My UGMA was a mistake. I didn’t research the tax laws properly (e.g. how much of the distributions/gains is claimed against the child vs parent’s tax rate) when I did it. Matching Roth contributions on a kids account is better than a UGMA but I earmarked my UGMA for college expenses. My kid has to worry about saving for his own retirement, hence my aversion to it but there’s nothing wrong with it if you’re that generous.

        For sure, I’m still going to try for non-need based college assistance.

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