Applying for financial aid starts with completing the Free Application for Federal Student Aid (FAFSA). The FAFSA form contains questions about your and your family’s income and assets. How is this information used to determine how much financial aid you will receive?

The FAFSA doesn’t actually calculate the amount (or determine the type) of financial aid you will get from any college. Instead, the FAFSA gathers information about your and your family’s income and assets, as well as other data about you, and, through a formula defined by law, calculates your Expected Family Contribution or EFC.

While the term “Expected Family Contribution” sounds like the amount your family will be “expected” to pay for college, your EFC is really a number colleges use to estimate how much financial aid you would need to attend their school for a year. Colleges subtract your EFC from their cost of attendance to determine your financial need. The financial aid you actually receive from a college could be higher or lower than your EFC, depending on the college’s financial aid policies.

HOW THE FAFSA LOOKS AT INCOME

The FAFSA requires parents and students to report income from two years prior to the school year for which financial aid is being requested. For example, if you plan to start college in the fall of 2023, you will provide income information from your 2021 tax return or W-2 tax form.

What INCOME IS COUNTED IN THE FAFSA FORMULA?

Here are some of the types of income the FAFSA formula considers. (This is not an exhaustive list. Be sure to read the FAFSA directions carefully and review all examples provided.)

• Income from work
• Proceeds from asset sales, dividends, and capital gains
• Retirement fund withdrawals
• Payments to tax-deferred pension and retirement savings plans
• Child support received
• Untaxed portions of IRA distributions and pensions
• Veterans noneducation benefits
• Workers’ compensation
• Disability benefits

How much of your income are you expected to spend On college?

After deducting amounts for living expenses and tax payments, the FAFSA formula determines how much of your income is “available” to spend on college. This amount is called your “adjusted available income.”

The FAFSA formula doesn’t expect students or families to use all of their adjusted available income to pay for college. The formula allocates 50 percent of a dependent student’s adjusted available income to cover college expenses and anywhere from 22 to 47 percent of parents’ available income. The higher your parents’ income is, the more of it will count towards your EFC.

What INCOME is NOT COUNTED IN THE FAFSA FORMULA?

As mentioned above, some income you and/or your parents earn is “protected” to cover living and other expenses. This is called the Income Protection Allowance and it changes each year. The amount also differs depending on your family size and whether you are an independent student (living on your own or supported by a spouse) or a dependent student (supported by parents).

For the 2023-2024 FAFSA, up to $7,600 of a dependent student’s income is protected — and thus not considered in the EFC. For parents, the income protection allowance depends on the number of people in the household and the number of students in college. According to the EFC Formula Guide for the 2023-2024 FAFSA, the income protection allowance for a married couple with one child in college is $21,200. These figures are different for independent students. Families may also be able to deduct employment expenses and tax payments from their total income.

Some types of income are not considered in the FAFSA formula, including but not limited to:

• Loan proceeds
• Grants and scholarships used for college expenses
• Withdrawals/distributions from 529 college savings plans
• Welfare benefits
• Work-study payments
• Veteran’s Administration education benefits
• Tax credits including the Additional Child Tax Credit
• Employer-provided tuition assistance
• Employer contributions to pension plans, retirement savings plans, and health benefits

What INCOME Determines a Zero EFC?

In some cases, a family’s income can result in an EFC of zero. If your EFC is zero, this doesn’t mean that college is free. Many colleges will not meet 100 percent of a student’s financial need, and financial aid packages may include loans that a student must repay. However, students with a zero EFC may qualify for the maximum federal Pell Grant, which is $7,395 for the 2023–2024 award year (July 1, 2023, to June 30, 2024).

To qualify for a zero EFC on the 2023-2024 FAFSA, a family with dependent students can’t make more than $29,000 annually. Parents must also meet one of the criteria below:

• The parents did not file a Schedule 1 with their tax form or were not required to file an income tax return
• Anyone in the parents’ household received benefits from a federal benefits program (such as food stamps or free and reduced-priced lunch)
• Either of the parents is a dislocated worker

INCOME AND THE CSS PROFILE

About 260 mostly private colleges require the CSS Profile aid application in addition to the FAFSA. These colleges may count more sources of income, such as home equity, retirement accounts, income from non-custodial parents, and all income earned by students.

HOW ARE ASSETS COUNTED ON THE FAFSA?

The FAFSA also looks at assets belonging to students and parents. For more information about how assets impact financial aid, see FAFSA Assets.

For guidance on completing the FAFSA, see this helpful video from the  U.S. Department of Education.