How a Millionaire Retiree Could Get as Much Aid for College as Someone Who’s Broke

Before we start, a couple disclaimers

  • I am not some kind of FAFSA professional. I’m merely a guy (who doesn’t even have any kids) who reads the relevant documents
  • I will be discussing how to get a zero Expected Family Contribution (EFC), but that doesn’t guarantee a zero out of pocket cost
  • Some colleges (particularly the expensive ones) do not use the FAFSA formulas
  • Some colleges do use the FAFSA formulas but practice “gapping”, which means that they acknowledge you should only pay $X according to FAFSA but don’t provide enough aid, meaning you have to pay more than $X
  • I’m sure that some readers will be disappointed that I am writing a post that informs how wealthy individuals could get a lot of aid when they clearly do not need it. And that’s certainly true. But now because of my post you know that this problem exists, and you can lobby for change.
  • This content was based off of a couple threads at the Mr Money Mustache forums involving madamwitty, Sol, DoubleDown, teen persuasion,  myself, and some others

The Free Application for Federal Student Aid (FAFSA) has this interesting loophole that most people aren’t aware of–one that potentially allows millionaire retirees’ children to go to college for free. I will be focusing on dependent students for this post.

The FAFSA form asks a bunch of questions about the student’s, and if the student is a dependent, the parents’ income and wealth. All these numbers are shoved into a formula to calculate the Expected Family Contribution (EFC).

Parents Total Income (PTI) = Adjusted Gross Income (AGI) + other untaxed income as determined on the FAFSA form
Parents Allowances (PA) = Allowances for taxes paid + Income protection allowance + employment expense allowance
Available Income (AI) = PTI – PA

Contribution from Assets (CFA) = 0.12*(Sum of assets – education savings and protection allowance)

Adjusted available income (AAI) = AI + CFA

If the parents' AAI isThen the parents' contribution from AAI is
less than -$3409-$750
-$3409 to $15,90022% of AAI
$15,901 to $20,000$3498 + 25% of AAI over $15,900
$20,001 to $24,100$4523 + 29% of AAI over $20,000
$24,101 to $28,200$5712 + 34% of AAI over $24,100
$28,201 to $32,200$7106 + 40% of AAI over $28,200
$32,201 or more$8706 + 47% of AAI over $32,200

EFC = AAI / number of students in college

(I’ve made up some of the acronyms above for brevity)

This formula is similar to income taxes – you start with AGI, add in some other income, subtract allowances which are like the standard deduction and exemption, and then contribute a percentage of the amount left over, on a progressive scale. You can find the tables for the income allowances in the EFC formula PDF.

I do want to call attention to two things

  • The top rate on income is 47%, while the top rate on assets is 12% * 47% = 5.64%. If you are earning enough income to be in this top bracket for the EFC formula while your kid(s) go)es( to college, your effective “marginal tax” bracket for wages is FICA + federal + state + 47%. Under most circumstances you’d have to be in the 25% federal income tax bracket to be in the top EFC bracket. Assuming a 6% marginal state income tax rate, your effective “marginal tax” is 85.65%. Talking about demotivating, huh?
  • The FAFSA includes some untaxed income in AI, including distributions from Roth IRAs

Of course, the focus of this post is on how to avoid this. There are two exceptions to this formula.

The first exception is to ignore ALL assets from the EFC calculation. From the EFC formula document,

For the 2016–2017 Award Year, a dependent student qualifies for the simplified EFC formula if both (1) below and (2) on the next page are true:

  1. Anyone included in the parents’ household size (as defined on the FAFSA) received benefits during 2014 or 2015 from any of the designated means-tested federal benefit programs: the Supplemental Security Income (SSI) Program, the Supplemental Nutrition Assistance Program (SNAP), the Free and Reduced Price School Lunch Program, the Temporary Assistance for Needy Families (TANF) Program1, and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC);
    the student’s parents:
    • filed or were eligible to file a 2015 IRS Form 1040A or 1040EZ,
    • filed a 2015 IRS Form 1040 but were not required to do so*, or
    • were not required to file any income tax return;
    the student’s parent is a dislocated worker.

  2. The combined 2015 income of the student’s parents is $49,999 or less.
    • For tax filers, use the parents’ adjusted gross income from the tax return to determine if income is $49,999 or less.
    • For non-tax filers, use the income shown on the 2015 W-2 forms of both parents (plus any other earnings from work not included on the W-2s) to determine if income is $49,999 or less.

    *Applicants who are not required to complete an IRS Form 1040, but do so solely to claim an educational tax credit are considered eligible if they meet all the other requirements for the simplified EFC formulas.

Note: The student also has an EFC with a simplified formula, meaning assets are ignored but his/her income is also contributed (at the student rate of 50%).

We’re going to focus on the 1040A/1040EZ option. Note that the threshold of $49,999 is applied to AGI, not the AI from the EFC formula. Remember, the AI includes nontaxable income such as Roth IRA distributions, while your AGI does not.

What requires the 1040? Here’s a non comprehensive list

  • Schedule A (itemized deductions)
  • Schedule C (self employment)
  • Schedule D (capital gains and losses, but NOT capital gains distributions or dividends)
  • Schedule E (rental income)
  • Foreign tax credit (which is triggered by holding international funds, among other things)
  • You itemized your deductions last year, claiming state income taxes, and received a 1099 G which you need to report
  • Form 8889 (HSA contributions* and distributions)
  • Deduction claimed for alimony paid

*I’m fairly certain contributions made by your employer through payroll shouldn’t trigger this form because it automatically gets deducted from your W-2, but this form seems to imply otherwise. I didn’t read too much into it though.
*Also, you can still have an HSA while your kid is in college. You just can’t distribute funds from it (or contribute? – if you can clarify one way or another, please leave a comment below!)

Now I know that unfortunately for a large section of the FIRE community, Schedule E will automatically disqualify them. Sorry!

A couple things on the above list seem optional. For example, what if I were to simply not claim the foreign tax credit even though I am eligible to do so? I’m pretty sure it’s legal for a taxpayer not to claim all deductions and credits they’re entitled to. Again, I am not a lawyer, but this could be a viable strategy for some people.

The fact that the 1040A allows you to report dividends and capital gains distributions, but not capital gains or losses (triggered by sales of your capital assets) creates some interesting incentives. I’ve always advocated for low cost tax efficient index funds. Tax efficient funds produce no capital gains. But here, that capital gains distribution is a way for you to “sell” shares from your portfolio (because a capital gains distribution drops the value of your remaining shares by an equivalent amount) without disqualifying yourself from the simplified EFC formula. Additionally, instead of investing in a total stock market index fund, a dividend focused index fund could make more sense because the dividends are again a way for you to “sell” shares from your portfolio (because a dividend also drops the value of your remaining shares by an equivalent amount) without disqualifying yourself from the simplified EFC formula.

Just how big is this effect? I don’t know. It depends on your specific numbers as to whether you should change your investing strategy. I doubt it would make sense for you to sell your current shares for a gain and replace them with  less tax efficient or dividend focused funds, but it might make sense for you to buy such funds after your next tax loss harvest.


And now for the headline: the automatic zero EFC:

Certain students are automatically eligible for a zero EFC. The requirements for receiving an automatic zero EFC are the same as those for the simplified EFC calculation except for these differences:

  • The income threshold* for the parents of dependent students and for independent students and their spouses is $25,000 or less (for an automatic zero EFC) instead of $49,999 or less (for the simplified EFC calculation), and

  • For independent students, those without dependents other than a spouse cannot receive an automatic zero EFC.

*Later in the document it explicitly states that for tax filers, income is again defined by AGI.

So an early retiree with millions of dollars in assets could end up with a zero EFC as long as they qualified to file a 1040EZ or 1040A, and kept their AGI under $25,000.

For those of you with pensions, this might be impossible simply because your pension income exceeds $25,000. Sorry!

For those of you relying on 401k’s, IRAs, and taxable investment accounts, the income requirement is certainly doable. If you’re like Mr Money Mustache, whose family can live on $25,000 a year, it’s no sweat. And even if you spend more than $25,000 a year, remember – Roth IRA and Roth 401k distributions are not included in AGI, even though they are included in the standard EFC formula. It’s the requirement that you’re eligible for a 1040EZ or 1040A that produces challenges not often seen by early retirees.


If I were a parent with a toddler, would I change my financial plans around these rules? Probably not. A lot can change by the time that kid goes to college. But if I were a parent with a teenager bound for college in the next couple years, would I take action? Probably, so long as it made financial sense.


Now as I mentioned earlier, just because you have a zero EFC doesn’t necessarily mean college will be free.

  • Some schools practice gapping – they acknowledge your EFC is only $X, but they only provide enough aid such that you’d have to pay more than $X. Tough luck
  • Some schools do not adhere to the EFC formula
  • Usually at least a portion of your aid will consist of loans or work study. The very top schools may provide grants for all of your aid

Regardless of whether the last bullet point is true or not, getting a zero EFC will certainly maximize your financial aid package!


6 thoughts on “How a Millionaire Retiree Could Get as Much Aid for College as Someone Who’s Broke”

  1. So essentially, if I can keep my spending under $25k (excluding dividends) and file a 1040EZ or 1040A, I can pretty much guarantee an EFC of zero, regardless of my assets (401ks, brokerages, etc.)? That’s pretty impressive.

    I don’t have kids yet, and I imagine by the time I do and they are college aged these rules will all have changed. But for people living the FI lifestyle now with kids entering college in the next few years, this is pretty amazing stuff. Great find!

    1. Well, you can just spend the dividends right?

      I agree, I’m sure in 18+ years the rules will have changed, and I certainly don’t think someone in a situation like yours should structure their assets differently based on this.

      I plan on updating this post with some example families that have similar incomes and assets, but all structured differently and showing how it can make a difference.

  2. Thank you for this article! I had a thought that I’d like to run by you to make sure I’m not crazy:

    Rental income disqualifying an early retiree from using this FAFSA hack is a huge bummer. But I’m thinking there might be a workaround?
    Instead of focusing on the 1040A/1040EZ option, what if we looked at the “Free and Reduced Price School Lunch” within the last 2 years criteria?
    If I had a household size of 5 (2 adults, 3 kids), according to the 2017-2018 school year income eligibility guidelines for the School Lunch program, as long as my income was below $53,243 then my children would qualify for reduced price meals. This is great because by the time my oldest starts high school I personally plan to have pulled the trigger on FI and I know I can keep my household expenses well below that threshold (probably at around $40k). So theoretically, as long as all income (rental income, dividends/distributions from taxable accts, roth ladder income, etc.) remains below that $53,243 we would qualify for the simplified needs test. PLUS if less than $25k comes from the taxable/rental income/side gig/part-time job, etc (so if 25k was from rental income and 15k was from Roth IRA distributions to total 40k), then that’d mean we would receive the auto-zero EFC, right?
    Since the lookback period on the free/reduced price lunch program eligibility is only 2 years, this strategy would only work up until my youngest child’s sophomore year in college, but it seems a little simpler than having to worry about getting rid of rentals (or letting them sit vacant while kids are in college), not contributing to or taking HSA distributions, etc. for at least the time it takes to put 2.5 kids through college.
    Even for a smaller family, this might work depending on the post-FI expenses/lifestyle. So for a family with 2 kids (household size of 4), there’s a $45,5410 income limit and a household size of 3 has a $37,777 limit for the school lunch program. Both limits are more “generous” than the $25k limit for auto-zero EFC so if you had that Roth IRA income to fill the gap, so to speak, between the 2 limits, you wouldn’t necessarily need to live the Mr. Money Mustache life to qualify.

    Please tell me I’m not crazy! Would this alternative strategy theoretically work?
    My kids are still very young and I know a lot can change in 10+ years but getting some college-funding strategy worked out in advance would certainly ease my crazy stress levels. 🙂

    (And thank you sooooooo much for publishing this awesome article!)


    1. Yes that should work. As you stated, you’d have to keep your AGI under $25k to get the auto zero EFC, but it will work.
      I would be remiss if I didn’t at least bring up the question of whether you actually want to take the reduced lunch benefit or not. It doesn’t say you have to qualify for those programs—it says you have to actually receive benefits for those programs. There is the moral question of do I really want to take these benefits knowing that it means less money is going to those in need of an essential item, food.
      Now obviously this entire article is talking about the same concept, just at a much higher dollar amount, and for something that isn’t essential. It’s not my place to judge what people decide here, but it should at least be discussed. I’m sure these programs also take donations.

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