Just-In-Time Lessons on Financial Aid for College (FAFSA)

Just-In-Time Lessons on Financial Aid for College (FAFSA)

Took a break from posting for the rest of the summer and the start of the 2021 school year. Now we are actively going through the college search for our older daughter, which includes the financial aid process. The “early decision” and “early action” applications are submitted, so we had to complete our first pass at the Free Application for Federal Student Aid (FAFSA®). Definitely learned some things that would have been helpful, so it’s not really “just in time” for us, but but maybe it will help someone else.



The FAFSA website (https://studentaid.gov) has a lot of great resources, but understanding some of the mechanics and timing involved are crucial to help maximize aid. Regarding the timing, don’t make the mistake we made and look at it too late! The one key takeaway for now is that the FAFSA will consider your financial standing based on your child’s “JUNIOR” year. For example, our daughter is graduating in the Spring of 2022 to enter college in the Fall of 2022. Our FAFSA application for the first year of aid is based on our 2020 Federal Tax return. We need to repeat the process each year, and and they will consider our financial standing with a fresh view.

In an unfortunate string of decisions, my wife and I took a maximum CARES act withdrawal from our 401K accounts in 2020 ($100K each for $200K total) since my wife had a financial impact at work. This withdrawal was meant to help us reallocate tax sheltered funds in taxable accounts to potentially help with a transition during an “early” retirement. The CARES act allowed tapping tax-sheltered accounts without the 10% penalty when younger than 59 1/2 years old. It also allows us to spread the tax hit over 3 years with an option to re- contribute the funds within that time period. Per our plan, we have already re-contributed $30K each ($60K total) and plan to continue this to minimize any tax implications. What I did not account for was the FAFSA implications!

To take a step back, at a high level, financial aid through FAFSA is calculated as follows:

TCA – EFC = Financial Aid (Need Based Aid)

TCA: Total Cost of Attendance including tuition, room and board, books, travel, etc.

EFC: Expected Family Contribution

As I was going through some “EFC” FAFSA calculators, like this one at FinAid.Org, I was not expecting much financial aid. The main impact to EFC are the parent’s income, the student’s income, and the student’s assets. For the FAFSA, parent savings in tax-sheltered accounts is not considered, which is great for us! Most of our net worth is in our 401K and ROTH IRA accounts. On a side note, it does add Tax-Sheltered contributions to 401K or IRAs back into the included income, which isn’t ideal since we try to max everything out. Of course, we had been increasing our taxable savings trying to get ready for (an early) retirement, but these savings are considered at a lower percentage for EFC compared to income.

When we submitted the FAFSA application and got our official EFC number, it was about $100K MORE than I expected! At first, I thought it was some kind of mistake, but eventually I realized that the CARES Act withdrawal is counting “against” us and significantly increasing our income, even though we re-contributed 1/3 and we have a 3 year grace period to spread out any tax hit (if we don’t pay it all back). The CARES act was obviously a unique occurrence, but by the FAFSA rules it is included as a withdrawal from a tax sheltered account. Ironically, it’s meant to be there to help families with financial hardship, but then it could cause more hardship if the family is trying to pay for college… I think we can talk to someone about this at FAFSA and see if it can be adjusted, however, even without the CARES act influence, we may not qualify for any “need-based” financial aid anyway. Hoping our child can win some “merit based” aid! Now that the reality of paying for college is imminent, we are going to update our plans and actions to deal with it. Some of her top choices have a “TCA” of $80K, so this is going to be a new challenge, but we’ll see how everything plays out.

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~$Retirement Nerd🤓

Disclaimer: I am not a financial planner and content on this site is meant to provide food for thought, not professional advice. I share my experiences to show what worked so far and what didn’t, YMMV. Please consult your financial advisor or tax professional as needed.

By $Retirement Nerd

$Retirement Nerd is in his late 40s and looking to retire in the next few years.


  1. The same thing happened to me – CARES Act withdrawal adversely impacting EFC for my daughters. Did you have any luck speaking with the FAFSA folks about adjusting it? My daughters financial aid office didn’t think they could do anything on their end. Any insights would be appreciated!

    1. Hi, I haven’t reached out to FAFSA about it yet. My daughter has some merit scholarships lined up at several options (UVM, Syracuse, Delaware, and UCONN), so I was feeling ok about paying for college next year. That is until we just heard from one of her top choices that she got in (Tufts University). Tufts only offers need-based aid. Today is her birthday, and also “Ivy League Decisions Day”, so we’ll see what happens with those decisions. It may be worth a try to see if they can adjust our “EFC”.

      I haven’t been able to update this blog lately, but I’m in the process of completing my taxes for 2021. We paid back enough of our distributions in 2020 and 2021 so that there is no additional tax liability from the Cares Act withdrawal. Turbo Tax just made the new form (8915-F) available as of 3/24. There’s some drama about it online in the various forums due to the delay. Anyway, I feel like paying back the distribution should make it pretty clear that it shouldn’t be counted in our EFC, but I’m not confident that they will make any adjustments. Good luck!

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