Suppose a student applies and gets into an expensive university and is given some aid, but not enough for the family to afford the EFC. The student decides to take a gap year to work to earn money and is able to save a tidy sum by living at home while working. Now the student has a much bigger bank balance–say $30,000, that he hopes to spend over the course of the 4 years to supplement what the parents are able to pay. Will the EFC simply go up at the same pace as the student’s bank balance? In short, is it a practical impossibility to take a year off to earn money for college, given that any money saved would just increase the EFC?
The one thing you should never do is to hide the money in cash outside of a bank. That would be dishonest and really would be a bad thing. Not recommended at all.
Your $30,000 that is IN your savings account the day you file your FAFSA will increase your family contribution by 20% of its value…or $6000. Really, that’s not bad.
Your income could also further reduce your EFC, but it would depend on how much you earn in each part of that gap year…because June to December would be one tax year, and January to August would be a different tax year.
ETA…another option would be to put this savings in a 529 account. For FAFSA purposes, student owned 529 accounts are assessed at the 5.6% parent rate. The student would need to use the 529 for allowed educational expenses.
@Dustyfeathers where did this poster say he wasn’t planning to put the money in his bank account. He clearly says “bigger bank balance” in his post.
@thumper1 Thanks, I see the merit of putting it in the 529–then presumably you use that up right away, before using the parent’s 529. So it would have some impact on the EFC, but not as much as the very high rate at which student savings accounts are assessed.
And, no, I never even considered stuffing the money in the mattress. It would show up on the student’s taxes, anyway, so that would be a pretty stupid idea.
@thumper1 OP never said that he/she wasn’t going to put it in the bank. Not at all. Just thought I’d mention it. That’s all. : )
Actually you could “hide” the money in a 529 if desired to get the kid’s assets assessed at 5.64% rather than 20% and then withdraw that money after submitting the FAFSA. After all the 529 tax penalty is only payable on the interest earned, and there won’t be much of that if you only deposit it for a few months.
More importantly, I would suggest using the parents’ 529 account to pay the educational expenses first because if the savings in there had accumulated over a longer period, a higher proportion will be from earnings. If your kid later drops out (or, more optimistically, gets a scholarship) there will be less earnings left and therefore a lower withdrawal penalty to pay in taxes if the money ultimately isn’t used for educational purposes. Broadly speaking, if drawing from several non-consolidated 529 accounts, take the money from the one with the higher proportion of earnings first.