EFC Reduction Strategies : Tell Grandparents to Hold Onto Those Bonds | Keeping Your Expected Family Contribution Loan

How to Reduce Your Expected Family Contribution: Tell Grandma to Hold Onto Those Bonds

hold onto bonds to make sure they don't effect a students expected family contribution

Every year grand parents across the country who can afford it leave their grand children with financial bequests to aid in their college education. Many more simply send grandchildren a savings bond each year in their name. What many don’t know is that these bequests, while sent with the best of intentions, could be killing your students chances at receiving need-based financial aid. However, there are a couple of easy strategies to use to make sure that grandma’s gifts go to good use while not hurting students chances at receiving need-based aid. more after the jump…


While my grandmother was a bit of a spendthrift & curmudgeon, some people are actually lucky enough have grandparents who still try to help out their grandkids with college expenses. Sounds nice doesn’t it! Problem is, that is one of the factors getting in the way of junior receiving financial aid. Every dollar grandparents contribute to their grandchildren’s education directly to the student will count against them when they file the Free Application for Federal Student Aid (FAFSA).

My next door neighbor sends his grandkids savings bonds each year on their birthday for college in their name. In addition, he has designated a restricted educational trust fund be set up in their name in the event of his death. My neighbor is no millionaire, and neither are his grandchildren. But the sale of his home, and assets, should yield some positive gains for his heirs. What he was unaware of until recently is that given the rising rate of the cost of education, that his gifts will be insufficient to cover all costs, and will even hurt their chances at need-based aid.


Heres what most family’s don’t know when they fill out the FAFSA: Every dollar in assets, including cash, bonds, marketable securities, trust funds, and any business interests can have a huge impact on the final EFC number! Many employing EFC strategies empty their bank accounts the day of filing the FAFSA to keep cash levels low. But here is the problem; parents have their available assets included in the EFC at a maximum rate of 5.64% of their real value. Students who are dependents however are hit at a 20% rate! In short, students who have savings bonds or trust funds from grandma is penalized at a rate nearly 300% higher than their parents!

So if grandma is being generous on a regular basis, or grandpa is planning to make a gift in his will, here are a few strategies to help keep that money from having a negative affect on your students EFC:

Don’t Put Savings Bonds in a Childs Name

Since earnings on savings bonds are tax-free for the holder anyway, ask grandparents to hold these bonds in their own name for the time being. If they wish to use them to help grandchildren, they can cash them out at the right time and distribute it as needed to lower the impact on the students EFC calculation.don't ever put bonds in a childs name: the interest and value could be held against them come FAFSA time

Contribute Annual Gifts or Bequests to a 529 Plan

I love 529’s. They have one of the best tax treatments you’re going to find and can gain up to $300,000 in value per student tax-free. If the parents of a student have a 529 plan setup already, why not throw into the pot? By contributing to a 529 Plan, the student will get the benefit of the funds, with a much more favorable asset protection rate when the plan is in a parents name and under parental control. Even better, withdrawals from a 529 plan are not counted against parents and students in the EFC formula as a part of annual income. So students can still potentially receive need-based aid even with a well-funded 529 plan. However be sure the 529 you select allows for third-party contributions. 


Why Wait for College, Give Them Cash While In High School

Here’s a dirty little secret no one likes to mention, but I wish I could shout from the rooftops. Working in High School is a bad idea when it comes to financial aid if your student earns more than $6000 in one year! We all think that working while in high school will help junior build character as he or she tries to buy a car. But those earnings have less asset protection ($6000) in the EFC calculation than parents do. While your child may have spent every dime he or she earned on their car, that wont stop the federal government from expecting the student to somehow put money into play for their college education that exceeded that $6000 exemption. If grandparents and family members want to help, buying items for grandchildren so they can spend their time volunteering in high school will benefit the student far more. Every dollar a student earns above their exemption works against them. Better they get job experience and volunteer credit by spending time at a soup kitchen, rather than slaving away at McDonald’s and killing their chances at need-based aid.


Family is the biggest assets a student will ever have. The generosity of grandparents and other family members is always a blessing; and with a little planning and coordination, its possible students can gain most benefit from those funds while still maintaining eligibility for need-based financial aid. As always, consult with a family financial advisor or planner to help you maximize your gains.

Helpful Links:

Free Application for Federal Student Aid (FAFSA)

List of 529 Plans by State



5 thoughts on “How to Reduce Your Expected Family Contribution: Tell Grandma to Hold Onto Those Bonds”

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  2. Okay, Big Myth to bust here that you want to shout from the roof tops. Student’s who work aren’t generally going to be hurt by it; there income allowance is over 6k. If a kid in high school can be making the grades, test scores, and extra curricular activities needed to get into a college, AND makes over six thousand in a year, he probably doesn’t have that much to worry about anyway.


  3. I have a question. I am filling out a FAFSA for me and my wife (she is in school and I am not). I am trying to reduce her EFC legally. I have some checking acct cash that I am wondering if I can loan it out to a friend or family member and not count it on my FAFSA (since it says AT THE TIME OF SIGNING THIS, how much cash, checking, and savings do you have). Then I would have the friend or relative pay me back per the loans contract that we sign. Other than loaning, is gifting the money for the purpose of EFC reduction legal?

    In the end, I can always put it towards a retirement acct or on my mortgage payment but I was wondering if loaning or gifting was also a legal option.

    Your advice is appreciated.


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