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Does paying off debt lower your EFC on FAFSA?

December 12, 2018

While going through the FAFSA application, you will notice that there is nowhere to include the value of your existing consumer debt. This is because consumer debt is not reported on the FAFSA and has no impact whatsoever on your aid package.


First, let’s review how your Expected Family Contribution (EFC) is calculated. The formula relies solely on income and asset net worth - meaning, the value of the assets you own, minus any outstanding loans (in other words, the value of what is actually already paid for). But not all assets are counted on the FAFSA, meaning that debt taken on to pay for those assets is also not counted. In calculating the asset net worth, the FAFSA formula subtracts any outstanding loans if they are secured by an asset that is reportable on the FAFSA.

Assets counted on the FAFSA include:

  • Money in cash, savings, and checking accounts

  • Businesses with more than 100 employees

  • College savings plans

  • Other investments, such as real estate (other than the home in which you live), UGMA and UTMA accounts, stocks, bonds, certificates of deposit, etc.

Assets not included on the FAFSA:

  • Your primary residence or family farm

  • Small businesses with fewer than 100 employees

  • Qualified retirement plans

  • Personal possessions

Reporting debt on the FAFSA

Consumer debt is not on the FAFSA application. This means there is no place to include debt on credit cards, automobiles or student loans, to name a few. Having this type of debt will not be reported and therefore, regardless of amount owed, will not make the Expected Family Contribution (EFC) higher or lower.

If a family plans to report an asset on the FAFSA application (i.e., real estate investments), any loans taken out on that asset must also be reported. This will help more accurately represent the family’s net worth, as the FAFSA will subtract the debt owed from the asset value to calculate the net value of that particular asset.

Debt and lowering the EFC

The EFC is calculated by combining net income with asset net worth. This will include the value of any savings accounts. Therefore, if aiming is to lower the EFC, a student or parent can try paying off consumer loans using their savings account. In theory, the lower the dollar amount in the savings account, the lower the EFC will be.

This effect, of course, will vary depending on family income, assets and other factors. It could have no effect at all. Use the FAFSA4caster to estimate how much aid you will receive if you pay off previous loans with a savings account versus if you leave your savings account as is.

In the case of debt that is secured by a reportable asset, paying off the debt will have minimal impact as the family’s overall net worth is not likely to change significantly.

Student loan debt and your EFC

The amount of loans a student has previously taken out for education will likely have no effect on the amount of aid offered through the FAFSA application for the present year. That said, some loans have a maximum annual or aggregate loan limit. This means that it is possible to only get a specific amount of money from a loan at a time.

Stafford loans, for example, only allows dependant undergraduate students to borrow and owe a maximum of $31,000 over the course of their education. Within that, no more than $23,000 of the $31,000 may be in subsidized loans. Values are different for independent and graduate school students.

If a student owes the above limit, they will not be able to borrow any more through this loan. By paying any value of the Stafford loan off, the student will be eligible to take out as much as they paid off. They cannot have more than $31,000 owed at one time, but can borrow indefinitely if they keep paying off some of the loan.