How Your Tax Return Affects FAFSA Financial Aid

Many families are surprised to learn that their tax return plays a major role in determining financial aid eligibility. When students submit the FAFSA, the form pulls information directly from federal tax returns to calculate what is now called the Student Aid Index (SAI). This number helps colleges determine how much financial assistance a student may qualify for.

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Because of this connection, the way taxes are filed—and the financial information reported—can directly impact how much aid a student receives. Understanding this relationship can help families make smarter financial decisions when planning for college.

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What Is the Student Aid Index (SAI)?

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The Student Aid Index replaced the Expected Family Contribution (EFC) in recent FAFSA updates. While the name has changed, the goal remains the same: to estimate how much a family may reasonably be able to contribute toward college expenses.

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Several factors are used to calculate the SAI, including:

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• Income reported on tax returns
• Assets such as savings and investments
• Family size
• Number of children attending college
• Certain untaxed income sources

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The lower the SAI, the more financial aid a student may qualify for.

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Because the FAFSA relies heavily on tax return data, it is extremely important that families file their taxes accurately and understand how certain financial decisions may affect financial aid eligibility.

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Why Timing Matters

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The FAFSA now uses prior-prior year tax information. This means that the FAFSA for the 2026–2027 academic year will use 2024 tax return data. This can catch families off guard because financial decisions made years earlier may still impact future financial aid eligibility.

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Examples of financial situations that could affect aid eligibility include:

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• Large capital gains from selling investments
• Retirement account withdrawals
• Business income fluctuations
• One-time bonuses or large commissions

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Being aware of how these financial events appear on tax returns can help families plan ahead and avoid unexpected changes in aid eligibility.

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Strategies to Protect Financial Aid Eligibility

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While taxes and FAFSA are closely connected, there are several ways families can make strategic decisions to protect their financial aid eligibility.

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Some common strategies include:

• Contributing to retirement accounts rather than taxable investment accounts
• Avoiding large one-time income increases during FAFSA base years
• Carefully timing asset sales or withdrawals
• Understanding how business income affects aid calculations

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These decisions can make a meaningful difference in the financial aid a student receives.

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Make FAFSA Less Stressful

Understanding the connection between taxes and FAFSA can help families avoid surprises and make smarter financial decisions. By planning ahead and staying informed, students can maximize their chances of receiving the financial aid they need.

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For more support, the Fund Your Future student portal provides resources designed to help students and families navigate the college funding process. Inside the portal, you’ll find scholarship opportunities, financial aid guides, and access to experts who can answer your college funding questions.

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