Last year I only contributed about $5K to my 401k and got a decent financial aid package for my dependent child. This year though, if I continue at my current pace, I will contribute almost the $15K max. How does FAFSA use the amount of 401k contribution to calculate the EFC?

A good question... I don't know the answer for sure - but generally all your assets are considered in your FAFSA. I am not sure if 401K funds are different. You might check with your school or call 1-800-4-fed-aid.

First, the money that you have accummulated in your 401K or IRA can not be used in either the FAFSA or CSS Profile calculations. However, your contributions to either a 401K or IRA are considered and are very important. Those contributions are considered to be untaxed income, and depending on your Adjusted Gross Income (AGI) can make a big difference in how much aid you do not receive. If your or your parents AGI is over $70,000, then your 401K contributions can be assessed at up to 47%. That means that determine your contribution and multiply by 47%. The formula will add this number on to your Expected Family Contribution (EFC).

Therefore, it is best to consider what you EFC would be without your retirement contribution, and determine for yourself if the retirement savings are worth what you will loose in financial aid. Basically the US Department of Education considers that the money you are saving for retirement during college years should have been saved for college. So the tax break really doesn't help you, and in fact, usually hurts you more.

As Pete has mentioned, the amount in your 401k does not affect your EFC calculation. I just looked over the EFC estimate website and nowhere within it does it ask for a 401k balance or annual 401k contribution. It does take in to account your home worth, business worth & net worth:

Adjusted Gross Income (AGI): ?
Federal Tax Paid: ?
Earned Income (Father/Stepfather): ?
Earned Income (Mother/Stepmother): ?
Worksheet A (Untaxed Benefits): ? calculate
Worksheet B (Tax-Deferred & Untaxed Income): ? calculate
Worksheet C (Student Aid Included in AGI): ? calculate
Liquid Assets (Cash, Savings, Checking): ?
Net Home Equity: ?
Net Worth Business or Farm: ?
Other Investments: ?

Also if you're contributiong $15k to a 401k, then your income should be quite high indeed, greater or closer to $100k? I don't know anyone getting education aid with $100k net income, may be I'm just wrong. Also the maximum 401k contribution for 2009 is $16,500 with a catch up provision of $5,500.