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Expected Family Contribution 

Are You Asking The Right Questions?

 

  • Tic -tac-toe, Did You Win The First Time?
  • You Asked Questions, Learned The Rules, Then Looked For "Someone" Who Did Not Know The Rules, And You Won! 
  • EFC Is Like Tic-tac-toe, More Rules, Do You Know Them?

 

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"Rules Can Be Opportunities, See How EFC Rules Are Like Tic-tac-toe.

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What Is EFC ?

 

Expected Family Contribution 

 

  • Calculation based on Financial Data
  • Amount Colleges Expect Families To Pay
  • Two Formulas Are Used for Calculation
  • Very Important to Understand Formulas
  • You Can Reduce Your EFC With Proper Planning

 

EFC or Expected Family Contribution is the amount a student and his or her family are expected to "reasonably"  contribute toward the cost of college in determining financial aid eligibility. 

The EFC calculation is computed by using the family financial data submitted on the Free Application for Federal Student Aid ("FAFSA") and possibly the Financial Aid Profile ("PROFILE").

These financial aid forms contain two different formula methodologies that are used to calculate your EFC.

  • Federal Methodology ("FM")
  • Institutional Methodology ("IM")

 

FAFSA Expected Family Contribution

 

Free Application For Federal Student Aid ("FAFSA")

 

Federal Method ("FM")

The Expected Family Contribution is computed by submitting  your financial data via the FAFSA Form to the need analysis service, the Federal Student Aid Programs, located in Mount Vernon, Illinois. 

When you file your FAFSA your EFC is computed and reported on the Student Aid Report ("SAR").

College Financial Aid Officers ("FAO") receive your SAR and subtract your EFC result from the Cost of Attendance ("COA") for the respective college. 

The FM method is used by every accredited college in the United States to determine how much federal money can be disbursed by the college to cover the students Cost of Attendance ("COA"). 

 

Institutional Method ("IM")

Some private colleges require a closer look at the family's financial situation. They request a second form, the Financial Aid Profile ("PROFILE").

Furthermore, some of these colleges may require their own Institutional Form. 

The College Board determines the IM Formula and makes annual changes to it. 

The IM calculates the EFC using additional financial considerations such as a family home, family farm, and other assessed items. As a general rule, the IM EFC will be higher than the FM EFC (Not Always!).

It's important to estimate your EFC using both formulas. Taking it a step further, make sure you understand the individual characteristics of your application schools that require the IM and any additional assets they might assess.

 

EFC Chart  Shows How To Estimate  EFC

 

EFC Calculators Do The Heavy Lifting

 

Below is an EFC Chart that explains how the process works. 

EFC  Calculators are readily available online, but not all are created equal. The chart below is an outline and the better calculators will ask a series of questions about some of the items listed in the chart.  

For example, "Untaxed Income & Benefits" which are added to the Parents AGI, one question might be;

  • Did you or your spouse contribute to a retirement account (in the base year)?

Someone who is well versed in how to calculate the EFC can be of great value to you. 

 

Expected Family Contribution Formula
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Graph Source: NICCP (National Institute of College Planners)

Reduce Your EFC 

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   See How It Works So You Have Choices

 

As you view the EFC Chart above, when you calculate expected family contribution, there are some strategies that you should understand in your efc results for the FAFSA and the IM calculations. 

These strategies are understanding the "rules of the game" as it relates to the components of the formula. 

  • Income (AGI plus Untaxed Income and Benefits) is more difficult to lower with a W-2 statutory employee versus a self employed household. 
  • Assets are the easiest component to lower. However, many people wait too long and then are forced to make hasty decisions without careful consideration of looking forward beyond college and measuring the financial impact over the next 10 - 20  years. 

 

Assessable and Non-Assessable 

Some financial items count ("Assessable") and some do not ("Non-Assessable") count. 

Obviously, you will want to focus on non-assessable or "efc formula omissions" when trying to lower your EFC.

Omissions from the formula might help you understand that you are doing nothing wrong when you implement "Formula Reduction Strategies".

Certain financial "things" count and certain one don't. The EFC process can be compared to the Tax Code, it is all about rules. 

When you know the rules and how they interact with the EFC Chart components above, then you are in position to lower your EFC calculation just like a CPA / Accountant might lower your taxes. 

 

Warning: The EFC rules are different between the Federal Methodology and the Institutional Methodology. Here are three  examples and there are many more differences. 

 

  • When you contribute to or receive payments from a Medical Savings Account the FM considers this a Non-Assessable Income event and the IM will consider it Assessable.  
  • If you own a business with less than 100 employees the FM will not assess it as an asset, the IM method will assess the business. 
  • Dependent Student Income Expense Allowance ("up to" non-assessable) for 2011-2012 is $5,250 for the FM EFC formula. The IM formula does not have a student expense allowance. 

 

Strategy Tip: Using the FM Method, you can see you can shift up to $5,250 to a student from the parents in the form of income to the student for "viable" services performed. Just a simple calculation assuming a state and federal tax rate of 30%, this is a savings of $1,575. For net savings other possible taxes must be considered. 

 

EFC FAFSA Reporting Rules 

 

There are many rules when comes to what is reported on on the FAFSA that provides you the Student Aid Report which gives you your Expected Family Contribution. 

Above we looked at how the formula works, but inside there are rules governing what is reported and not reported. 

These are the basic areas of the EFC Chart where numerous rules govern was is assessable and not assessable; and what is required to be reported as income even though the financial event may not be taxable. 

Here are some of the areas the free course covers.

 

Financial Aid or Untaxed Income and Benefits

 

Non Assessable Income

  • Two examples would be insurance reimbursement used to pay for a loss and loans.  

 

Deductions from Financial Aid Income

  • Two examples, taxable scholarships and child support paid. 

 

Non-Assessable Assets

  • Some examples personal items like computers / i-phones, annuities, and life insurance. 

 

Asset Information -  Market Value
  • The date you sign the FAFSA is the date of the asset value. The value is the current market value which is defined as if you were forced to sell the asset within 30 days, what would be the value under this condition.