Expected Family Contribution: Digging For (and Finding!) Financial Aid
As you’re waiting for that perfect college to give you the nod, “Expected Family Contribution,” or EFC, is a key term you need to understand BEFORE filling out the FAFSA form (…and you should be filling out the FAFSA form NOW).
Expected Family Contribution is the amount you’ll be expected to pay out of pocket toward your education. Here’s the simple formula:
Cost of college – your need = Expected Family Contribution
Sometimes it’s easier to understand what’s being asked by seeing the equation drawn out. Not to be completely obvious, but that equation makes three points clear:
- You can lower your bill by attending a less expensive institution
- You could attend a more expensive school and not pay a dime more if your need covers the difference between the cheaper school and more expensive school.
- You can lower your Expected Family Contribution by attending a less expensive school, increasing your need, or a combination of both.
Like I said, pretty obvious, huh?
If it was SO obvious, though, why do so many people overpay for college? Not my readers, though, right? We’re so lucky we hang out together!
EFC is about Income and Assets:
An overall note about assets: Assets are excluded for most people with adjusted gross income below $50,000.
Child Money – The FAFSA treats dependent student money as MORE IMPORTANT than parent money in the EFC equation.
Rational? While parents may have other priorities, the child has one: graduate.
Therefore: 20% of dependent and independent student assets count against them when calculating EFC. Little Jimmy’s got $10 in his savings? That’s $2 less financial aid school will give him.
The EFC calculation includes an “asset protection allowance” for parents and independent students with children before ANY money counts against their EFC calculation. How much is the allowance? While the amount varies depending on age and marital status, the average family receives a $45,000 allowance. After that, only 12% of assets are used toward the family EFC calculation.
So, to summarize:
- Parents and Independent Students with Children receive an asset protection allowance of around $45,000
- 20% of dependent student assets are used for the EFC calculation
- 12% of parent assets are used
- 7% of independent students with children assets
Got it? Awesome.
What’s the rational for these numbers? Parents and students with children have to make ends meet at home first, and then can focus some of their money on college. Students in college should spend a higher percentage of assets on education.
I hope you’re starting to see that WHERE you save is an important factor when deciding how to save for college. Clearly, keeping money in a parent’s hands vs. saving in junior’s name can be a good idea in many circumstances.
Big Point: It’s illegal for parents (or anyone other than the child) to remove money from junior’s name to avoid horrible EFC consequences (or for another other reason). However, junior can purchase items beyond food, clothing and shelter with his own money. You can also choose to save more money (or an equal amount) into the parent’s name for college.
Also notice – 529 plans….they’re in a parent’s name.
…and that money in life insurance policies? It doesn’t count against you at all. As far as EFC calculations go, it doesn’t exist.
Want more on the best places to save for college? Check out: College Savings Simplified, The Best Places to Save for Education
Forget full time work for dependent students. It weighs heavily against EFC!
Yeah, I know, you want junior to have a job in college. Guess what? Every dollar junior earns (after a small allowance) counts more severely against his need than income a parent earns. Once again, there’s good rationale for this: junior should be focused on graduating, so if he works, then he should pay every dollar he makes toward school.
As with assets, there is an income protection formula:
- Dependent students receive an income protection amount of $6,000. After that, between 22 and 47% of the amount junior earns is used for EFC calculations. (It’s a sliding scale with percentages rising as the income level rises.
- Independent students with children and parents receive a much more generous allowance. For parents, the number ranges from $16,000 to $55,000 depending on the number of dependents in school and overall family size.
As you can see, parent income counts against need, but once again, parents only have a smaller percentage of their income that counts against EFC.
Rationale? Parents have many priorities besides a dependent student’s education, while dependent students need to save. The EFC allows for a small part time job to learn skills, but punishes students who work full time. Work on graduation!
Good news for me: during the EFC calculation, because I’ll have two in college at the same time, my total parent contribution is divided by two.
How do retirement accounts factor into EFC? Money saved into retirement accounts DOES COUNT against EFC. Rationale? You should expect to sacrifice for a short time to help junior through college. If you’re the one headed to school, graduation quickly is your number one priority.
If you’re reading this with young children (or just a glimmer in your eye), realize these calculations can change. However, I’ve been teaching clients about EFC since my children were born, and things are roughly the same as they were then. So:
- Save money into the parent name instead of a child’s name.
- Save aggressively into 401k plans BEFORE college years start because you may have to lower your contributions during college years.
- If you’re fairly certain you’ll be a financial aid candidate, cash value life insurance may be an option (although I generally shy away from these products)
- Forget about junior working full time during college. You’ll just elongate the process for him and you.
- Use Junior’s money to buy assets he’ll use during college and for expenses that don’t include food, clothing and shelter. If you’d like, use the money YOU save by NOT covering these non-essentials into a plan in the parent’s name.
Fun, huh? Financial aid programs actually make a ton of sense to me AND it becomes much clearer HOW to save when you know the keys to the FAFSA and EFC.
What parts of financial aid are most confusing to you? Leave them in the comment section and we’ll try and tackle those next.
This is only one piece of an overall college financial plan. Check out: 5 Steps to a Successful College Financial Plan.
Photos: College student w laptop: Ed Yourdon;
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