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
Income
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.
Retirement
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.
Strategies
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;
I love your strategy list at the end. I was totally ignorant about keeping the savings in the “parents” names. I’ll need you to write up another article in 15 years when my first daughter goes to college. 🙂
Call me anytime, Jason! Luckily, it hasn’t changed much, so hopefully it’ll be the same then.
Duh? So it seems that some financial legerdemain is required before you were born (nearly!). Has this always been the system in the US or is it, like here over the pond, that legislators having benefited from virtually free university education themselves are foistering ridiculous bills onto the next generation?
It’s a mess of rules, isn’t it John?
On retirement accounts – would money in a kid’s Roth IRA count against their EFC? It doesn’t seem reasonable that the govt would expect a kid to pay a penalty to cash out their IRA in order to meet the EFC.
Great question! While most money counts against EFC, money iside ANY type of retirement account doesn’t count, only the contributions.
Students whose parents make a decent amount of money but don’t help out the student at all are the ones who get hurt the most on the financial aid equation…
You, sir, are headed right where I am when I rant about that very topic next week.
I was talking to someone recently – well, maybe more like 6 months ago – who told me that he wanted his son to work in college. He believed in teaching them responsibility, the need to work for your money instead of being entitled, etc. Despite best intentions, perhaps he was not as smart as he thought.
It’s actually okay if Junior works, as long as the “lesson” means earning $6k or less. After that, you’re just screwing your kid.
We’ll just have to really push golf lessons to get that scholarship!
Ha! Remember that commercial with the guy teaching his three year old to play tennis? “Don’t be afraid to charge the net!”
Good explanation! When my son applied to law school, they wanted information from me although he was independent. I never understood that.
That doesn’t make sense. In some cases, you may consider the student independent, but the rules say that he isn’t. That’s a great topic for another post, actually! “What Qualifies as Independent.”
I could be mistaken, but I believe different rules when applying to private schools. They can basically ask you anything they want (CSS Profile) in addition to the FAFSA.
Yes. Often private schools will use additional requirements on top of the FAFSA. However, most still require the FAFSA form.
I know that the time for filling out the FAFSA is long past, but the impact is just hitting us now. Our EFC is $25,000!! It angers (and deeply saddens) me to no end that the government is telling the schools, that my daughter applied to, that we can afford to pay $25,000 per year. So, although the schools are covering 100% of our “need”, it is way out of our price range. Even for our daughter to go to a low-priced, in-state, public school (with some scholarship money), it would mean $70,000 in loans. I feel like we are being punished for trying to be good stewards of our money. If we made the same amount of money, but had a nice house, employer provided pension, and spent just about everything we made, our EFC would most likely be $5,000 or less. But we bought a cheaper house, took out a home equity loan that sits in our savings account so that we can use that money for the constant remodeling and repairs, are saving money on our own for retirement, and kept our $24,000 starter house as a rental property. Also, we drive two older used cars that both will need to be replaced soon and the kids carry Tracfones. On the other hand, we are NOT poor, but sending her to school will make us be. Essentially the government wants us to completely wipe out our savings to send our daughter school. Then what about any sort of retirement for us or a finished house (I’ve been without a kitchen for a year now – remodeling is slow going)? $25,000 for one school year is almost $3000 per month. I can’t even imagine what kind of beautiful house I could live in for $3000 per month.
I am so sad for our daughter. She is a straight A student graduating top of her class, yet she has very little options. What do we do? Let her go to a school that will challenge her, sell our other house, deplete (or stuff our mattresses) all our savings and count on a much lower EFC next year??
Thank you for your comment. It puts a pit in my stomach, because you’re right on: the system is “logical” (meaning that you can understand the inputs and the outflow) but doesn’t make sense. We reward people for not saving, while we punish those who save aggressively for their goals. Why is that? People who’ve been good stewards of their cash flow and financial assets are asked to spend those dollars while people without are given increased amounts of aid.
While I have no good advice (other than changing the system…..), I can only point to a few cost-reducers:
1) Take AP tests to gain college credit, reducing the overall cost.
2) Enroll in basic courses at a local community college and transfer to a university or bigger school for the more important classes during the final two years.
3) Ask every school financial aid officer about grant opportunities. They sometimes know of grands that are school specific that you may not have access to, even using resources such as FastWeb.
Those don’t come close to covering your situation, but they can reduce the cost.