The “Expected Family Contribution” (EFC) is a measure of the family’s financial strength and the amount of resources the family has available to pay for education. The government uses the submitted FAFSA form to calculate EFC. The question is how the EFC is calculated.

We are going to take the next two BLOG postings to review the EFC formula. It is best to have available your paper work for the FAFSA form submission. You can take the numbers from the form and enter them into the EFC formula.

This week, we will review the 2008-2009 EFC Formula for Parents of Dependent Students. Next week, we will look at the student.  The numbers in RED are examples to help explain how the formula is used.

EFC Formula: Parent Calculation

1: Parent’s Adjusted Gross Income

(this number is from the FAFSA form #79). Adjusted gross income is also from your filed 1040 tax returns.

For use in this example (or enter your own number): let’s enter $80,000

2: Parent’s Income from Work

the formula reviews how much of the Adjusted Gross Income is earned from work for both parents.

2a) enter the Father’s / Stepfather’s earned income (from FAFSA form #82): 

for our example: enter $55,000

2b) enter the Mother’s / Stepmother’s earned income (from FAFSA form #83):

for our example: enter $20,000

3: Parent’s Taxable Income

 enter the number from Line (1) or Line (2).  If the parent filed tax returns in 2007, you will enter Line (1).

number: $80,000

4: Untaxed Income and Benefits

4a) enter the total from Worksheet A, Line #84.  This would include all earned income credit, child tax credits, welfare benefits, and social security benefits.

for our example: enter $5,000

4b) enter the total from Worksheet B, Line #85. This would include contributions to tax-deferred pension plans, 401-K plans, IRA plans, child support, VA benefits and other non-tax benefits.

for our example: enter $10,000

5: Taxable and Untaxed Income

sum lines 3 and 4:  $95,000

6: Total from FAFSA Worksheet C, Line #86. 

This would include all education credits, student grant and scholarship aid reported to the IRS in your adjusted gross income, and taxable earnings from need-based employment programs:

for our example: enter $5,000

 7: Total Income

subtract line 6 from line 5 (it can be a negative number)

number: $90,000

this concludes the section on Parent Income

EFC Formula:  Allowances Against Parents’ Income

The EFC formula allows some of the income calculated in Line 7 to be protected.   

 8: 2007 U.S. Income Tax Paid (FAFSA form #80)

the amount of taxes paid is an allowance against the parents’ income

for our example: enter $6,000

9: State and Other Tax Allowance

number is derived from Table-A1 that has been approved by Congress.  The number takes in consideration income taxes paid to States and sales tax.

We will use the State of Virginia in this example.  The percentage is 4%.

(you can view the EFC formula guide in PDF format: it includes all Tables being used in this example:  open PDF file) 

number: $3,600 (line 7 X 4%)

10: Father’s / Stepfather’s Social Security Allowance

number is derived from Table-A2 that has been approved by Congress.  This number takes in consideration social security taxes paid.

(you can view the EFC formula guide in PDF format: it includes all Tables being used in this example:  open PDF file) 

from line #2a above: $55,000 X 7.65% (this percentage increases with higher numbers: view table)

number: $4,207.50

11: Mother’s / Stepmother’s Social Security Allowance

number is derived from a Table that has been approved by Congress.  This number takes in consideration social security taxes paid.

from line #2b above: $20,000 X 7.65% (this percentage increases with higher numbers: view table) 

number: $1,530

12: Income Protection Allowance

Table-A3 takes in consideration the number of members in the parents’ household (FAFSA form #66) and the number of students attending college (FAFSA form #67).

For our example, let’s assume that there are 5 members of the family household (married parents with 3 children; with 1 child attending college).  Based on a sliding scale, our income protection allowance is 5::1 (from the table)

number: $27,910

13: Employment Expense Allowance

• if two working parents: 35% of the lesser of the earned incomes, or $3,300, whichever is less
• if one-parent families: 35% of the earned income, or $3,300, whichever is less
• if two-parent families, one working parent: enter zero

number: $3,300
since 35% of the lesser earned income is greater than $3,300

14: Total Allowances

sum Lines 8, 9, 10, 11, 12 and 13

number: $46,547.50

Available Income

Total Income from Line 7: $90,000
Total Allowances from Line 14: $46,547.50

15: Available Income

(Line 7 minus Line 14): $43,452.50 

this concludes the section on Income

Parent’s Contribution From Assets

 16: Cash, savings & checking (FAFSA form #87)

for our example: $12,000

17: Net worth of investments (FAFSA Form Line #88)

this would include all investments, including real estate and 529 plans, if any.  What will not be included is the home in which you live, retirement plans, non-education IRAs, and Keogh plans.

for our example: $35,000

18: Net worth of business and/or investment farm (FAFSA Form Line #89)

includes all business value, land, buildings, machinery, equipment, inventory, etc.  Do not include the family farm that you live on and operate.  Do not include the value of a small business that you own that has less than 100 or fewer full-time or full-time equivalent employees.

for our example: $0

19: Adjusted Net Worth of Business

an adjustment based on Table-A4. 

for our example: $zero adjustment

20: Net Worth

sum of lines 16, 17, and 19):  $47,000

21: Education Savings and Asset Protection Allowance

this is an allowance to protect certain assets for education and retirement.  Based on a sliding scale from Table-A5, take the age of the oldest parent and move over the rows to find allowance protection number. 

we will use age 45 with 2-parent household: $43,400

22: Discretionary Net Worth

line 20 minus line 21: $3,600

23: Asset Conversion Rate

percentage of assets: 12%

number: $432

24: Contribution from Assets

number: $432

this concludes the section on Income

Parents’ Contribution

Available Income (Line 15): $43,452.50
Contribution From Assets (Line 24): $432

25: Adjusted Available Income (AAI)

sum line 15 and line 24: $43,884.50

26: Total Parent’s Contribution from AAI

based on Table-A6 that has been approved by Congress.  Siding scale. 

number: $15,078.72

27: Number in college in 2008-2009

(exclude parents) (FAFSA form #67)

for our example: only 1 child

28: Parents’ Contribution

divide Line 26 by Line 27

number: $15,078.72

So from the parents’ income and total assets, the “Expected Family Contribution” will be $15,078.72 for the 9-month academic year.  This figure will be added to the student’s numbers to give your total EFC.  The colleges will use the information when determining how much qualified financial aid that may be awarded. 

Fifteen thousand dollars is a substantial EFC for some public colleges where the cost of education may be around $15,000.  So the student in this case may not expect much financial aid assistance from the college (again, this may vary on the college and the student).

So the goal of parents is to reduce the EFC number whenever possible.  This may require assistance from a tax preparation specialist who can offer advice on reducing adjusted gross income and asset allocation. Note that the student must submit the FAFSA for each academic year.  So tax planning now may position you in the future to qualify for financial aid assistance.     

Next time, we will review how the EFC is calculated for the student.

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The government uses the submitted FAFSA form to calculate “Expected Family Contribution” (EFC). The EFC is a measure of the family’s financial strength and the amount of resources the family has available to pay for education.

The government looks at 5 areas to calculate EFC:

1. Assets
   includes stocks, mutual funds, annuities, trusts, US savings bonds, bank cash accounts, 529 plans, prepaid tuition plans, investment real estate, and other family holdings.  Parent assets are assessed at 5.6% of the value.  Student assets are assessed at 35% of the value.
2. Income
   how much money the parents (or spouse) AND the student make.  Certain amount of the parent’s income is protected based on the size of the family. Anything over that amount is then assessed on a sliding scale.  The student’s income is protected to a certain level. Anything over that amount is assessed at a higher rate, usually around 50%.
3. Household Size
   the number of dependents in the home that are being supported by the parent or student
4. Number in College
   the number of people within the household who are attending college
5. Age
   how close are the parents age to retirement

Your assets and income are the factors that have the biggest impact in calculating EFC. The EFC is calculated according to a formula established by Congress.

About Asset Allocation:

• parent assets are assessed at 5.6% of the value; student assets are assessed at 20% of the value.
• if the parent’s assets are valued at $100,000, about $5,600 will be added to the formula that calculates EFC.
• if the student’s assets are valued at $10,000, then about $2,000 will be added to the formula that calculates EFC

About Income Allocation:

• a certain amount of the parent’s income is protected based on the size of the family. Anything over that amount is then assessed on a sliding scale.
• the student’s income is protected to a certain level. Anything over that amount is assessed at a higher rate, usually around 50%.
• these income assessments are then added to the formula that calculates EFC.

What Happens to EFC

After you submit your completed FAFSA form, the federal government will process your application and calculate the EFC.  It will then produce a Student Aid Report (SAR) and send that back to the student and the colleges that the student entered on the FAFSA form. 

The SAR will report the information from the FAFSA form and the calculated EFC (the EFC will appear near the top section of the report). After the student receives the SAR, he/she must review it carefully and make any necessary corrections. You can make changes online using your PIN: click here for FAFSA form corrections  

How Does the College(s) Use the SAR

The financial aid office of the school you will be attending calculates the total cost of attendance.  It then subtracts the EFC that is reported on your SAR.  The remaining cost left over (if any) is the amount of financial need the student qualifies for; adjusted by other financial aid assistance the student expects to receive (such as school scholarships, grants, etc.).

So you can see that the lower your EFC, the greater the amount of financial aid that you may qualify for.  So it is very important that you take actions to reduce the total amount allocated for EFC.  Even many expensive schools use the EFC to determine how much qualifying aid that they are willing to offer.  So submitting your FAFSA form “correctly” is an important first step for maximizing your financial aid potential.

Next time, we will review more deeply EFC allocation and what steps to take to maximize your financial aid. 

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