College Financial Aid

Expected Family Contribution (EFC) Toward College Costs

The Expected Family Contribution (EFC) is the minimum amount that a family is expected to contribute toward the cost of attendance (COA). Calculating expected family contribution is necessary in determining a family's need for financial aid. Essentially, a family's EFC is subtracted from the cost of attendance of a college and if the EFC is less than the COA, then the family qualifies for need-based aid because they have a demonstrated need for it. When a family's EFC is greater than the COA of a school, they won't qualify for need-based financial aid.

The EFC formula is updated for inflation each year and is administered by the Department of Education based on the guidelines of the Higher Education Act. The Higher Education Act is reauthorized on a regular basis by Congress. Thus the formula is often called the Congressional or Federal Methodology and is required to be used if a school wants to participate in Title IV financial aid programs such as Pell grants, Stafford loans, etc.

To apply for federal financial aid, students and parents must complete the Free Application for Federal Student Aid (FAFSA)

About 300 private colleges often use an additional formula called the Institutional Methodology to calculate a family's EFC when considering the student for the school's own aid money. In addition to the FAFSA, these colleges usually require a separate form called the Profile. Information on the Profile is available through the College Board at

In general, the primary differences between the two formulae are: 1) The Institutional Methodology (IM) counts more types of assets and assesses income more stringently than does the Federal Methodology (FM), which means that families could have a higher EFC under the IM formula and 2) under the IM formula ironically, families that have little or no assets could have a lower EFC than under the FM formula.

The Federal Methodology is by far the most widely used methodology and will be the focus of the remaining content.

Expected Family Contribution (EFC) is comprised of a Parental contribution and a Student contribution that together become the Expected Family Contribution. Both the parental contribution and the student contribution are made up of contributions from assets and income. Except for 529 College Savings Plans and Coverdell Education Savings Accounts (ESA), income and assets in a student's name are counted more heavily than income and assets in a parent's name.

As a result of the College Cost Reduction and Access Act passed in September of 2007, starting with the 2009-2010 academic year, student-owned 529 and ESA accounts will be treated the same as parent-owned 529 and ESA accounts. Thus, these types of accounts will be counted against the child's aid eligibility at a rate of 5.64% of the total account value on the date that the FAFSA is completed.

As income increases, EFC increases. Income is considered to be the following:

  • Adjusted gross income (AGI)
  • Wages, salaries and tips
  • Interest, dividend and capital gain income
  • Untaxed social security income
  • Aid to Families with Dependent Children
  • Child support received for all children
  • Alimony received
  • Unemployment compensation
  • Contributions to qualified retirement plans (401k, 403b, deferred compensation, IRAs, etc.)

As allowances against income increase, EFC decreases. The primary allowances against income are:

  • Federal tax paid
  • FICA
  • State tax paid
  • Child support paid
  • Income protection allowance (IPA increases as household size and number in college increase)
  • Alimony paid
  • One-half of self-employment tax
  • Self-employed health insurance deduction

Asset Protection Allowance (APA) is determined by the age and marital status of the oldest parent. The APA is the maximum amount of "visible" or reportable, assets that a family can have without the assets being used in the EFC calculation. If a family's APA is $40,000 and they have $39,000 worth of reportable assets, the assets will not be included in the calculation of EFC. The APA is higher for married couples than for single parents, and increases with age.

As reportable assets exceed the Asset Protection Allowance, EFC increases. Visible assets are:

  • Cash, savings, CD's and checking accounts
  • Mutual funds, stocks or bonds
  • Trusts
  • Money market funds
  • Section 529 College Savings/Prepaid Plans
  • All real estate except the primary home (the value and debt against the primary home are used in the IM formula, but not the federal)
  • Limited partnerships
  • Businesses (except small businesses with less than 100 employees)
  • Precious metals
  • Commodities
  • Stock options (options that are in the money)
  • Farm value (unless the parents claimed on schedule F of their tax return that they materially participated in the farm's operation)
  • Mortgages held, and land sale contracts

Any debt that is held against a reportable asset is an allowance against it. So as allowances against a reportable asset increase, the value that should be reported for that asset decreases.

The calculation of expected family contribution does not include 401k accounts, regular IRA's, Roth IRA's, insurance cash values and annuities. On the Profile form however, they do request this information and it can be used along with the IM formula by schools requiring the Profile to assess a student's eligibility for their aid.

Assets in parents' names count against them at a rate of 5.64% of the net reportable assets. Assets in students' names are counted at a rate of 20%.

As the number of college students in the household increases, Parental Contribution decreases per student. If a couple has one child in college, their Parental Contribution is $10,000 per year. If a year later they have two in college, their Parental Contribution does not increase to $20,000. The $10,000 contribution basically gets divided among the two children. So they have a $5,000 Parental Contribution for each child.

The Expected Family Contribution can differ among two children in college at the same time if their Student Contributions are different, but the Parental Contribution will basically be the same for each student if they are attending comparable schools.

Implications of Untaxed Income and Benefits

Contributions to qualified retirement plans reduce adjusted gross income (AGI) for tax purposes, but these contributions are included as income in the EFC calculation. For example, if a couple has an AGI of $50,000 and they make an IRA contribution of $2,000, their total income for EFC purposes will be $52,000. Consequently, because there was no tax paid on the $2,000, there is no allowance against the additional income. Thus, the couple's overall income will be higher, as well as their EFC. Contributions to qualified plans increase EFC even though assets in retirement accounts are not reportable and are not counted in the EFC calculation.

Likewise, tax free interest income, untaxed social security benefits, child support received, and other types of untaxed income and benefits will increase a family's EFC because they are included as part of the family's income, but there is no tax paid on them.

The Simplified Needs Test

To qualify for the Simplified Needs Test (SNT), you must have an adjusted gross income (AGI), or a total combined income from work from both parents, of not more than $49,999 and be able to file a 1040A or 1040EZ tax form. If a family qualifies for the SNT, their assets are not counted in the EFC calculation. The formula is "simplified" because assets are "thrown out" and may result in a lower EFC.

Who can use Form 1040A to file their taxes?

You can use the Form 1040A if all six of the following apply:

  1. You only had income from the following sources:
    • Wages, salaries, tips
    • Interest and ordinary dividends
    • Capital gains distributions (e.g., mutual fund distributions, but not capital gains from the sale of mutual fund shares)
    • Taxable scholarship and fellowship grants
    • Pensions, annuities and IRA's
    • Unemployment compensation
    • Taxable social security and railroad retirement benefits
    • Alaska Permanent Fund dividends
  2. The only adjustments to income you can claim are:
    • The IRA deduction
    • Educator expenses
    • Student loan interest deduction
    • Tuition and fees deduction
  3. You do not itemize deductions.
  4. Your taxable income is less than $100,000.
  5. The only tax credits you can claim are:
    • Earned income credit
    • Credit for child and dependent care expenses
    • Credit for the elderly or disabled
    • Adoption credit
    • Child tax credit
    • Additional child tax credit
    • Education credits
    • Retirement savings contributions credit
  6. You did not have an alternative minimum tax adjustment on stock you acquired from the exercise of an incentive stock option.

You can also use the 1040A if you received advance earned income credit (EIC) payments, or employer-provided adoption benefits, or if you owe tax from the recapture of an education tax credit or the alternative minimum tax.

Source: Internal Revenue Service, 2008, 1040A Instruction Booklet

Families that pass the SNT face the challenge of managing their investments so that they can continue to file a 1040A or 1040EZ tax return which means avoiding capital gains from the sale of individual stocks, exchange traded funds (ETFs), mutual funds, etc. Distributions from mutual funds will not disqualify a taxpayer from using the 1040A or 1040EZ tax forms.

Automatic Zero EFC

Certain students are automatically eligible for a zero EFC. For the 2009-2010 award year, a dependent student automatically qualifies for a zero EFC if both of the following are true:

  1. Anyone included in the parents' household size on the FAFSA received benefits during the base year from any of the means-tested Federal benefit programs: the Supplemental Security Income (SSI) Program, the Free and Reduced Price School Lunch Program, the Food Stamp Program, the Temporary Assistance Program for Needy Families (TANF) and WIC; OR the student's parents filed or are eligible to file a 2007 IRS Form 1040A or 1040EZ;
  2. AND

  3. The 2007 income for the parents is $20,000 or less.

Determining the Contribution from Assets

The types of assets that are reportable on the financial aid forms are the same for parents and students.

As a result of the College Cost Reduction and Access Act passed in September of 2007, student-owned 529 and ESA accounts will be treated the same as parent-owned 529 and ESA accounts starting with the 2009-2010 academic year.

However, students do not have an asset protection allowance (APA) and they are expected to contribute 20% of any reportable assets toward the cost of college. So if a student has $10,000 in an investment account, the student will be expected to contribute $2,000 toward the cost of college.

If there is $10,000 in the parents' names, and their asset protection allowance is $38,000, then there will be no contribution expected from the asset, because the total reportable assets do not exceed the asset protection allowance. If the family had $60,000 in reportable assets, they would be expected to make a contribution from assets on $22,000 (i.e., $60,000 - $38,000). Unlike students, the parental contribution from assets is only 5.64%, not 20%. So the contribution expected from assets on the $22,000 would only be $1,241.

"Hiding" Assets

Many college planners make a living transferring "visible" or reportable, assets into non-visible assets such as annuities. The purpose in doing this is to decrease the family's EFC and help them qualify for more financial aid. For example, if a child has $10,000 in a CD and she moves that money into an annuity, her EFC will decrease by $2,000 for the upcoming year. The practice of hiding assets is not advised in most cases for several reasons.

First, assets transferred into an annuity are not cost effective to use in paying for college because of the surrender costs and penalties involved when withdrawals are taken. And, if the assets are withdrawn, any taxable income will be counted against the family in the income section of the EFC formula.

Second, there is usually a cost of selling the existing asset before it is transferred. Any dividends, capital gains or interest income from the asset will be reported on the family's tax return. In addition to the potential tax costs, these events leave a paper trail if the college audits the family's financial aid information using tax returns and other documents. One in three families are audited by the Department of Education and required to provide documentation to support the information provided on their financial aid forms. If the financial aid office "finds" the money, they will usually count it as a visible asset.

Third, increasing aid eligibility does not mean that the family is going to get more grants or scholarships (i.e., free money). It may merely result in a student receiving more loans. Moreover, the admissions and financial aid tendencies of colleges change every year and cannot be accurately predicted based on enrollment and aid statistics from a prior year.

Fourth, the increase in EFC resulting from the visible asset may be minimal depending on the asset protection allowance of the family. Or the family may have a high EFC based on income alone and transferring the assets will not lower their EFC enough to help them qualify for any additional aid.

However, if a lower income family has the cash flow and assets to pay for college and also has money in the child's name, they may be well advised to transfer the child's money into a 529 college savings plan where it will be treated as an asset of the parent instead of the child. This makes sense because, as we have noted before, all assets in the parent's name are counted against the child for aid purposes at a rate of 5.64% instead of 20% in the child's name. Thus, the family will likely qualify for more financial aid.

Aid Eligibility and Financial Aid Awards

Financial aid (grants, scholarships, loans and work-study) is awarded on the basis of need and/or merit. Need-based aid is based on a family's demonstrated need for aid through the needs analysis formula: COA - EFC = Need. Merit-based aid is awarded regardless of the student's ability to pay and is based on the student's talent.

All financial aid award packages that include federal student aid are based on eligibility for the Federal Pell grant. The Pell grant was authorized funding for 2009 that places the maximum at $5,350 for the 2009-2010 academic year. Undergraduate students must have an EFC of less than $4,641 to qualify for this grant. The amount of the Pell grant award is based on tables published by the Department of Education. Students with a zero EFC would be eligible for the maximum award of $5,350 while students with an EFC closer to $4,641 will receive smaller awards. The minimum award is $400.

If a student is eligible for the Pell grant then they are also eligible for the Academic Competitiveness grant (ACG) or the SMART grant if they also fulfill the curriculum and grade point average requirements for these programs.

If a student is eligible for the Pell grant and also demonstrates financial need (i.e., the COA is greater than the EFC) then he is also eligible for the Supplemental Educational Opportunity grant (SEOG). The SEOG is awarded to students with exceptional need based on the aid packaging policy of the college. It is possible to be eligible for the SEOG and not get it depending on the amount of available funds, the number of other students at the college who are considered to have exceptional need, and so on.

For students who are not eligible for the Federal Pell grant, the Academic Competitiveness grant, Supplemental Educational Opportunity grant (SEOG) and the SMART grant because their EFC is too high, yet who still qualify for need-based financial aid, the vast majority of federal need-based aid at most 2-year and 4-year public colleges is in the form of student loans and work-study.

The Perkins loan and federal work-study are also awarded on the basis of financial need, with the first choice going to students with exceptional need as defined by the college's aid packaging policy.

The Federal Stafford loan is the most common form of "aid" awarded to students. The Stafford loan can either be subsidized or unsubsidized depending on whether the student demonstrates financial need or not. Students who have need are eligible for a subsidized loan. The interest on subsidized Stafford loans is paid by the federal government while the student is in college, whereas the interest on unsubsidized loans must be paid by the student. The Parent PLUS loan allows credit-worthy parents to borrow up to the full cost of attendance minus any financial aid that the student has been awarded.

Here is an example of a student with an EFC of $13,000 that demonstrates need for financial aid at a four-year public college with a cost of attendance of 19,500.

Cost of Attendance $19,500
- Outside Financial Aid $0
- EFC $13,000
= Financial Need $6,500

Since the student's EFC is greater than $4,641, the maximum EFC for Pell grant awards, he is not eligible for the Pell grant. Therefore, he is also not eligible for the Academic Competitiveness grant, the SMART grant or the Supplemental Educational Opportunity grant (SEOG) either because they are all based on eligibility for the Pell grant.

The student does qualify for a subsidized Stafford loan because he has a demonstrated need and has no other financial aid. Assuming that he is a freshman, the maximum amount of his Stafford loan can only be $5,500 ($3,500 subsidized and $2,000 unsubsidized). Subtracting the Stafford loan of $5,500 from his financial need leaves him with an unmet need, or gap, of $1,000 that he and his family will have to come up with in addition to the EFC. Therefore, his out-of-pocket cost is $14,000, not just his EFC of $13,000.

Cost of Attendance $19,500
- Outside Financial Aid $0
- EFC $13,000
= Financial Need $6,500
- Stafford Loan $5,500
= Financial Need $1,000

Thus, out-of-pocket cost ($14,000) = cost of attendance ($19,500) – all financial aid ($5,500).

If your child doesn't qualify for need-based aid, all hope is not lost. Remember that merit aid is not awarded on the basis of one's ability to pay.

Merit aid is awarded on the basis of merit as determined by a particular institution. So it is common that a student may not demonstrate a need for financial aid because the family shows too much income and they have a high EFC, but the student is talented in academics, sports, music, dance or some other area, and the school awards the student a scholarship based on those merits.

Since merit aid is not based on your family's ability to pay, it is a perfect complement to several key tax-saving tactics that will be discussed later. The reason is that many of the most effective tax-saving tactics call for income and assets to be "shifted" to the student which has an adverse effect on the student's eligibility for aid because the extra income and assets raise his EFC. Thus, many tax-saving tactics actually disqualify students for need-based aid. Of the two types of aid, merit aid is a better companion to tax-saving tactics.

Examples of merit aid are grants and scholarships which the college has designated for specific purposes or that the student was awarded privately (e.g., YMCA, Kiwanis, etc.).

A word of caution is warranted at this point. You need to be aware that usually grants and scholarships, including "outside" or "private" scholarships that the student may receive, will be used by most colleges to first reduce the student's financial need (if he has one) and then, and only then, will those awards go toward reducing the student's EFC and out-of-pocket cost.

In the example above, had the student been awarded a $2,000 scholarship from his local Community Foundation, his financial need would have been reduced to $4,500 instead of $6,500. And since his financial need would be less than the $5,500 maximum for Stafford loans, the student's subsidized Stafford loan could be reduced from $5,500 to $4,500, enough to eliminate the student's financial need.

Cost of Attendance $19,500
- Outside Financial Aid $2,000
- EFC $13,000
= Financial Need $4,500
- Stafford Loan $4,500
= Financial Need $0

In this example, the student's outside scholarship of $2,000 helped to reduce his financial need which slightly lowered the amount of money that he had to borrow and dropped his subsequent out-of-pocket cost to $13,000. Out-of-pocket cost ($13,000) = cost of attendance ($19,500) – all financial aid ($4,500 + $2,000).

If we assume that the same student is attending a four-year private college with a sticker price of $39,000, the student would have a need of $24,000 after subtracting his EFC of $13,000 and his $2,000 scholarship. With $24,000 in need, if the college offers the student a $15,000 academic grant, a subsidized Stafford loan of $3,500 and federal work-study in the amount of $3,500, the student's financial need would be met.

Cost of Attendance $39,000
- Outside Financial Aid $2,000
- EFC $13,000
= Financial Need $24,000
- Academic Grant from College $15,000
- Federal Work-Study $3,500
- Stafford Loan $3,500
= Financial Need $0

In this example, the student was able to attend an "expensive" private school for the same out-of-pocket cost of $13,000 as the less expensive public college. Now granted, the same student could go down the road twenty miles to the next private college and that college may not find the student as "favorable" from an admissions standpoint, and the student could end up with NO academic grant. Thus, once again, remember that the amount of merit aid an applicant receives is often tied directly to how attractive that candidate is to a particular institution.

A student at a public or private college can always appeal a financial aid award and attempt to get a better financial aid package. However, public colleges and universities typically have less flexibility in aid packaging because they have less endowment monies to work with and lack the ability to adjust their cost of attendance like their private college counterparts. Hence, because private colleges have more room to work with families financially, it can often be possible for students to attend an expensive private college for close to the cost of a public college. Appeals should be made in good faith and in person with the family having some concrete reason to demonstrate why they feel they qualify for a more generous offer, such as a more substantial grant from another college of similar stature or a change in family circumstances since the first numbers were submitted. Once an appeal has been denied, though, the process is over. Remember too that there are strict federal guidelines as to how a college may award funds. It is conceivable that the award one receives is truly all that an institution may be able to offer by law.

The best financial aid packages come from schools that really want a specific student for a specific reason. The proactive family is the one that seeks out schools which may have an interest in the student's special talent, situation, place of residence or anything else that can add a perceived value to the school's population.

There are many factors affecting the calculation of a family's expected contribution toward the cost of college. Ultimately it is the family's EFC and the cost of attendance (COA) of the college that determine a student's eligibility for need-based financial aid at that college. However, the student may receive merit-based aid regardless of the family's ability to pay.

In general, the biggest driver of expected contribution for most families is their household income, followed by assets in the child's name. Most families cannot lower their household income, nor should they want to, in order to lower their EFC. Indeed, for many families their income alone is too high for them to qualify for need-based aid anyway, so it doesn't matter whether the child has money in her name or not; their EFC may just be too high. In this case, families should search even harder for merit aid and focus on the strategic use of the education tax credits as part of their overall effort to decrease the overall cost associated with education funding.