# Presentation: 665269

## <date/time>

## Session 52

***How EFCs are Calculated***

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## How is EFC Determined?

- Three Federal Methodology (FM) models
- Dependent student
- Independent student
- Independent student with dependents other than a spouse

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## How is EFC Determined?

- Three distinct FM formulas
- Regular
- Simplified
- Automatic zero

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## Factors that affect EFC

- Number in Household
- Number in College
- Taxed and Untaxed income
- Taxes paid
- Investments
- Age of the older parent
- Number of wage earners

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## Principles of Need Analysis

***Principles of Need Analysis***

- Family has primary responsibility to pay for educational costs
- Student and parents are expected to contribute to the extent they are able

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## Principles of Need Analysis

- Family should be accepted in its present financial condition
- Families should be evaluated in an equitable and consistent manner

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## Need Analysis Concepts

- Need-based funds are available to assist with educational costs that exceed the family’s ability to pay
- FM assesses strength at the time of application
- Family resources are devoted first to basic subsistence

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## Need Analysis Concepts

- Beyond basic needs, families can exercise discretion
- FM allowances protect family resources
- Basic needs
- Non-education related discretionary costs

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## Need Analysis Concepts

- FM measures discretionary resources
- Establishes a portion available for education

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## Treatment of Income in FM

- Total Income:
- Base year income from all taxable and untaxable sources
- -Exclusions (FAFSA Worksheet C)
- =Total Income

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## Treatment of Income in FM 

- Available Income
- Portion of income remaining for discretionary spending:
- Total income
- -Total Allowances
- =Available Income (AI)

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## Total Allowances

- Allowances for taxes
- U. S. Income tax paid
- Estimate of state and other taxes
- State of residence
- Amount of total income
- FICA

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## Total Allowances

- Income Protection Allowance-IPA
- Estimates amount needed for basic needs
- Based on BLS lower budget expenditures adjusted for CPI
- Increases with each household member
- Decreases with each member in college

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## Total Allowances 

- Employment expense allowance
- Represents additional costs when both parents work
- Applies to single parent working families

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## Treatment of Assets in FM

- Assets defined
- Cash, savings, checking
- Investments and trusts
- Real estate equity
- Business/farm equity (non-family farms only)
- Protects first 60% of equity up to $95K
- Decreases protection percentage after $95K

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## Treatment of Assets in FM 

***Treatment of Assets in FM ***

- Cash, savings, checking
- +Net worth of real estate and investments
- +Adjusted net worth of business/farm
- =Total Net Worth

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## Treatment of Assets in FM 

- Total Net Worth
- -Education Savings and Asset Protection Allowance
- =Discretionary Net Worth

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## Treatment of Assets in FM 

- Education Savings and Asset Protection Allowance
- Protects assets for retirement and future education costs
- Applies > age 25
- Increases with age
- Adjusted for marital status
- No protection for dependent students

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## Treatment of Assets in FM 

- Discretionary Net Worth
- X 12% (asset conversion rate)
- =Contribution from Assets

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## Adjusted Available Income

-   Parents’ Available Income (+ / -)
- +Parents’ Contribution from Assets (+/ 0)
- =Total Adjusted Available Income (+ / -)

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## Determining Parents’ Contribution

- As income increases, amount needed for basic household expenses decreases
- Discretionary income increases
- Income available for education
- Adjusted Available Income (AAI)
- X AAI contribution rate
- =Total Parents’ Contribution from AAI

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## Determining Parents’ Contribution

- Total contribution from AAI is divided evenly among all household members in college
- Total PC from AAI	= 9-month PC
- Number in College

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## Determining Student’s Contribution

- Total of student taxed + untaxed income
- - state and federal taxes
- - $2330 IPA
- -allowance for parents’ negative AAI
- = Available income (AI)
- X 50% assessment of AI
- = Student contribution from AI

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## Determining Student’s Contribution

- Cash, savings, checking
- +Net worth of real estate and investments
- +Adjusted net worth of business/farm
- =Total Net Worth
- X 35%
- =Student contribution from assets

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## Determining EFC

- Parents’ Contribution
- +Student’s Contribution from AI
- +Student’s Contribution from assets
- = 9 month EFC

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## Simplified Formula

- Assets not considered
- Parents’ AGI or earnings from work < $50,000 _and_
- Neither parents nor student required to file IRS form 1040

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## Automatic Zero

- EFC is automatically zero if
- Parents’ AGI or income earned from work is $13,000 or less _and_
- Neither parents nor student required to file IRS form 1040

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## Independent Students

- Independent Students without Dependents other than a spouse
- Applies to single and married independent students
- May _NOT_ qualify for auto zero EFC
- May qualify for simplified formula
- Student (and spouse) AGI or earnings from work < $50,000 _and_
- Student (and spouse) not required to file IRS form 1040

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## Independent Students	

- Independent Students with Dependents other than a Spouse
- Analysis looks much like that of parents of dependent students
- EFC automatically zero if
- Student’s (and spouse’s) AGI or income earned from work is $13,000 or less _and_
- Student (and spouse) not required to file IRS form 1040

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## Independent Students	

- May qualify for simplified formula
- Student (and spouse) AGI or earnings from work < $50,000 _and_
- Student (and spouse) not required to file IRS form 1040

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## Tech Slide

- We appreciate your feedback and comments.  We can be reached:
- Marianna Deeken
- 	Phone:  206-615-2583
- 	Fax:  206-615-2508
- Email:  marianna.deeken@ed.gov

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## Tech Slide

- We appreciate your feedback and comments.  We can be reached:
- Greg Martin
- 	Phone:  215-656-6452
- 	Fax:  215-656-6499
- Email:  gregory.martin@ed.gov

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