# Presentation: 805449

## Session 12

**Fundamentals of EFC Calculations, Part 1**

- Claire Micki Roemer
- Greg Martin

## How is EFC Determined?

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

## How is EFC Determined?

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

## 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

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

## 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

## Need Analysis Concepts

- Beyond basic needs, families can exercise discretion
- FM allowances protect family resources
- Basic needs
- Non-education related discretionary costs
- FM measures discretionary resources
- Establishes a portion available for education

## Simplified Formula

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

## Automatic Zero

- EFC is automatically zero if
- Parents’ AGI or income earned from work is $15,000 or less **and**
- Neither parents nor student required to file IRS form 1040

## 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

## 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 $15,000 or less and
- Student (and spouse) not required to file IRS form 1040

## 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

## Our Student	

- Carol is a dependent student
- Lives in OK with a family size of 6
- Father works, mother works part time
- Parents have total assets of $30,100
- First in her family to go to college

## Treatment of Income in FM

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

## Treatment of Income in FM 

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

## Total Allowances

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

## 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

## Total Allowances 

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

## 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 $100K
- Decreases protection percentage after $100K

## Treatment of Assets in FM 

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

## Treatment of Assets in FM 

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

## 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

## Treatment of Assets in FM 

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

## Adjusted Available Income

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

## 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

## Determining Parents’ Contribution

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

- = 9-month PC

## Determining Student’s Contribution

-    Total of student taxed + untaxed income
- -  state and federal taxes
- -  $2440 IPA
- -  allowance for parents’ negative AAI
-     Available income (AI)
- X  50% assessment of AI
-     Student contribution from AI

## 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

## Determining EFC

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

## We appreciate your feedback and comments.  We can be reached at:

-  Claire Micki Roemer
-  Phone: 202-377-3452
-  Fax: 202-275-4551
-  Email: claire.roemer@ed.gov

-  Greg Martin
-  Phone: 215-656-6452
-  Email: greg.martin@ed.gov