Financial Aid - how the federal government determines Expected Family Contribution
When you apply for federal financial aid for college, you fill out a lengthy form called the Free Application for Federal Student Aid, or FAFSA. Among other things, you fill out information on your parents’ income and assets and your income and assets. From this information, the federal government determines what’s called your Expected Family Contribution (EFC). The EFC, in turn, determines how much and what type of federal financial aid you’re eligible to receive. The formula used to determine EFC is calculated based on the following percentages being available to pay for college costs:
- 50% of the student’s income
- 22% to 47% of the parents’ income*
- 35% of the student’s assets
- 2.6% to 5.6% of the parents’ assets*
*The parental share is a sliding scale based on the elder parent’s age. The older the elder parent is the less the parents are expected to contribute. Retirement accounts and the value of the primary residence are not counted as parental assets in this calculation.
This table tells us several things. First, in most cases it’s best to hold assets in the parents’ names rather than the student’s. Second, the federal government expects the family to have lots of disposable income available to pay for college. Finally, this underscores the need to save first for retirement, then college, since retirement assets are excluded from consideration when determining financial aid.
Some commentary:
Wow! Those are some pretty steep numbers. I can understand 50% of the student’s income going to college. It’ll likely be closer to 100% for most people. But 22% to 47% of the parents’ income??? I guess they assume there are no other people in the household except that student. I’m wondering, too, how this is spread out if you have two or more kids in school at once like my family did for many years. Also, 35% of the student’s assets is no small amount either. If my math is right, if you go to college for five years (fairly common now), you’ll come out with about 10% of the assets you started with. If it only takes four years, you still have less than 20% of the assets you started with.
April 20th, 2007 at 4:35 am
So to get the smallest EFC (and make someone else pay for your kids college), you should have your kid NOT work & NOT have accounts in their name. Also, if you have the financial security, getting a lower paying job or even retiring when your kids are heading off to school will greatly decrease your expected contribution. And, with this current EFC formula, you should definitely WAIT to move into your empty nest pad until the last kid is done with college (keeping more of your net worth tied up in your primary residence).
April 20th, 2007 at 10:19 am
As strange as it sounds, all the moves you suggest would reduce your EFC. Of course, that may just mean you’ll have more loans made available to you, since the vast majority of ‘financial aid’ is in the form of loans.
April 30th, 2007 at 5:44 am
Very true. But even nominal interest loans with tax-deductible interest that you don’t have to start paying back until you graduate are better than having to fork over cash.
June 11th, 2007 at 8:46 pm
is this for minor kids?
I wouldn’t expect parents to pay for their 29 yr kids still wasting time in college getting masters degrees or multiple undergrad degrees.
Also, does the kids Roth IRA contribute towards their net assets?