EFC Calculation

The financial aid process can be overwhelming, and it is vital to understand the Expected Family Contribution or EFC.  The EFC is generated after completing the FAFSA and determines your need-based aid position at each college.  I wanted to explain the EFC calculation so that you have a better understanding of how your financial aid positioning is determined.

Before beginning your financial aid positioning for college, a family must understand how their EFC is calculated.  PayForED understands that saving for college and then paying for college is becoming a significant concern for many families.  That is why PayForED has developed student loan solutions to help you understand your EFC calculation and get the customized answers you need.

Understand your EFC Calculation

Most people believe the EFC to be one number, but it is the sum of four significant calculations.  Our EFC chart breaks down the Expected Family Contribution so parents and students can understand the details involved in this calculation and their positioning.  The calculation is four separate numbers that are summed together: parents’ income, parents’ assets, student’s income, and student’s assets.  Each of these components has distinct rules and allowances.  People often call the EFC calculation by other names like Federal EFC, FAFSA EFC, or EFC FAFSA.

A family will get their Federal EFC by completing the Free Application for Federal Student Aid or FAFSA.  This process only provides one number and does not break out the four separate numbers.  You need to understand the four quadrants of the EFC calculation to create a proper college-funding strategy.  The EFC Chart below shows the four individual numbers used to calculate the EFC number.  Some colleges require additional financial information beyond the FAFSA, so please review your college list and their financial aid form requirements.

EFC Parent Income

The first component of the EFC is the parent’s income, which for most applicants will be the largest number of their EFC.  It is based on the family’s structure, the number of dependents, adjusted gross income, and state of residence.  These terms are similar to your federal tax terms, as the two systems are now linked.

The parent income section of the calculation is progressive.  As the family’s Adjusted Gross Income increases, a higher percentage of the multiplier will apply to the income contribution number.  This method will result in the EFC increasing more quickly.

The one exception to the adjusted gross income is in the years you are applying for financial aid, the amount a person puts in deferred income is added as income.  Deferred accounts, IRAs, 401ks, and 403b accounts, are included as an income number in the financial aid income section of the calculation.  For income tax purposes, it still has the same tax deferral advantage.

EFC Parent Assets

For the parents’ asset calculation, non-retirement assets are all included.  Small farms, small family businesses, and your home equity are also excluded as counted assets.  There is an allowance amount based on the tax-filing status and the age of the oldest FAFSA-filing parent.  The asset amount that exceeds the allowance amount will be multiplied by 5.64 percent to arrive at the parent asset calculated amount.

EFC Student Income

For dependent student income, the rules are straightforward.  Since dependent students are included on another person’s tax return, their income allowances are limited by the state they reside in and the federal income exemption amount.  Amounts over the allowances are weighted at 50 percent.

EFC Student Assets

There are no allowances for the student asset section, and assets are weighted at 20 percent.  Therefore, many people think getting assets out of the student’s name is a good idea.  People compare the student’s percentage of 20 percent to the parents’ percentage of 5.64 percent and disregard the cost of attendance as part of their decision.  This asset-moving strategy is a common error.

It would be best if you were careful when liquidating student assets.  The first issue is the tax consequence of liquidating assets.  For dependent college students up to the age of twenty-four, if there is a taxable gain from the sale of assets, the “Kiddie Tax” rules will apply.  For the student, the first $1,150 of unearned income will be tax-free; the next $1,150 is taxed at the child’s marginal rate, and any amount over that will be taxed using the parent’s marginal income rate.  Do your research, as this limit changes periodically based on the tax code.  Depending on the amount of gain, a very high tax rate could be charged due to the parent’s income level.

The next issue is ownership of the account or asset.  If the primary social security number on the account is the student’s, then the asset or account is legally their money.  Legally, this money must be spent on the student’s behalf.  A parent would need documentation to properly liquidate a Uniform Gift to Minor Account (UGMA account), which is the type of account issued for most children under eighteen.

FAFSA Simplification Will Be Changing the Calculation

Starting in October 2023 and for School Year 2024-25, the FAFSA Simplification process will be completed.  The changes for the high school class of 2023 are not significant for your first year, but your outer years will be affected significantly.  A detailed description of the changes is described in our FAFSA Simplification article.

Here is a list of some changes that will increase your EFC and reduce the amount of need-based financial aid a student may receive starting in the 2024-25 school year.

  • Multi-child college discount is eliminated.
  • Family-owned farms and businesses values will be added back as assets
  • State Income Tax allowance is eliminated
  • Automatic feed from IRS tax system

These are just of few of the changes.  The EFC name will also be changing to Student Aid Index or SAI.  The overall function of the EFC/SAI is the same in the financial aid process.  A student will still need to complete the FAFSA to get that number and qualify for federal and state financial aid.

Second EFC Method or Institutional Method

In addition to the FAFSA EFC, some schools have a secondary financial aid process called the institutional methodology.  The most common is the CSS profile which uses a different calculation and is primarily used by many of the more competitive schools.  Unlike the FAFSA EFC, this EFC number will differ at every school.  Each college can modify the calculation to its specific goal within this method.  This number is often not explained or displayed to you.  This EFC calculation will include other items not included in the Federal EFC or FAFSA.  In most cases, this number is higher due to the inclusion of other items.  The college will typically use the higher of the two numbers when designing a student financial aid award.

EFC Summary

Understanding the parts of your EFC is essential for creating the proper paying for college strategies.  With this knowledge and the financial award letter, students can better project their college affordability and the financial outcome of getting a college degree.  We often understate the importance of affordability and focus only on admissions.  Many of these early college financial decisions will affect the student and the parent’s financial life for years to come.  Focusing on the outcome needs to be part of the decision.

At PayForED, we make it our job to offer intelligent and efficient student loan solutions for families who want more help.  We aim to help you make easy college comparisons and better financial decisions.  The PayForED College Cost Analyzer will provide a detailed estimated family contribution and estimated financial aid award calculation by the college.

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