Basics of the EFC Calculation Presented by Kim
Basics of the EFC Calculation Presented by: Kim Eck, Illinois Student Assistance Commission Michelle Stipp, De. Vry University
The Basics • Expected family contribution (EFC) is the amount a family can be expected to contribute toward a student’s college costs – used to determine a student’s need for financial aid • Source of the data is the Free Application for Federal Student Aid (FAFSA) • Calculation is done consistently for all students using the Federal Methodology (FM) – Assesses available income and assets
How Is EFC Determined? • Three FM models – Dependent student – Independent student without dependents other than a spouse – Independent student with dependents other than a spouse
How Is EFC Determined? • Three distinct FM formulas – Regular – Simplified • Does not include assets – Automatic Zero
Factors that Affect EFC • • Number in Household Number in College Taxed and Untaxed Income Taxes Paid Assets and Investments Age of the Older Parent Number of Wage Earners
Total Income in FM Base year income from all taxable and untaxable sources - Excludable income (e. g. education credits, earnings from need-based employment programs such as Work Study, or other income reported on Worksheet C) = Total Income
Total Allowances in FM • Allowances for Taxes – U. S. income tax paid – State and other taxes – FICA • Income Protection Allowance (IPA) • Employment Expense Allowance
Treatment of Income in FM Total Income - Total Allowances = Available Income (AI)
Treatment of Assets in FM Cash, savings, checking + Net worth of real estate & 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 x Asset Conversion Rate = Contribution from Assets
EFC Components • Parents’ Contribution (PC) consisting of: – Contribution from parents’ available income (AI) – Contribution from parents’ assets • Student’s Contribution (SC) consisting of: – Contribution from student’s available income (AI) – Contribution from student’s assets
Parents’ Contribution Available income + Contribution from assets = Adjusted available income (AAI) x Assessment rate = Total parents’ contribution ÷ Number in college (excluding parents) = Parents’ contribution (if negative, set to 0)
Total Student’s Contribution Student’s contribution from AI + Student’s contribution from assets = Student contribution
Dependent Model Parents’ contribution + Student’s contribution = Nine-month EFC
Independent Student without Dependents other than a Spouse • Applies to single and married independent students • EFC Components of Regular Formula: – Contribution from student’s (and spouse’s) available income – Contribution from student’s (and spouse’s) assets
Independent Students with Dependents other than a Spouse • Regular Formula looks much like that of parents of dependent students • Similar allowances and asset conversion rate
Simplified Formula • Applies to all three models • Elements used in the simplified need analysis: – – – Adjusted gross income Federal taxes paid Untaxed income and benefits Number of family members in college Allowances for state and other taxes • Assets are not considered in the calculation
Simplified Formula • Must meet specific criteria: – Income less than $50, 000, and – Eligible to file a 1040 A or 1040 EZ, or – Recipient of a means-tested federal benefit program • • • Supplemental Security Income (SSI) Food Stamp Program Free and Reduced Price School Lunch Program Temporary Assistance for Needy Families (TANF) Supplemental Nutrition Program for Women, Infants and Children (WIC)
Automatic Zero EFC • Applies to Dependent Students and Independent Students with Dependents other than a Spouse • Does not apply to Independent Students without Dependents other than a Spouse
Automatic Zero EFC • Must meet specific criteria: – Income less than $20, 000, and – Eligible to file a 1040 A or 1040 EZ, or – Recipient of a means-tested federal benefit program • • • Supplemental Security Income (SSI) Food Stamp Program Free and Reduced Price School Lunch Program Temporary Assistance for Needy Families (TANF) Supplemental Nutrition Program for Women, Infants and Children (WIC)
HERA Need Analysis Changes Implementation for 2006 -07 and 2007 -08
HERA Need Analysis Changes • Went into effect July 1, 2006 for 2006 -07: – Only the parent’s type of tax return filed will be considered for dependent students for Simplified and Auto Zero EFC Formulas • Previously, the tax filing criterion applied to dependent students as well. – Means-tested federal benefit programs added as an alternative to tax return requirement – Income threshold increased from $16, 000 to $20, 000 for Automatic Zero EFC
HERA Need Analysis Changes • Went into effect July 1, 2006 for 2006 -07: – Exclude assets of a family owned and controlled business with 100 or fewer full-time employees from the need analysis – Qualified education benefits (529 prepaid tuition, 529 prepaid savings, Coverdell) included as an asset • For dependent model, only counted as parental asset if parent is the owner; not considered an asset of a dependent student • Considered an asset of independent student if that student owns the plan
HERA Need Analysis Changes • Effective for 2007 -08: – Increases in Income Protection Allowances • To $3000 from $2200 for dependent students • To $6050 from $5000 for independent students without dependents other than a spouse (single student and married student with both enrolled) • To $9700 from $8000 for independent students without dependents other than a spouse (married student, only one enrolled) – Decreases in Asset Assessment Rates • 35% to 20% for dependent students and independent students without dependents other than a spouse • 12% to 7% for independent student with dependents other than a spouse
Hand Calc Case Studies … Rounding Rules • Carry all calculations to three decimals • Round resulting amount to nearest whole number. 001 to. 499 rounded down. 500 to. 999 rounded up
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