Few families these days are able to afford to send their children to college without any financial aid. However, the way financial aid is determined can be a mystery. In order to unravel this mystery, it’s helpful to start with the concept of Expected Family Contribution (EFC).
In layman’s terms, the EFC is the amount that a family is expected to contribute to a student’s education expenses and is determined pursuant to federal law. The number is used by the federal government to determine eligibility for federal student aid programs, including Pell Grants, Stafford Loans, Perkins Loans, Federal Work Study, and Supplemental Educational Opportunity Grants. EFC is also used by individual colleges to calculate how much aid the college itself may provide.
EFC is calculated according to an enormously complex formula that is established by law. Your family’s taxed and untaxed income, assets, and benefits (such as unemployment or Social Security) are all considered in the formula. Also considered are the family size and the number of people in your family who will attend college or technical school during the year. The data to determine EFC is drawn from the FAFSA form completed by your family each year that one of your children attends college.
Once the EFC is established, it is then plugged into a simple formula:
Cost of Attendance – EFC = Financial Need
Financial Need is the maximum amount that can be met by need-based financial aid. (Other forms of financial aid, such as scholarships may be available independent of a student’s Financial Need). The higher the EFC, the lower the amount of financial aid for which the student is eligible. School policies differ on how much of that Financial Need they will cover, but it is the baseline that they use to make those decisions.
Three weighting factors are used in calculating the EFC. The student’s income carries a 50% weighting (i.e. a maximum of 50% of the student’s income can be applied to the EFC calculation); assets in the name of the student carry a 20% weighting; and parental assets carry a 5.64% weighting. Parents’ income over a certain minimum level is weighted on a sliding scale between 22% – 47%.
Because parents’ assets are weighted less heavily than a students’ assets, it is preferable for assets to be held in your name instead of your child’s name. Assets in UTMA or UGMA custodial accounts, which can be opened at your bank, are considered to be held by your child for purposes of the financial aid calculation. On the other hand, money in a 529 college savings plan is considered the asset of the owner of the account–usually the parent. It is important to consider these factors as you start putting money aside for your child’s college education.