Expected Family Contribution
Your Expected Family Contribution (EFC) is an amount determined by your family's and student's income and assets which is used to determine your eligibility for need-based college aid. It is computed from the Free Application for Federal Student Aid according to formulas on the Expected Family Contribution worksheet. Some colleges will meet your full need and limit the cost to the EFC, but even if a college does not meet the full need, the amount of need-based aid you receive is likely to depend on the EFC.
For each academic year, the income is calculated from tax forms for two years ago; for example, 2015 tax forms are used for the 2017-2018 EFC. (This allows the application to be filed before the tax form; if the prior year's tax form was required, applicants would have to wait until filing their taxes before applying for aid for the next fall.) Assets are reported as of the day the form is filed.
For a dependent student, the EFC comes from both the parents and the students:
- Parental adjusted available income: The contribution formula is progressive, with a 22% rate on the lowest levels of available income, up to 47% on higher levels. The income is determined by:
- Available income: after-tax income, including non-taxable income, reduced by a basic income allowance depending on family size.
- Discretionary net worth: Net worth reduced by a savings allowance depending on the parents' age. Net worth does not include a home, retirement account, small family business, or family farm. 12% of discretionary net worth is added to available income, which causes 5.64% of discretionary net worth to be part of the expected contribution at the 47% rate.
- Divide by the number of children in college to determine each child's EFC.
- Student income: after-tax income, including non-taxable income, reduced by a basic income allowance. 50% of student income above the basic allowance is included in the student's EFC.
- Student assets: Net worth not including the value of a home, retirement account, small family business, or family farm. 20% of all student assets are included in the student's EFC.
For an independent student, the EFC comes from only the student's income and assets, but still at the same 50% rate on income (with a larger allowance) and 20% on assets (with an allowance) unless the student has non-spouse dependents.
Definition of income
Income includes all discretionary income. It thus includes taxable income as reported on a tax form, but it also includes non-taxable income such as child support and tax-exempt interest. Tax-free withdrawals from an IRA are also considered income; withdrawals from a 529 plan are not considered income because the 529 plan was already considered an asset. Voluntary retirement contributions (to an IRA, 401(k), or other retirement plan) are considered discretionary and are thus included in income.
Money received or bills paid by a third party are also considered income. Scholarships are not income, but tuition paid by someone other than the student or parent is a bill paid by a third party and is thus income to the student.
Income is reduced by the actual amount of federal income and Social Security tax, and by a fixed percentage of gross income to estimate state and local taxes. The percentage depends on the state.
Definition of net worth
Net worth is calculated separately for bank accounts, investments, and businesses and farms; a negative value in any one category is treated as zero and cannot offset a positive value elswehere. Investments include real estate (but not the home that you live in), and non-retirement investment accounts, but do not include retirement accounts such as IRAs or 401(k)s. College savings investments such as 529 plans and Coverdell Education Savings Accounts (regardless of the beneficiary) are considered investments; however, they are considered parental assets if owned by the student. Small family businesses and family farms are not counted in net worth; small businesses and farms which are counted in net worth are counted at a reduced value.
The formula for the EFC makes it possible to manage investments in order to prevent them from being counted, or to move income or assets from one category to another.
Moving income to a non-counted year
The EFC is determined based on income in the calendar year two years before the academic year for which it is computed. Any income received in previous years is not counted (although it will become an asset if not spent), and income received in the calendar year before the student starts his or her last year of college (2016 for a student graduating in 2018) is not counted for any year that the student is in college. (If you have two children in college in consecutive years, you cannot use the "last year" for one child as it will increase the EFC for the other child in the next year.)
Therefore, if the college spending will produce income, it is best to delay this income until the year it will not be counted; use it for the student's last two years, or January or later of the previous year. For example, if grandparents or other relatives than the parents own a 529 plan with the student as beneficiary, the plan should be used for January of the sophomore year or later; otherwise, the withdrawal will be income to the student and will significantly reduce aid in the next year. Similarly, if some of the college funds will come from an IRA withdrawal (which is usually penalty-free if used for college), make the withdrawal in January of the sophomore year in college.
If you have a choice of when to realize income, it is best to realize it in a year not relevant for the EFC. For example, if you plan to sell stock for a capital gain, selling three years before the student begins college, or in January of the student's sophomore year, will prevent the capital gain from increasing your EFC.
Converting assets to non-counted assets
While assets are counted at a much lower rate, they are counted as long as they remain assets. A student who has a $1000 bank account and does not touch it will increase the EFC by $200 for every year of college. Any assets which are spent will not be counted in net worth for subsequent years.
However, even if assets are not spent, they can be moved into a non-counted category. If you can afford to contribute to a retirement plan while your children are in college, the contribution will still count as income for that year, but it will not count as an asset in future years. Likewise, if you pay down your home mortgage or other non-investment debts such as auto loans, this will not increase your reported net worth; if you instead pay down the mortgage on an investment property, this will increase the net worth of the investment property.
Students can also take advantage of converting assets to non-counted assets. If a student earns income in high school or college which he or she does not need to spend, he or she can contribute to a Roth IRA and not have the savings counted for the EFC.
Student versus parental money
Since student assets and income are counted at a much higher rate than parental assets, it will reduce the EFC if the parent has more of the assets and income. Therefore, spending the student's assets for his or her benefit (for example, using the student's money to buy a computer) will reduce the EFC.