Understanding EFC and Ways to Lower Your EFC

In order to understand college financial aid, you need to will need to learn a plethora of acronyms and abbreviations: FAFSA, CSS PROFILE, SAR, and EFC. With out a doubt, the most important abbreviation for you to learn is EFC. It stands for Expected Family Contribution, and it is the amount of money that a school is going to expect you to pay each year for your child’s college education (sorry to have to break it to you: but you must apply for financial aid EACH year that the child is in school).

Before you determine what your EFC is, it is important that you know a few things. First, there is one formula for the entire country, so often what the colleges will expect you to pay and what you can actually pay are two very different numbers. Often this is because they do not give you a cost of living adjustment, but even if you live in a low cost area of the country, all they allow you to protect of your income is the federal poverty level. The EFC is determined using four basic factors:

• Parent Income
• Parent Assets
• Student Income
• Student Assets

For most of the families that I have worked with, the parent income is the primary driver of Expected Family Contribution. Unless the parents own a business, there is not much you can do to adjust your income. While some may try to lower their taxable income by increasing contributions to 401k or other retirement plans, the amount of your contribution is added back in to your income. The reason they do that is they (they being the people who make up the EFC formula, primarily the government) feel that while your child is in college you should suspend your own retirement savings and focus on paying for the child’s education. So, increasing retirement plan contributions while the child is in college will not help you. If you own a business and it isn’t an S Corp or an LLC, then you may be able to hold cash in the business and defer compensation. The first two forms of business are pass through entities, and thus there is not much you can do to lower your income. If you do own a business, a change made this past year will greatly benefit you. They no longer consider the value of a business if it has less than 100 employees. This means if you fully own a business, you may consider keeping cash in the business accounts rather than personal accounts, since they will not be considered. We will get to other strategies for business owners after we discuss the second factor in determining EFC: parent assets.

The formula assesses parent assets at a maximum rate of 5.6%. The parents also receive an Asset Protection Allowance. That is, they do not look at all of the parents’ assets, they only look at the amount over their allowance. The asset protection allowance is based on the age of the older parent and the number of parents in the household. If there are two parents in the household, a good rule of thumb is $1,000 for year. So, if the older parent is 45, and the family has $100,000 saved for college, the formula will assess the parents for 5.6% of $55,000 (the amount over the protection allowance), or $3,080 will be added to the students Expected Family Contribution. So, you can see that parents’ assets do not greatly affect the EFC. Thus, you should think twice before concocting some elaborate scheme to hide all of your assets, as it will most likely cost you more in commissions than it will save you in tuition.

The primary strategy that a parent should use to lower a student’s EFC is to make certain that the student has no money in her name. Student Assets, the third factor in determining EFC, are assessed at 20% (this is a significant reduction, in the past they were assessed at 35%). Further, there is no asset protection allowance for students, so if a student has $20,000 in her name, it will add $4,000 to her EFC. If you have the money in a 529 plan, those assets will grow tax free and be assessed at the parents’ rate for financial aid purposes, the best of both worlds. If you have money for the student in a UGMA/UTMA account, you may not be able to move it in to a 529 Account, this is something you should discuss with your financial advisor. We are not investment advisors, and can tell you what it will mean from a financial aid perspective, but investment decisions are personal and we encourage you to look at your financial planning holistically. That is, to not only consider college financing ramifications, but also to consider retirement and other financial goals when making decisions.

The final component in determining EFC is student income. Basically they expect that 50% of student income above an income protection allowance will go towards financing college. While it might make it seem like it isn’t worth it for a student to work, keep this in mind, they only take $.50 of every after tax dollar, so the student still has $.50.

It is very difficult to give someone an estimate of their EFC, since there are so many variables that go into determining the EFC. Also, there are two kinds of EFC. An EFC by Federal Methodology (what the federal government expects you to be able to pay each year. This is used for doling out all federal monies). The second type of EFC is determined by Institutional Methodology. That is, some of the private schools have their own formula for determining how they will give out their own money. You can learn what your EFC is using both methods by utilizing the College Board’s EFC Calculator (link to http://apps.collegeboard.com/fincalc/efc_welcome.jsp). We encourage you to learn your EFC as soon as possible for several reasons: first, if there is anything that you can do to lower your EFC, you can do that; second, the sooner you know what they will expect you to pay, the sooner you can start making adjustments to your budget and you can also use that figure in choosing colleges.

You should not be scared off from a college because of a high sticker price. In a perfect world, you would only pay your EFC (who are we kidding, in a perfect world, someone would pay us to go to college), however, you will usually end up paying a little bit more than your EFC. However, if you know your EFC, and you know it is very low, then you can focus on colleges that have excellent financial aid programs and do a great job of meeting need. If you have a high EFC, you can focus on colleges that will offer your child merit aid. Either way, we encourage you to learn your EFC as soon as possible.