Stratagee.com Blog

Today, US Secretary of Education, Arne Duncan, called for Congress to no longer include student and parent assets in the analysis of a student’s eligibility for federal student aid. This move has been researched and discussed for several years, but today was the first time the change was officially called for by the Department of Education.

Should Congress react favorably to the proposal the outcome for many middle and upper income families could mean a substantially lower expected family contribution toward the cost of college, and in some cases, depending on the cost of the college a student attends, an increase in federal student aid eligibility.

I was one of many college funding profesionals and education leaders in recent years who have made the trip to Washington to meet with Department of Education officials about this sort of change. The EFC Quick Reference Table that I have been creating for twelve years, and was published in this blog last year, was updated last week for the 2010-2011 academic year. This table was presented to Department of Education officials some years ago as an example of how simple the federal student aid analysis could be if assets were removed from the equation, and EFC based just on household income and demographics.

As such, it is a good preview of what a student’s EFC would be for the 2010-2011 academic year if the change occurs, as well as an estimate of an income-only EFC under current rules.

Our new Smart Search software utilizes a proprietary formula that dramatically reduces the amount of information needed to calculate a family’s EFC, and was designed to be capable of performing EFC calculations under the proposed rule change announced today. So if the proposed change becomes law it will simplify our software further.

We constantly strive to stay ahead of the curve, and that requires a constant watch on political, economic and legislative happenings around the country.

The EFC Quick Reference Table works like this. First, you need to know the parent’s adjusted gross income (AGI) which is typically the last line on the first page of your tax return. To keep things simple, if you don’t know your AGI simply use the amount that you earn from working each year.

Step 1 – Locate your income in the AGI column.

Step 2 – Find the column at the top of the table that corresponds to the number of dependent children that you have and follow that column down to the row that corresponds with your income (AGI). The number in the intersecting box is your estimated EFC based on parental income only.

For example, if your income is $70,000 and you have two dependent children, then your EFC is $8,511 and falls into the green area. If your income is $350,000 and you have one dependent child, then your EFC is $99,394 and is in the red area.

Eligibility for Need-Based Financial Aid

Eligibility for need-based financial aid is based on two things: 1) the cost of attendance (COA) of the college, tech school or university that a child wants to attend and 2) the expected family contribution toward that cost.

Cost of Attendance

Since you need to know the cost of attendance of a college in order to calculate need-based financial aid eligibility, I used a 2010-2011 projected national average cost of: a 2 year public college, a 4 year public college and a 4 year private college.

Expected Family Contribution

Expected Family Contribution (EFC) is the minimum amount that a family is expected to contribute toward the cost of attendance (COA). Calculating expected family contribution is necessary in determining a student’s need for financial aid. Essentially, a student’s EFC is subtracted from the cost of attendance of a college and if the EFC is less than the COA, then the student qualifies for need-based aid because he has a demonstrated need for it. When a student’s EFC is greater than the COA of a school, he won’t qualify for need-based financial aid. All of the EFCs are color coded to give you an idea of whether the student will qualify for need-based financial aid at one of three types of colleges. Use the color codes below to estimate need-based aid eligibility.

Let’s Put All of This Into Perspective

You Qualify

Using the example from above, if your income is $70,000 and you have two dependent children, your EFC is $8,511 and is green, which means that based on this estimated EFC using your income alone (your actual EFC may be higher), your child should qualify for need-based financial aid at all three types of colleges. As a result, your child is eligible to receive grants, scholarships, work-study and student loans as part of the child’s financial aid package. Eligibility does not mean certainty however. You will have to wait to see what form of aid the child gets and how much it is worth.

You Don’t Qualify

On the other hand, if your income is $350,000 and you have one dependent child, then your EFC is $99,394 and is red, which means that your child won’t likely qualify for need-based aid at any of the three types of schools used. But, that doesn’t mean that you have to pay $99,394 because the “sticker prices” at the three types of schools is less than that. You will never pay more than the cost of attendance.

Keep in mind too that I used national average costs for these three types of schools and that the cost of attendance of a specific college will be different than the national average. Several Ivy League colleges are more than $50,000 annually, but the projecte 2010-2011 national average cost for 4 year private colleges is $40,000. So the national average costs give you a broad sense of aid eligibility, and if your child doesn’t qualify for need-based aid, he might still receive some merit-based aid.

Financial aid (grants, scholarships, loans and work-study) is awarded on the basis of need and/or merit. Need-based aid is based on a family’s demonstrated need for aid through the needs analysis formula: COA – EFC = Need. Merit-based aid is awarded regardless of the student’s ability to pay and is based on the student’s talent (academically, athletically, etc). I need simple ways to keep all of this straight, so I just remember that need-based aid is based on your ability to PAY and merit-based aid is based on your ability to PLAY.

The EFC Formulae

The formula for determining EFC is not simple and is quite involved. The EFC Quick Reference Table is a way to quickly estimate need-based aid eligibility. Parents income is by far the biggest determinant of a student’s expected contribution, although currently parent’s assets and the student’s income and assets are also used in the official calculation.

The EFC formula is updated for inflation each year and is administered by the Department of Education based on the guidelines of the Higher Education Act. This table has already been updated for 2010-2011 based on the June 2009 update published by the Department of Education. The Higher Education Act is reauthorized on a regular basis by Congress. Thus the formula is often called the Congressional or Federal Methodology and is required to be used if a school wants to participate in Title IV financial aid (Pell grants, Stafford loans, etc.).

To apply for federal financial aid and get your EFC, students and parents must complete the Free Application for Federal Student Aid (FAFSA) www.fafsa.ed.gov. There is a copy of the 2009-2010 FAFSA in Stratagee’s College section. In addition, Stratagee’s College Section also contains several other useful resources published by the Department of Education that simplify and clarify the process of applying for financial aid

About 300 private colleges often use an additional formula called the Institutional Methodology to calculate a family’s EFC when considering the student for the school’s own aid money. In addition to the FAFSA, these colleges usually require a separate form called the Profile. Information on the Profile is available through the College Board at www.collegeboard.com. In general, the primary differences between the two formulae are: 1) The Institutional Methodology (IM) counts more types of assets from more family members than does the Federal Methodology (FM) which means that families with substantial assets could have a higher EFC under the IM formula and 2) under the IM formula, families that have little or no assets could have a lower EFC than under the FM formula.

Recently, Congress passed a law increasing the maximum amount of Stafford Loan that a student may borrow in a year. Beginning with the 2008-2009 Academic Year, students will be eligible to for an additional $2000 in Stafford Loan. This will be in the form of an Unsubsidized Stafford Loan. The following charts show the Stafford Loan limits for 2008-2009 by class:

Dependent Students:

Independent Students or Dependents Students whose parent is denied a PLUS Loan:

Subsidized and Unsubsidized Stafford Loans have two major differences. The first is that Subsidized Stafford Loans do not accure interest while the student is in school or during the six month grace period immediately following school, while Unsubsidized Stafford Loans do accrue interest during these time. The other difference is the interest rates. The following chart shows the differences between interest rates for Subsidized Stafford Loans and Unsubsidized Stafford Loans:

Let’s look at a couple of examples to illustrate the possibilities.

Example 1:

First Year dependent student with $10,000 need and their parent will qualify for a PLUS Loan. This student would receive:

Example 2:

Sophomore dependent student with $3000 of need and their parent will not qualify for a PLUS Loan. This student would receive:

Example 3:

Senior dependent student with $4,500 of need and their parent will qualify for a PLUS Loan. This student would receive:

Example 4:

Junior independent student with $15,000 of need. This student would receive:

Hopefully, this will clarify the new Stafford Loan limits for the 2008-2009 Academic Year.