The world of paying for college is an alphabet soup of abbreviations. The most important one for your clients to know and understand is the EFC. EFC stands for “expected family contribution.” Knowing your client’s is key to making decisions about finding a college your client can afford. Let’s look closer, dispel some EFC myths, and talk about how your client can use it in their college search. The federal government uses their Free Application for Federal Student Aid or FAFSA (yes, another acronym!) to determine your client’s EFC. Whether or not they will qualify for federal student aid is based on this number.
Federal student assistance can come in the form of:
- Pell Grants Subsidized Stafford Loans
- Subsidized Stafford Loans
- Federal Supplemental Educational Opportunity Grants (FSEOG)
- Perkins Loans (Terminated October 1, 2017)
- Federal Work-Study (FWS)
Determining your client’s “need”
Your client’s financial need is calculated by subtracting their EFC number from the cost of attendance at the college they choose. The difference between the two is their “need.”
(In this piece we’re going to focus on the FAFSA calculation of EFC or what’s called the “Federal Methodology.” Most colleges use FM; however, some of our most prestigious universities use very different formulas. You can read more about them in our blog post.)
The government uses three different worksheets when calculating EFC depending on the student’s status. Are they a dependent student? An independent student without dependents other than a spouse? Or an independent student with dependents other than a spouse? For details on how to define “independent,” refer to the government’s EFC formula worksheet found here.
Let’s focus on dependent students – those who receive more than half their support from their parents or guardians.
7 EFC myths debunked
1. My client’s EFC will be a number my client can afford to pay towards their child’s education.
Probably not. What the formula says your client can pay and what they can actually afford to pay aren’t even close. Your client will probably gasp at the amount the government expects them to contribute to their child’s college education every year. (The EFC is an annual amount.)
Families with a combined income of around $150,000 can expect to have an EFC that exceeds $30,000, more than the annual cost of most state schools, although not all colleges. EFCs can soar to $70,000, $80,000, $90,000 per year and the largest driver is parental income.
2. Your client’s home equity will impact their FAFSA EFC.
No. Your client’s home equity is not used in the EFC calculation. Some of the alternate methodologies take a home’s value into account, but not the Federal Methodology. This can make a huge difference in a family’s EFC from one school to the next if they use the Institutional Method!
3. If your client didn’t qualify for aid last year, they won’t qualify this year.
Not necessarily. Things like financial aid policies at colleges and your client’s own income/asset figures can change year-to-year. It’s always best to file the FAFSA every year just in case.
In addition, the EFC is one number for the entire family. If your client’s have an EFC of $30,000, that number would be split if they have two students enrolled in college at the same time–roughly $15,000 each! Many families may not qualify when they have one student in school, but very well might when they have overlap.
4. The EFC number equals what my client’s have to pay for college. Any additional cost exceeding that number will be paid for by the college.
Earlier, we said your client’s “need” is the cost of attendance minus their EFC. However, not every college out there can meet your client’s need 100%. In fact, most can’t. Only a handful (about 60) can guarantee 100% need met for students. Understand your client’s “net cost” to attend the school after all aid and how they will pay for all 4 years down to the penny before committing to that school!
5. Saving less money will improve their EFC.
Yes and no. Income of the parents and the student has the greatest impact on their EFC number. A parent’s assets (cash, savings, investments—other than retirement) are assessed at a rate of 5.64% and they have an asset protection allowance based on the age of the oldest parent. In comparison, a parent’s income can be assessed at a rate up to 47%. Student’s income is assessed at 50% and their assets at 20%. It’s not the assets which will drive up your client’s EFC…it’s their income.
However, if they can afford to, sometimes using their savings to pay down their consumer debt is a good idea. You’ll look “poorer” on paper with less savings, and colleges don’t care about the amount of their outstanding debt. A little better financial footing for families going forward as they approach paying for college and managing their cash flow during the college years is a good idea.
KEY POINT – don’t be hoodwinked by insurance sales people. They will try to convince your client that since the cash value of life insurance is not assessable they should not fund 529 plans and instead put all their money in insurance. Buyer beware! The most a 529 asset is assessed is 5.64%. The cost of life insurance outweighs the benefit in almost all scenarios.
6. Putting money into accounts in your client’s child’s name is the best way to save for college.
Nope. Bad idea. Assets in a student’s name are assessed at a higher rate (20%) than those in a parent’s name (5.64%). Assets in your client’s students name will drive up their EFC.
7. If your client won’t qualify for need-based financial aid, knowing their EFC is useless.
Your client might be surprised. Knowing their EFC can be a great tool not only for planning for the future (how much will you be expected to pay) but also for your client’s college search.
If your client’s EFC is $24,000 and State School A costs $19,000 per year, they will not be eligible for a federal aid award. Your client’s EFC is higher, so you’d be expected to foot the whole bill. However, say Private School B costs $52,000 per year and will meet 100% of your client’s need. Suddenly your client may be receiving potential federal aid in the amount of $28,000—something to consider as they start your college search.
How do you know what your client’s EFC will be?
A simple way to figure out your client’s EFC is to take advantage of an online calculator like this one.
Don’t wait to calculate your client’s EFC. Figuring the number in middle school is a good idea—way before your client’s college search begins. Do your client’s need to be saving more in a 529 than they expected? Do they need to get some assistance to create a plan to minimize their student’s future student loan debt? Early is better than later in this case!