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Fundamentals of EFC Calculations Part 1

Session 15. Fundamentals of EFC Calculations Part 1. Micki Roemer Marianna Deeken. Principles of Need Analysis. Family has primary responsibility to pay for educational costs Student and parents are expected to contribute to the extent they are able

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Fundamentals of EFC Calculations Part 1

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  1. Session 15 Fundamentals of EFC Calculations Part 1 Micki Roemer Marianna Deeken

  2. Principles of Need Analysis • Family has primary responsibility to pay for educational costs • Student and parents are expected to contribute to the extent they are able • Family should be accepted in its present financial condition • Families should be evaluated in an equitable and consistent manner Session 15

  3. Need Analysis Concepts • Need-based funds are available to assist with educational costs that exceed the family’s ability to pay • FM assesses strength at the time of application • Family resources are devoted first to basic subsistence Session 15

  4. Need Analysis Concepts • Beyond basic needs, families can exercise discretion • FM allowances protect family resources • Basic needs • Non-education related discretionary costs • FM measures discretionary resources • Establishes a portion available for education Session 15

  5. Factors that affect EFC • Number in Household • Number in College • Taxed and Untaxed income • Taxes paid • Investments • Age of the older parent • Number of wage earners Session 15

  6. How is EFC Determined? • Three distinct FM formulas • Regular • Simplified • Automatic zero Session 15

  7. Simplified Formula • Assets not considered • Parents’ AGI or earnings from work < $50,000 and • Neither parents nor student required to file IRS form 1040 Session 15

  8. Automatic Zero • EFC is automatically zero if • Parents’ AGI or income earned from work is $15,000 or less and • Neither parents nor student required to file IRS form 1040 Session 15

  9. How is EFC Determined? • Three Federal Methodology (FM) models • Dependent student • Independent student • Independent student with dependents other than a spouse Session 15

  10. Independent Students • Independent Students without Dependents other than a spouse • Applies to single and married independent students • These students may NOT qualify for auto zero EFC • These students may qualify for simplified formula • Student (and spouse) AGI or earnings from work < $50,000 and • Student (and spouse) not required to file IRS form 1040 Session 15

  11. Independent Students • Independent Students with Dependents other than a Spouse • Analysis looks much like that of parents of dependent students • Can qualify for Auto Zero EFC if • Student’s (and spouse’s) AGI or income earned from work is $15,000 or less and • Student (and spouse) not required to file IRS form 1040 Session 15

  12. Independent Students • These students may qualify for simplified formula • Student (and spouse) AGI or earnings from work < $50,000 and • Student (and spouse) not required to file IRS form 1040 Session 15

  13. Treatment of Income in FM • Total Income: Base year income from all taxable and untaxable sources -Exclusions (FAFSA Worksheet C) =Total Income Session 15

  14. 47,896 48,000 0 48,000 47,896 0 650 650 48,546 0 48,546 Session 15

  15. Treatment of Income in FM • Available Income • Portion of income remaining for discretionary spending: Total income -Total Allowances =Available Income (AI) Session 15

  16. Total Allowances • Allowances for taxes • U. S. Income tax paid • Estimate of state and other taxes • State of residence • Amount of total income • FICA Session 15

  17. Total Allowances • Income Protection Allowance-IPA • Estimates amount needed for basic needs • Based on BLS lower budget expenditures adjusted for CPI • Increases with each household member • Decreases with each member in college Session 15

  18. Total Allowances • Employment expense allowance • Represents additional costs when both parents work • Applies to single parent working families Session 15

  19. 4,144 3,884 3,672 0 17,060 0 28,760 Session 15

  20. 48,546 28,760 19,786 Session 15

  21. Treatment of Assets in FM • Assets defined • Cash, savings, checking • Investments and trusts • Real estate equity • Business/farm equity (non-family farms only) • Protects first 60% of equity up to $100K • Decreases protection percentage after $100K Session 15

  22. Treatment of Assets in FM Cash, savings, checking +Net worth of real estate and investments +Adjusted net worth of business/farm =Total Net Worth Session 15

  23. Treatment of Assets in FM Total Net Worth -Education Savings and Asset Protection Allowance =Discretionary Net Worth Session 15

  24. Treatment of Assets in FM • Education Savings and Asset Protection Allowance • Protects assets for retirement and future education costs • Applies > age 25 • Increases with age • Adjusted for marital status • No protection for dependent students Session 15

  25. Treatment of Assets in FM Discretionary Net Worth X 12% (asset conversion rate) =Contribution from Assets Session 15

  26. 1,500 1,000 0 0 2,500 43,200 0 0 Session 15

  27. Adjusted Available Income Parents’ Available Income (+ / -) +Parents’ Contribution from Assets (+/ 0) =Total Adjusted Available Income (+ / -) Session 15

  28. Determining Parents’ Contribution • As income increases, amount needed for basic household expenses decreases • Discretionary income increases • Income available for education Adjusted Available Income (AAI) X AAI contribution rate =Total Parents’ Contribution from AAI Session 15

  29. Determining Parents’ Contribution • Total contribution from AAI is divided evenly among all household members in college Total PC from AAI = 9-month PC Number in College Session 15

  30. 19,786 0 19,786 4,820 1 4,820 Session 15

  31. Determining Student’s Contribution Total of student taxed + untaxed income - state and federal taxes - $2420 IPA -allowance for parents’ negative AAI = Available income (AI) X 50% assessment of AI = Student contribution from AI Session 15

  32. 1,660 1,660 0 0 0 0 1,660 1,660

  33. 0 100 127 0 2,647

  34. 1,660 2,647 0 0 34

  35. Determining Student’s Contribution Cash, savings, checking +Net worth of real estate and investments +Adjusted net worth of business/farm =Total Net Worth X 35% =Student contribution from assets Session 15

  36. 50 0 0 50 18 Session 15 36

  37. Determining EFC Parents’ Contribution +Student’s Contribution from AI +Student’s Contribution from assets = 9 month EFC Session 15

  38. 4,820 18 0 4,838 38

  39. Tech Slide We appreciate your feedback and comments. We can be reached: Micki Roemer Phone: 202-377-3452 Email: claire.roemer@ed.gov Marianna Deeken Phone: 206-615-2583 Email: marianna.deeken@ed.gov Session 15

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