LO 8.1.2: Evaluate the income and assets of parents and children to estimate the Expected Family Contribution (EFC) for financial aid.

Question 1

Expected Family Contribution (EFC)

Answer 1

• An index number that colleges use to determine the amount of family-paid annual college costs.
• EFC is subtracted from the total annual cost of attendance to determine the amount of financial aid that students will received.

Question 2

Free Application for Federal Student Aid (FAFSA)

Answer 2

• Application that students file for federal student aid.

* Uses the EFC number.

Question 3

What are the four several calculations that compose the EFC?

Answer 3

1. Parental income
2. Parental assets
3. Student income
4. Student assets

Question 4

Parental income

Answer 4

• Includes taxable and nontaxable income from two years prior to the award year (two-year lookback) and reduced by a specified income protection allowance.
• Ranges from 22% to 47%

Question 5

What variables does parental income depend on?

Answer 5

• Depends on:
  
  • parent’s AGI from 2 years prior,
  • number of dependents enrolled in college,
  • marital status of the parents, and
  • special family circumstances.

Question 6

“Two-year lookback”

Answer 6

• Term used in parental income to refer to two years prior to the award year for financial aid.

Question 7

Parental assets

Answer 7

• Most nonret assets (e.g., cash, investments, and savings) are assessed from 5% up to a maximum of 5.64% toward the EFC.
• Almost everything owned by the parents except
  
  • home equity,
  • cars used for regular transportation,
  • cash value of a life ins policy, and
  • parents’ accrued benefit or acct balances in any ret plans.

Question 8

What parental assets are excluded from the EFC calculation?

Answer 8

• home equity,
• cars used for regular transportation,
• cash value of a life ins policy, and
• parents’ accrued benefit or acct balances in any ret plans.

Question 9

Student income

Answer 9

• Includes taxable and nontaxable income from the year preceding the award year,
• Reduced by an income protection allowance ($6,600 in 2019) and taxes.
• Student income above the protected amount is included at a rate of 50% in the EFC calculation.

Question 10

Student assets

Answer 10

• The value of everything the student owns or that has been saved on his behalf (e.g., a custodial acct such as an UTMA or UGMA, trusts, etc),
• 20% toward the EFC.

Question 11

EFC formula

Answer 11

total annual cost of college - ([22%—47% parent income + 5%—5.64% parent assets] + [50% student Income + 20% student assets]) = EFC

Question 12

What does a higher percentage of assets in the EFC do to the amount of available financial aid?

Answer 12

A higher percentage of assets and income included increases the EFC and reduces the available financial aid.

Question 13

Are parental assets and income assigned a lower weighting in the EFC calculation than are student assets and income?

Answer 13

• Yes.

Question 14

Why are titling of assets important to consider when saving for education expenses?
*

Answer 14

Because custodial accounts are considered assets for the child, whereas parent-owned or dependent child-owned 529 assets are considered assets of the parents—parental assets are weighted less than student assets and income in calculating EFC.

Question 15

How much are assets owned by relatives (grandparents, aunts, cousins) on which the student is a beneficiary included in the EFC calculation?

Answer 15

• 0% for the EFC calculation when determining financial aid eligibility.
• However, distributions from relative-owned college savings accounts are counted 50% toward EFC.
• Proper timing of relative-owned acct distributions is important to optimize financial aid eligibility.

Question 16

When should relative-owned assets with the student as a beneficiary be distributed?

Answer 16

• these assets should be distributed later in college (such as junior and senior year)
  
  • This allows the acct to remain outside the EFC calculation, and the distributions will not impact future eligibility in undergraduate studies.