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What Is Your EFC And How Does It Impact Financial Aid?

Imagine two identical families who live in my home town of Moorhead, Minnesota. Everything about them is the same except that one family wants to send their child to the state college, Minnesota State University Moorhead (MSUM - my alma mater), and the other wants their child to go to the private college, Concordia College (CC). Who pays more for college?

Here's some more information. The all-in cost of MSUM is about $20,500 per year, and for CC it is about $49,500. On the surface, it's clear that the family sending their child to CC would have to pay more. However, once you dig into the details you find that, since both families are need-based candidates and CC covers more of that need, CC is cheaper than MSUM.

Let's explore how that's possible.

Types of Financial Aid

To start we should make the distinction between need-based financial aid and merit-based financial aid. Need-based financial aid, much like it sounds, is aid that's awarded if you show financial need. Merit-based financial aid is awarded to those who shine in some area, such as academics, athletics, leadership or some other reason.

The other distinction to make is between gift aid and self-help. Gift aid is what most people think about when they think about financial aid. Gift aid comes in the form of grants and scholarships and does not need to be paid back. Self-help, on the other hand, is not a gift and needs to be paid back. Self-help comes in the form of work-study and student loans. Self-help can be confusing because when you get financial aid award letters, you will see self-help listed as financial aid, even though it needs to be paid back either with time (work-study) or money (student loans).

Financial Aid Formula

The financial aid formula on the surface is quite simple: take the cost of college and subtract what you are expected to pay and you are left with your financial aid qualification. As with most things in life, it's not quite as simple as it appears, so let's take a look at each of those components.

Cost of College

The cost of college is just what it sounds like. It's the full cost of attendance, but the thing to note is that it is the cost at each individual institution. Meaning, the first term in this formula is going to be different at each school. For example, at the University of Minnesota, the cost of attendance is $27,500. At Macalester College in St. Paul, Minnesota, the cost of attendance is $66,900. New York University costs $73,000. So you can see that this formula is going to give you a different result depending on the institution to which you are applying.

Expected Family Contribution

Your expected family contribution, or EFC, is the minimum amount that a formula determines you are able to pay for college. Basically it takes into account four factors; 1) assets of the parents, 2) assets of the student, 3) income of the parents, and 4) income of the student. There are three different formulas that can be used to calculate the EFC. So not only is the first term in the financial aid formula going to differ by institution, different institutions can use different EFC formulas. Most schools use, and most of us have heard of, the FAFSA. FAFSA stands for Free Application for Federal Student Aid. The good news is that most of the institutions out there will use the FAFSA EFC number. There are close to 400 institutions that a different method, called the CSS Profile. CSS Profile, which is short for College Scholarship Service Profile, takes longer to fill out and is more detailed than the FAFSA, but some of the outcomes can work out better depending on your situation. Further, there are 23 elite private schools that use something called the consensus method to calculate the EFC.

Here are some of the differences between these three methods.

FAFSA - When calculating the EFC, the FAFSA method, or federal method, parent assets are assessed at 5.64%. For example, if you have $50,000 in a 529 plan for your child, the federal EFC method thinks you should contribute $2,820 toward your child's education. This method assesses assets in 529 plans, Coverdell accounts, taxable brokerage accounts, savings accounts, and money in savings bonds. It also considers the equity you have in vacation properties or investment properties. It does not count money in retirement accounts, insurance policies, or the equity in your primary residence. Assets in the student's name are assessed at 20%, so if you have a choice, this says it is better to hold assets in the parent's name than in the student's for financial aid purposes. Child income is assessed at 50%, meaning this formula wants your child to contribute half of his or her income toward college. Finally, parent income is usually the largest contributor to the EFC. This is a scale (much like the income tax system), but it doesn't take long to get to 47%. Further, when doing this calculation, you have to add back retirement plan contributions and health savings account contributions so you can't get your income down that way. This means that this formula thinks you ought to pay close to half your income toward the cost of your child's education.

CSS Profile - A major difference between the CSS Profile method, or institutional method, is that each institution can determine what they want to assess on their own. So two institutions that use the institutional method could calculate two different EFCs. When comparing to the federal method, the institutional method can assess the equity in your home, and they can assess assets in your child's siblings' names. It also counts assets in annuities. The assessment rate for assets in the parent's name is 5%, though, compared to 5.64% using the federal method.

Consensus Method - The consensus method is the same at all institutions that use the consensus method. They count all assets, no matter who owns them, at 5% (including parent assets, child assets, sibling assets, annuities). They asses the equity in your primary home, but they cap it at 120% of your income. They also look at the assets of the parent who doesn't have custody in cases where parents are divorced.

Qualifying For Financial Aid

The bottom line of the formula is the amount of aid for which you qualify. Sounds easy, but just because you qualify for financial aid does not mean the institution has the money to give you. There are some schools that can meet 100% of your need, but others can only meet a portion of your need. This is important, because even if you are looking at two colleges who have similar prices and use the same EFC method (meaning, you would qualify for a similar amount at each school), one school may be able to offer you much more in grants and scholarships than the other.

I hope this helps give you some understanding of need-based financial aid. If you are a need-based candidate, look for ways to reduce your EFC and look for schools that meet 100% of your need. Also, never rule out schools based on their sticker price.

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About the Author

Derek Hagen, CFA, CFP, FBS, CFT-I, CIPM is a speaker, writer, and coach specializing in financial psychology, meaning and valued living, resilience, and mindfulness.


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