Federal Methodology

The Expected Family Contribution (EFC) is computed using a standard federal formula, referred to as Federal Methodology, which assesses a family’s ability to pay for college. Federal Methodology utilizes the income and asset information that was reported on the FAFSA, from both the student and parent, to establish the Expected Family Contribution (EFC).

Why is Federal Methodology Necessary?

Federal financial aid monies are not unlimited, thus the formula is used to provide a basis on which federal financial aid can be distributed as fairly as possible. The philosophy is that families with similar financial situations will be treated in the same way. By utilizing a standard formula, the theory is that financial aid distribution will be a fair and equitable process. An underlying premise of financial aid policy is that it is the main responsibility of the family to pay for college, as the student is the primary benefactor of the education. Thus, Federal Methodology is the system in place that analyzes data and formulates equitable contribution amounts. Federal financial aid funds are available to assist and support students to attain a college education; however, funds must be distributed as fairly as possible.  Families with similar financial situations should be treated similarly in the financial aid process as a result of the standardized federal formula.

What does Federal Methodology take into Consideration?

Although both student and parent data is taken into consideration, the income and asset data sets are actually looked at differently within the federal formula. The chart below illustrates how parent and student data are viewed in the Federal Financial Aid formula:

Financial Aid Formula – Treatment of Income and Assets

 

Income

Assets

 

Parent Data

22-47% of available income * will be considered available after allowing for federal taxes, family size, number in college, income protection allowance, etc.

5.6 % maximum of assets will be considered and included in the

Expected Family Contribution (EFC)

Student Data

50% of the student’s income * will be considered after an income protection allowance of $6,000 against student income

20% of a student’s assets are considered and included in the Expected Family Contribution (EFC)

 * This is a simple illustration to give you a general idea of what the formula considers. Information source is the website listed below. For complete details about the federal needs analysis formula, Federal Methodology, visit the federal site which outlines federal methodology. Information in the above chart is general in nature, and provided for illustrative purposes only.

As you can see above, when calculating the Expected Family Contribution (EFC), the federal formula takes into consideration financial data from both the student and his/her parent(s); a general overview of required data elements is included in the next few pages.

Federal Methodology considers both taxed and untaxed sources of income from both the student and his/her parent(s). Although the federal formula will take into consideration all income sources, the federal formula does account for the size of the family, the number of children attending college, and the total federal tax liability. In addition, specific allowances are incorporated into the formula that provides an offset against income, such as accounting for basic living expenses and protection of assets. The federal formula will determine a contribution from income for both the student and the  parent(s).

In addition to expecting a contribution from income sources, both student and parent assets are also taken into consideration when determining a family’s ability to pay for college, as noted in the chart on the preceding page. The federal formula considers assets including cash, checking and savings accounts, stocks and bonds, the net value of second homes, other real estate, business assets, farm values, and in some cases commercial property. After considering parental and student asset information, a contribution from student and parent assets will also be determined. The contribution from income and the contribution from assets for both the student and parent(s) will be combined and in total constitutes the Expected Family Contribution (EFC).

Student Contribution + Parent Contribution = Family Contribution

For federal financial aid programs, the FAFSA does not request information on the value of a primary residence; thus, this asset is not taken into consideration when computing the Expected Family Contribution (EFC). Nor is the value of qualified retirement plans or life insurance taken into consideration.  However, for institutional funds, colleges may take into consideration the value of those assets when evaluating students for institutional funds.

Graduation

Jan Marie Combs, EzineArticles Basic Author