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• "To give away money is an easy matter ... and in any man's power. But to decide to whom to give it, and how large and when, for what purpose and how, is neither in every man's power nor an easy matter. Hence it is that such excellence is rare, praiseworthy and noble."- Aristotle

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Pre-Conference Presentation

FEDERAL METHODOLOGY (FM)Expected Family Contribution:

An Overview of Philosophy and Methodology

NCASFAA

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Determination of EFC

Parents’ contribution

+ Student’s contribution

_________________________

= Expected Family Contribution

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Basic Equation Need-Based Financial Aid

Cost of Attendance

– Expected Family Contribution

__________________________

= Eligibility for Need-Based Funds

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Federal MethodologyFederal Methodology

((Italicized Statements not Italicized Statements not from CORE NASFAA from CORE NASFAA

Materials)Materials)

Module 6Module 6

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Federal Methodology• Method for assessing ability to pay consists of two steps:

– Measuring a family’s financial strength

– Assessing a part of financial resources as being available to contribute toward educational costs

– Formulas look at income and assets to determine ability to pay

– FM makes some political assumptions about WHICH income and assets

– Remember that you have to use FM for federal aid but not for your own aid unless that is your campus decision

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Paying for Higher Education

• Available Income is income that is not required for mandatory expenses

• Asset strength is also a factor, although not to the same extent as income – assets are considered as a supplement to income

• A portion of available income, supplemented by a portion of assets, is assumed to be available to pay the costs of higher education for a particular student

• Just WHO’s available income and WHAT PORTION is expected depends on which formula one is using

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Federal Methodology

• Classifies students according to one of three models:

– Dependent student

– Independent student without dependents other than a spouse

– Independent student with dependents other than a spouse

Dependents may be children or elderly parents or some other person who is supported by the student

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Dependent Student EFC Components

• Parents’ contribution (PC) consisting of:

– Contribution from parents’ available income

– Contribution from parents’ assets

• Student contribution (SC) consisting of:

– Contribution from student’s available income

– Contribution from student’s assets

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Independent Student EFC Components

• Contribution from student’s (and spouse’s) available income

• Contribution from student’s (and spouse’s) assets

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Federal Methodology Characteristics

• Base-year income used WHY?

(e.g., 2005 is base year for 2006-07)

• Allowances protect portions of income and assets WHY?

• Distributes available family resources among all family members (other than dependent student’s parents) attending postsecondary schools WHY?

• EFC calculated for nine-month enrollment period (we’ll omit variant calculations today)

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Dependent Model: Simplified EFC Formula, Income Criterion

• Parents’ 2005 AGI is less than $50,000 if tax filers; and either

• Parent(s) not required to file tax return or filed (or eligible to file) 1040a or EZ or

• Parent or dependent student received means-tested benefits in previous 12-month period

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Dependent Model: Simplified EFC Formula, Tax Filing Criterion

• Parents and student for the 2005 tax year:– File or eligible to file a 1040EZ or 1040A;

– File tax return required by the tax code for Puerto Rico, Guam, American Samoa, U.S. Virgin Islands, Republic of the Marshall Islands, Federated States of Micronesia, or Palau; or

– Are not required to file any tax return

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Dependent Model: Simplified EFC Formula, Tax Filing Criterion

• Tax filing criterion no longer applicable to student as of 7/1/06

• Tax filing criterion applies to parents only• New alternative to tax filing criterion if

parents or student received benefits under a means-tested federal benefit program

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What’s wrong with simple needs test?

The Cliff Effect is to be avoided in need analysis!

Two families, just alike, except one earns $50,000 and the other earns $49,999.

One is in the lounge chair while the other has fallen off the cliff.

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What’s wrong with simple needs test?

The Cliff Effect is to be avoided in need analysis!

And think about the second year for the family that is in the lounge chair in year one. What will they think when the extra dollar of salary in year two results in wild ride down the cliff?

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Dependent Model: Automatic Zero EFC, Income Criterion

• Parent(s) had adjusted gross income of $20,000 or less; and either

• Parent(s) not required to file tax return or filed (or eligible to file) 1040a or EZ, or

• Parent or dependent student received means-tested benefits in previous 12-month period

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Dependent Model: Automatic Zero EFC, Tax Filing Criterion

• Parents and student for the 2005 tax year:– File or eligible to file a 1040EZ or 1040A;

– File tax return required by the tax code for Puerto Rico, Guam, American Samoa, U.S. Virgin Islands, Republic of the Marshall Islands, Federated States of Micronesia, or Palau; or

– Are not required to file any tax return

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Independent Student Models: Automatic Zero EFC

• Not applicable for independent student without dependents other than a spouse

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Independent Student with Dependents Other than a Spouse Model: Automatic Zero EFC

Student’s and spouse’s 2005 AGI and either

total earned income is $20,000 or less or

Student (or spouse) received means-tested benefits in previous 12-month period

• Student and spouse for the 2005 tax year:– File or eligible to file a 1040EZ or 1040A;

– File tax return required by the tax code for Puerto Rico, Guam, American Samoa, U.S. Virgin Islands, Republic of the Marshall Islands, Federated States of Micronesia, or Palau; or

– Are not required to file any tax return

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Potential Institutional Adjustments to EFC in Awarding Institutional Funds

• Establishment of a minimum level of student contribution

• Use of home equity in determination of net assets

• Adjustments for medical/dental expenses

• Adjustments in the losses/depreciation claimed for business/farm operations

• Ignoring of simple needs test and automatic zero EFC

NOTE: THIS IS SLIDE FROM HIGH SCHOOL NIGHT, not NASFAA

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Questions?