College Financial Aid: 7 EFC Myths Debunked
By Joe Messinger, CFP®
December 1, 2017
The world of paying for college is an alphabet soup of abbreviations. The most important one for you to know and understand is the EFC. EFC stands for “expected family contribution.” Knowing yours is key to making decisions about finding a college your family can afford. Let’s look closer, dispel some EFC myths, and talk about how you can use it in your college search.
The federal government uses their Free Application for Federal Student Aid or FAFSA (yes, another acronym!) to determine your EFC. Whether or not you will qualify for federal student aid is based on this number.
Federal student assistance can come in the form of:
- Pell Grants
- Subsidized Stafford Loans
- Federal Supplemental Educational Opportunity Grants (FSEOG)
- Perkins Loans (Terminated October 1, 2017)
- Federal Work-Study (FWS)
Determining your “need”
Your financial need is calculated by subtracting your EFC number from the cost of attendance at your college. The difference between the two is your “need.”
(In this piece we’re going to focus on the FAFSA calculation of EFC or what’s called the “Federal Methodology.” Most colleges use FM; however, some of our most prestigious universities use very different formulas. You can read more about them in our blog post.)
The government uses three different worksheets when calculating EFC depending on the student’s status. Are they a dependent student? An independent student without dependents other than a spouse? Or an independent student with dependents other than a spouse? For details on how to define “independent,” refer to the government’s EFC formula worksheet found here.
Let’s focus on dependent students – those who receive more than half their support from their parents or guardians.
7 EFC myths debunked
1. My EFC will be a number I can afford to pay towards my child’s education.
Probably not. What the formula says you can pay and what you can actually afford to pay aren’t even close. You will probably gasp at the amount the government expects you to contribute to your child’s college education every year. (The EFC is an annual amount.)
Families with a combined income of around $150,000 can expect to have an EFC that exceeds $30,000, more than the annual cost of most state schools, although not all colleges. EFCs can soar to $70,000, $80,000, $90,000 per year and the largest driver is parental income.
2. My home equity will impact my FAFSA EFC.
No. Your home’s equity is not used in the EFC calculation. Some of the alternate methodologies take a home’s value into account, but not the Federal Methodology. This can make a huge difference in a family’s EFC from one school to the next if they use the Institutional Method!
3. If I didn’t qualify for aid last year, I won’t qualify this year.
Not necessarily. Things like financial aid policies at colleges and your own income/asset figures can change year-to-year. It’s always best to file the FAFSA every year just in case.
In addition, the EFC is one number for the entire family. If you have an EFC of $30,000, that number would be split if you have two students enrolled in college at the same time–roughly $15,000 each! Many families may not qualify when they have one student in school, but very well might when you have overlap.
4. My EFC number equals what I have to pay for college. Any additional cost exceeding that number will be paid for by the college.
Earlier, we said your “need” is the cost of attendance minus your EFC. However, not every college out there can meet your need 100%. In fact, most can’t. Only a handful (about 60) can guarantee 100% need met for students. Understand your “net cost” to attend the school after all aid and how you will pay for all 4 years down to the penny before committing to that school!
5. Saving less money will improve our EFC.
Yes and no. Income of the parents and the student has the greatest impact on your EFC number. A parent’s assets (cash, savings, investments—other than retirement) are assessed at a rate of 5.64% and you have an asset protection allowance based on the age of the oldest parent. Student’s assets are assessed at 20% with no asset protection allowance. For many families, it’s not the assets which will drive up your EFC…it’s your income.
Currently, the FAFSA protects dependent student income up to $6,570, but it is assessed at 50% above that amount. It should be noted that federal work study dollars do not count as income to the student as it is considered need based financial aid. Parent’s income can be assessed at a rate up to 47%. For parents, the allowance depends on the number of people in the household and the number of students in college. For example, the income protection allowance for a married couple with two dependent children in college is $25,040 per the EFC Formula Guide 2018-19.
However, if you can afford to, sometimes using your savings to pay down your consumer debt is a good idea. You’ll look “poorer” on paper with less savings, and colleges don’t care about the amount of your outstanding debt. A little better financial footing for families going forward as they approach paying for college and managing their cash flow during the college years is a good idea.
KEY POINT – don’t be hoodwinked by insurance sales people. They will try to convince you that since the cash value of life insurance is not assessable you should not fund 529 plans and instead put all your money in insurance. Buyer beware! The most a 529 asset is assessed is 5.64%. The cost of life insurance outweighs the benefit in almost all scenarios.
6. Putting money into accounts in my child’s name is the best way to save for college.
Nope. Bad idea. Assets in a student’s name are assessed at a higher rate (20%) than those in a parent’s name (5.64%). Assets in your student’s name will drive up your EFC.
7. If I won’t qualify for need-based financial aid, knowing my EFC is useless.
You might be surprised. Knowing your EFC can be a great tool not only for planning for the future (how much will you be expected to pay) but also for your college search.
If your EFC is $24,000 and State School A costs $19,000 per year, you will not be eligible for a federal aid award. Your EFC is higher, so you’d be expected to foot the whole bill. However, say Private School B costs $52,000 per year and will meet 100% of your need. Suddenly you may be receiving potential federal aid in the amount of $28,000—something to consider as you start your college search.
How do you know what your EFC will be?
A simple way to figure out your EFC is to take advantage of an online calculator like this one. Having this vital piece of information will help you know whether you are a need-based candidate and what schools may be a better financial fit.
Don’t wait to calculate your EFC. Figuring the number in middle school is a good idea—way before your college search begins. Do you need to be saving more in a 529 than you expected? Do you need to get some assistance to create a plan to minimize your student’s future student loan debt? Early is better than later in this case!