What types of formulas are used to determine our financial aid?
There are two main financial aid formulas in use today:
FEDERAL FORMULA – “FM”
Federal Methodology or FM is based upon information provided by your answers on the Free Application for Federal Student Aid – FAFSA. The FM formulas produce what is called the Expected Family Contribution or EFC. Separate formulas are used for the parent(s) and the student.
Institutional Methodology or IM is based upon information provided by your answers on the CSS PROFILE. The IM formulas produce what is called the Family Contribution or FC. Separate formulas are used for the parent(s) and the student.
Both formulas collect specific types of family income and assets, and then provide allowances against income and assets based upon your family demographics. The IM formula includes more sources of income, more family assets, slightly different allowances and is generally considered a more accurate indicator of a family’s relative financial strength.
So, how are the EFC and FC used to determine what my family will pay for college?
Your eligibility to receive financial aid within each formula is based upon your calculated “financial need.”
Your “financial need” is determined by subtracting the amount you are expected to pay (your EFC or FC) from the cost of attending (COA) a specific school. The higher your EFC or FC, the smaller your financial need and eligibility to receive financial aid.
Parents are expected to contribute 46% of their “financial aid income” above approximately $32,000+/- and between 5% -12% of the adjusted value of most family assets toward the education costs of their children.
Students are expected to contribute 50% of their income above $6,300+/- and 20% of the value of their assets towards their own education costs.
FEDERAL FORMULA – “FM” is used to determine your eligibility for federal grants, federal loans and work-study earnings
FM is used by ALL schools to determine your eligibility for federal financial aid. The data used in the FM formula is collected by the Free Application for Federal Student Aid (FAFSA). The FM formula includes:
Your FM income begins with the “AGI” from your prior year federal tax return, or the actual income you received in the prior year, if a federal tax return was not required to be filed.
Prior-Prior Year Income:
Your FM income will use the “AGI” from your “prior-prior year” federal tax return, or the actual income you received in the prior-prior year, if a federal tax return was not required to be filed.
Prior-prior year means two calendar years before the academic year. Again, the prior-prior year income for the 2020-2021 academic year is tax year 2019.
The following tax items are considered “untaxed income” for financial aid and are added to your “AGI:”
+ tax exempt interest,
+ untaxed pension or annuity distributions,
+ your contributions to your HSA account,
+ your contributions to your self-employed retirement account,
+ your contributions to your traditional IRA accounts and
+ your contributions to your 401(k), 403(b) or similar plan in Box 12 of your W-2
The following are subtracted from your FM income:
– federal tax paid from your tax return (not the amount withheld on your W-2)
– state & other tax allowances from a table provided by FM
– FICA taxes (or equivalent) paid by parents
– an income protection allowance provided by a table in FM – varies ($22,280 for family size of 3 with 1 in college)
– an employment expense allowance for single parents and married parents when both work
= Available Income – Used to calculate your Expected Family Contribution (EFC) and ultimately how much federal financial aid you are eligible to receive.
All assets values are as of the date you complete the FAFSA form.
+ cash, checking, savings,
+ investments – investment debt
+ your share of all trusts,
+ net value of all real estate other than your personal residence (Value – Debt)
+ adjusted value of businesses which are owned 50% or less by the family. The adjusted value of most family owned businesses will not be reported on the FAFSA. (See our Business Owners Guide for more details.)
– educational savings and asset protection allowance from a table provided by FM
= Discretionary Net Worth
X 12% (assessment rate)
= An contribution amount from your assets which is added to your available income
+ Available Income from above
= Adjusted Available Income
X (assessment rates which are graduated and vary from 22%, to 47% of amounts >$32,201
= EFC FROM PARENT(S)
FOR THE STUDENT:
Use the same process with the following changes.
Income protection allowance is a flat $6,310 and student income above $6,310 is assessed at 50%,
There is no asset protection allowance and student assets are assessed at 20%.
MAIN TAKEAWAYS FOR FM:
Parent Adjusted Available Income > $32,201 assessed at 47%
Parent Net Assets assessed at 5.64%
Student Available Income > $6,310 assessed at 50%
Student Total Assets assessed at 20%
INSTITUTIONAL FORMULA – “IM”
IM is used by approximately 300 schools or scholarship providers to determine your eligibility for scholarships, grants and school based loans. The data used in the IM formula is collected by the CSS PROFILE form. IM starts with FM income above and adds all business losses, capital losses or rental losses to the reported AGI. In addition, all losses or exclusions shown on the other income line of your tax return are considered untaxed income. IM assets include all FM assets plus the value of your personal residence and the value of all businesses you own. IM is considered a much more accurate indicator of a family’s relative financial strength.
IM starts with the all the income components from FM and adds the following from the parent tax return
+ ALL Schedule C losses,
+ ALL Capital Losses,
+ ALL Schedule E Losses: rental property, royalty income, Subchapter S Corps, LLC’s and Partnerships
+ ALL Farm Losses
+ Untaxed Social Security Benefits
+ ALL Losses shown on the Other Income line of a 1040: Net Operating Losses, Foreign Income Exclusion, etc.
+ The tuition and fees deduction
IM Assets begin with FM assets and adds the following:
+ The net value of all businesses owned by the family
+ The net value of all farms owned by the family
+ The net value of your personal residence
It is important for you to know how your eligibility for financial aid is determined. Knowing how schools use your family income and assets to calculate your DISCOUNTS is a critical step towards understanding the financial aid process and the resulting NET PRICE of each of the school on your list. Most schools arrive at your financial need by subtracting your calculated annual contribution towards education from the total cost of attending the school.