Parents often want to know if their child will qualify for financial aid.
They frequently assume that there is some sort of income cutoff to be eligible for assistance. There is, however, no income dividing line between households that receive aid and those that don’t.
That’s because financial aid formulas calculate far more than income. Financial aid formulas also take into consideration nonretirement assets, the number of students in college, size of the household and the marital status of the student’s parents. The generosity of a specific college’s financial aid policy and the school’s price are also huge factors in aid determination.
A way exists, however, to determine, well in advance, if a student will be eligible for financial aid, and that is to obtain a household’s Expected Family Contribution.
The EFC, expressed as a dollar figure, represents what the federal formula says a household should be expected to pay, at a minimum, for one year of college. It’s almost always higher than what parents think they can afford.
The lowest possible EFC is $0, which means a family can’t afford to pay anything for college. (It’s extremely rare that someone with this EFC will pay nothing for college.) In contrast, there is no ceiling for how high an EFC can be for someone who is wealthy.
The EFC can indicate whether a family has a chance for need-based aid by comparing the household’s EFC with a specific school’s cost of attendance.
Let’s say a family’s EFC is $60,000, and a school on a child’s list costs $55,000. Since the EFC exceeds the cost of the college, there is no chance for need-based aid.
In contrast, if the family’s EFC was $6,000, the student would be eligible for up to $49,000 for a university costing $55,000.
When money is an issue, and it almost always is, families can use their EFC to determine what type of colleges and universities their children should target and maximize their chances of obtaining need-based or merit aid. It is also possible to get a combination of both.
Families who discover that they have a high EFC and aren’t eligible for need-based financial aid should look for schools that provide merit scholarships that are given regardless of need. The vast majority of public and private colleges and universities dispense merit scholarships. In fact, at many private institutions, nearly all students pocket a discount.
If an EFC is modest, families should search for schools that provide excellent need-based assistance. Far fewer schools fit into this category. People who need financial help should also apply to public colleges in their own state, which have lower sticker prices.
Parents should get a ballpark idea of what a family’s EFC will be as early as a child’s freshman year in high school. Obtaining a preliminary EFC will give parents a rough idea of the minimum amount that they would be expected to pay for college.
Families will usually have to pay more for college than their EFC indicates because most schools do not meet 100% of a student's demonstrated financial need. Consequently, it's important to identify the most generous colleges that would consider a child an attractive candidate.
Parents can obtain their EFC by using the College Board’s EFC Calculator.
Parents will need to use figures from their tax return and their latest nonretirement investment account statements, including checking and savings accounts, as well as any accounts and income that their child has.
The College Board’s EFC Calculator actually produces two figures that use a federal and an institutional methodology. The federal EFC formula is connected to the Free Application for Federal Student Aid. Most private and public institutions use only the FAFSA when determining who receives federal, state and institutional aid.
The institutional formula is linked to the CSS Profile, which roughly 200, mostly private, colleges use. Just about every name-brand private college uses the Profile to determine who is eligible for their own institutional pot of money.
Parents should also use their EFCs at the end of the college admission process.
Parents will find their official federal EFC a few days after filing the FAFSA. The EFC will be on a document called the Student Aid Report that will be emailed to them.
After filing the CSS Profile, families will not receive a follow-up document with their EFC. Instead every Profile school can tweak its own EFC for a student in different ways. For instance, some Profile schools count home equity, while others don’t. If the EFC is not on the financial aid letter, families should ask a school what it is. Without that figure, you can’t determine if this is as much as a student can get from a school.
Once a family has their EFC(s) and their financial aid packages, compare the EFC with what each school is offering.
Let's say, for example, that the cost of a school after deducting institutional grants is $41,000 and the EFC is $29,000. That means there is a $12,000 gap between what the EFC suggests that a family can pay and what the school wants to charge the client. Based on this knowledge, a family can appeal the award and should.
Lynn O’Shaughnessy, a nationally recognized college expert, offers an online course—Savvy College Planning—exclusively for financial advisors. Click here to get Lynn’s guide, Finding the Most Generous Colleges.