Written by: Guest Contributor College is a big expense, and saving for it can be…
EFC stands for expected family contribution. It’s the amount that the government and colleges calculate you should be able to pay out of pocket toward college costs. It’s also used to calculate the amount of need-based financial aid students qualify for.
Many families don’t know that they have some control over their EFC. By understanding how your expected family contribution is calculated and used by colleges, you can learn EFC-reducing strategies that can increase your student’s financial aid eligibility and decrease your overall college costs.
How is EFC calculated?
Your EFC is based on the financial information you report on the FAFSA (Free Application for Federal Student Aid). It’s calculated using a formula known as the federal methodology, which is established by law and looks at:
- Parent income (including taxable, untaxed, and tax-deferred)
- Student income (including taxable, untaxed, and tax-deferred)
- Parent assets (not including retirement accounts)
- Student assets (not including retirement accounts)
- Number of people in the household
- Number of students in the household who are attending college at the same time
The higher your income and assets as reported on the FAFSA, the higher your EFC will be and the less need-based federal student aid your student will qualify for. Families who have multiple children in school at the same time have a lower EFC for each child.
How many EFCs do I have?
You may have two slightly different EFCs, depending on whether you are applying to schools that use the federal methodology (based on the FAFSA) or the institutional methodology (based on the CSS Profile).
- Federal methodology (FAFSA): The government uses the federal methodology to calculate eligibility for federal financial aid including Pell Grants, work-study and subsidized direct federal student loans. Many colleges also use the federal methodology to award grants and scholarships.
- Institutional methodology (CSS Profile): There are a handful of colleges that feel the information on the FAFSA does not give the most accurate picture of what a family can afford to pay. These 250-300 colleges rely on supplemental information from the CSS Profile, which is an additional financial aid application. Schools that require the CSS Profile calculate a slightly different, often higher EFC.
There is also a third formula known as the Section 568 or consensus formula. Only a couple dozen colleges use this method, which is why you don’t hear much about it.
How does EFC affect financial aid?
Here’s how schools use your expected family contribution to calculate need-based financial aid:
1. They find your demonstrated financial need
Each school takes its cost of attendance (COA) and subtracts your EFC to find your demonstrated financial need. Since every school has a different cost of attendance, you may have a different demonstrated need at each school.
2. If you have more than one child in college, they account for that
With schools that use the federal methodology, having two children in college at the same time reduces the expected family contribution for each child by 50%. For example, if your EFC with one student is $20,000, then it would drop to $10,000/student if you have two in school at the same time. This EFC reduction is lower at schools that use the CSS Profile.
3. Colleges fill some of your demonstrated need by offering aid
This financial aid offer will be made up of need-based grants, scholarships, work-study and loans. Schools can use their own discretion when putting together the financial aid package and may decide that your EFC should be lower or higher than what was calculated on the FAFSA.
However, most schools do not meet 100% of a student’s demonstrated financial need. That means families often have to pay more for college than their EFC indicates they can afford. Consequently, these families should focus on schools that award a lot of merit-based aid. Any unmet need that’s not filled by need-based aid, merit-based aid or outside scholarships is money you will have to come up with in addition to the EFC.
How do I find out my EFC?
After completing the FAFSA, students receive their official federal expected family contribution via an electronic document called the Student Aid Report (SAR). The SAR includes the family’s EFC and summarizes all of the information that the family reported on the FAFSA. Review your SAR carefully and check for any errors that could be mistakenly increasing your EFC. If there are errors, correct them as soon as possible.
You must submit a FAFSA every year that you have a child in college, which means your EFC could be different every year (depending on your financial situation).
How do I reduce my EFC?
There are several strategies that can reduce your family’s EFC and increase your child’s financial aid. With all of the following strategies, early planning (starting when your student is in middle school or early high school) is key.
- Make sure saving accounts are in a parent’s name, not the student’s. The EFC formula weights student assets more heavily than parent assets, meaning that money in a student savings account will increase your family’s EFC more than having the same amount of money in a parent savings account would.
- Time your tax-deductible retirement contributions. The more you pay in income taxes during your FAFSA base years, the lower your EFC. Accordingly, make larger tax-deductible contributions prior to your FAFSA base years. However, it’s important to weigh potential EFC reductions against your federal income tax bill. This can get complicated, so consult a tax professional.
- Keep your money in non-assessed accounts. This includes retirement accounts, life insurance policies and annuities—this money will not be counted in the EFC formula.
- Avoid IRA withdrawals during your children’s college years. Avoid this even if the penalty can be waived, because distributions will count as untaxed income on next year’s FAFSA, reducing eligibility for need-based financial aid. For instance, don’t rely on your Roth IRA to pay for college (even though these withdrawals may not be taxable).
- Time the use of grandparent-owned 529s wisely. Otherwise, the school could consider these disbursements as untaxed student income, which can significantly increase your EFC.
- Consider the strategies that are uniquely available to business owners. If you are a business owner, there may be options available to you to reduce your taxable income, depending on the type of business entity you have.