nasfaa self-study guide: need analysis - award year 2016–17

NASFAA UNIVERSITY

SELF-STUDY GUIDES

NEED ANALYSIS: FEDERAL AND INSTITUTIONAL

METHODOLOGY

NASFAAUNIVERSITY

CREDENTIALED TRAINING

AWARD YEAR 2016–17 • ISSUE DATE APRIL 2016

i

NASFAA University Self-Study Guide

2016–17 Need Analysis: Federal and Institutional Methodology

Table of Contents Lesson 1: Introduction to Need Analysis ......................................................................................................... 1

Lesson 2: The Regular Formula .................................................................................................................... 23

Lesson 3: Simplified Formulas ...................................................................................................................... 69

Lesson 4: Recalculating the EFC ................................................................................................................ 103

Lesson 5: Institutional Methodology (IM) ..................................................................................................... 127

Feedback Form ............................................................................................................................................. 155 This self-study guide contains pages excerpted from The EFC Formula, 2016–2017, a U.S. Department of Education publication. You may access the publication in its entirety at the Information for Financial Aid Professionals (IFAP) website at http://ifap.ed.gov/ifap/index.jsp. © 2009–2016 by National Association of Student Financial Aid Administrators (NASFAA). All rights reserved. NASFAA has prepared this document for use only by personnel, licensees, and members. The information contained herein is protected by copyright. No part of this document may be reproduced, translated, or transmitted in any form or by any means, electronically or mechanically, without prior written permission from NASFAA. NASFAA SHALL NOT BE LIABLE FOR TECHNICAL OR EDITORIAL ERRORS OR OMISSIONS CONTAINED HEREIN; NOR FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES RESULTING FROM THE FURNISHING, PERFORMANCE, OR USE OF THIS MATERIAL. This publication contains material related to the federal student aid programs under Title IV of the Higher Education Act and/or Title VII or Title VIII of the Public Health Service Act. While we believe that the information contained herein is accurate and factual, this publication has not been reviewed or approved by the U.S. Department of Education, the Department of Health and Human Services, or the Department of the Interior. The Free Application for Federal Student Aid (FAFSA®) is a registered trademark of the U.S. Department of Education. NASFAA reserves the right to revise this document and/or change product features or specifications without advance notice. April 2016

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NASFAA University Self-Study Guide: Need Analysis

© 2016 NASFAA Need Analysis: Lesson 1 1

Lesson 1: Introduction to Need Analysis

Learning Objectives After completing this lesson, you will: • Understand what is need

analysis; • Know a brief history and

the evolution of need analysis; and

• Understand the underlying principles of need analysis.

Key Concepts The key concepts you will learn in this lesson: • Need analysis; • Cost of attendance; • Expected family

contribution; • Student financial aid; • College Scholarship

Service (CSS); • National Defense

Education Act of 1958 (NDEA);

• Portability; • Centralized multiple data

entry; • Higher Education

Amendments of 1986; • Congressional

Methodology (CM); • Single application; • Federal Methodology

(FM);

• Institutional Methodology (IM) and;

• Underlying principles of need analysis.

Introduction Welcome to NASFAA University’s self-study guide on the need analysis used to determine eligibility for the federal Title IV student aid programs. Lesson 1 will begin by defining need analysis and end by explaining its underlying principles. Along the way will be a look back in time to help you understand the history and evolution of need analysis.

Need analysis is the system used to allocate limited financial aid resources to students, and consists of two basic components:

1. A measure of the amount it will cost the student to attend a given school for a year, commonly referred to as the cost of attendance (COA); and

2. A measure of the family’s ability to contribute to those costs for a given year, known as the expected family contribution (EFC).

Expressed in its most simple form, a student’s need for financial aid is the difference between the COA and the family’s ability to pay that cost. The need analysis equation for determining financial need is:

Cost of attendance (COA) – Expected family contribution (EFC)

= Financial need

Cost of Attendance

The COA represents a school’s estimate of the costs a student is expected to incur during the period of enrollment, usually a full academic year. Components of the COA include, but are not limited to, tuition, fees, room, board, books, supplies,

transportation, and miscellaneous personal expenses.

The COA components are outlined in NASFAA’s Overview of the Financial Aid Programs Self-Study Guide. Details on COA construction may be found in Monograph 24–Developing the Cost of Attendance, available on the NASFAA website at

http://www.nasfaa.org under the “Tools & Resources” menu. Expected Family Contribution

The other component used to calculate a student’s financial need is the EFC. The EFC is a measure of a student’s and his family’s ability to pay postsecondary expenses.

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2 Need Analysis: Lesson 1 © 2016 NASFAA

Resources for This Lesson

• Need Analysis Timeline • Lesson 1 Glossary

Icons You will see the following icons in Lesson 1:

• Key concept

• Quick quiz

• Reflection questions

• Learning activity

• Helpful hint

In general, the method for assessing ability to pay consists of two steps:

1. Measuring the family’s financial strength or wealth; and

2. Assessing a portion of the family’s financial resources as being available to contribute toward the costs of the student’s education.

The result of this assessment is called the EFC. It is calculated using data provided by the student and family and a formula known as the Federal Methodology (FM). It is used by all schools to award federal student aid. In addition, some schools use additional data and an institutional methodology formula to distribute nonfederal student aid. Brief History and Evolution of Need Analysis

Concept of Student Financial Aid. The first student financial aid offered by an American educational institution was private assistance, in the form of scholarships. These scholarships were developed in response to the same basic needs we see today:

the cost of education, and the need for help in meeting that cost. Then, as now, it cost money to obtain a postsecondary education; and then, as now, not everyone could afford to pay that cost. From the beginning, these two concepts—cost of education and financial need—have been at the foundation of student financial aid. First Recorded Scholarship—1643 The first recorded scholarship, in 1643, was a grant of 100 English pounds from Lady Ann Mowlson to Harvard College, to “establish an endowment for support of some poor scholar.” Similar private donations followed, and before the Civil War, colleges themselves began to set aside funds for needy scholars.

Great Depression and World War II The need for student financial aid became more of a national concern during the Great Depression when the first modern-day student financial aid program was created. The National Youth Administration established a part-time employment program to help students pay for their education. After World War II, the Serviceman’s Readjustment Act of 1944, popularly



known as the “GI Bill,” was enacted to provide education and training to thousands of returning servicemen. Concept of Need Analysis. While the concept of student financial aid has early origins, the modern concept of need analysis didn’t arrive until later—in the early 1950s—when post-GI Bill demands for postsecondary education increased significantly. This brought increased pressure to create an equitable distribution system for student financial aid nationally among colleges and universities. First Need Analysis Formula—Early 1950s Dean John Monro, former dean and director of financial aid at Harvard College, developed a model for analyzing a family’s financial resources and, considering cost of attendance, determining eligibility for financial aid. This was the first need analysis formula for need-based financial aid:

Family’s Net Income

x 15%

= Initial Contribution

– $100 x children in public school

– $200 x children in private school

= Family’s ability to pay for college

Subsequent discussions led to further work on designing a more accurate formula, as this original formula was considered by some to be somewhat arbitrary in its 15 percent assessment of income. It was also a static formula that did not allow for adjustments based on individual family circumstances. This work led to a more comprehensive need analysis system of collecting and analyzing the following additional family income and asset information:

• Parents’ income, taxes, business expenses, and unusual medical expenses;

• Parents’ assets, including home equity (value minus debt);

• Parents’ jobs and/or types of business;

• Children in public and private school; and

• Student’s earnings and assets. Under this new formula approach, the income assessment was based on a family’s maintenance costs in relation to family size. The family’s income was adjusted for taxes paid, and only a portion of the balance was considered available as the family’s income contribution toward college costs. The equity was combined for all assets owned by the family, and that equity was taxed at an increasing percentage based on the level of equity in order to reach the family’s contribution from assets. The total income and asset contributions were then combined to arrive at the total family contribution. This formula was used by consensus of many (but not all) schools to award financial aid. This approach became the basis for the need analysis methodology that eventually was written into law, and subsequently modified, to become the Federal Methodology used today. During these earlier years of community consensus, financial aid professionals worked cooperatively to define need analysis standards and procedures. Application forms, procedures, and methods of awarding aid varied from school to school and most aid came from institutional funds. College Scholarship Service (CSS)—1954

The establishment of the College Scholarship Service (CSS) in 1954 was a turning point and one of the first attempts by the financial aid community to

standardize need analysis methods. This led into an era characterized by:

• Community-developed need analysis standards and practices;

• A rapid increase in the number of financial aid programs, the number of students eligible for financial aid, and the number of need analysis forms and methods;

• The adoption of a common application form and a single need analysis formula, developed by and agreed upon by the financial aid community, to award financial aid; and



• An emphasis on equity, sensitivity, and economic principles in developing and evaluating need analysis methodologies.

The CSS focused on the design and distribution of financial aid application forms. Students and families could complete a single form when applying for financial aid at multiple institutions. The CSS would provide a Financial Transcript of the family’s information. The CSS also centralized the previously developed need analysis methodologies into what would become the CSS methodology. National Defense Education Act of 1958 (NDEA)

In 1957, the Soviet Union successfully launched its first artificial satellite, Sputnik. Congress was shocked into action by what the American people

perceived as Soviet scientific superiority. In response, Congress enacted the National Defense Education Act of 1958 (NDEA) to stimulate education in math, science, and foreign languages. The NDEA affected nearly every level of public and private education, and established the National Defense Student Loan (NDSL) Program, which offered long-term, low-interest loans to qualified students, first in the targeted fields of mathematics, science, and foreign languages, and later in all academic majors. Today, this program is known as the Federal Perkins Loan Program. College Access. The NDSL was the first national federal program based on the conviction that no student of ability should be denied an opportunity for higher education because of financial need. Thus, college access became a continuing focus of the need analysis system.

All current federal student aid programs are defined in the Lesson 1 Glossary.

Starting with the 1960–61 award year, the CSS first implemented its Parents’ Confidential Statement. The CSS centrally calculated an EFC and processed forms for colleges displaying this information. As a result, more and more colleges adopted the CSS methodology.

In the mid-1960s, as part of President Lyndon Johnson’s “War on Poverty,” Congress passed the Economic Opportunity Act of 1964. This legislation created the College Work-Study Program, which would later become the Federal Work-Study (FWS) Program, designed to expand part-time employment opportunities for students enrolled in higher education.

Higher Education Act of 1965 (HEA) In 1965, the Higher Education Act of 1965 (HEA) dramatically expanded the federal role in financing higher education. The HEA, which has been amended many times since it was enacted, forms the basis of current law authorizing the federal student aid programs. The student aid programs administered by the U.S. Department of Education (ED) are contained in Title IV of the Act, which is why we refer to them as the “Title IV programs.” The HEA consolidated the laws authorizing the NDSL Program and the College Work-Study Program, and created two new programs:

• The Educational Opportunity Grant (EOG) Program, which was later replaced by the Federal Supplemental Educational Opportunity Grant (FSEOG) Program; and

• The Guaranteed Student Loan (GSL) Program, which would later become the Federal Family Education Loan (FFEL) and Federal Direct Student Loan (Direct Loan) programs.

Except for unsubsidized loans under the GSL Program, all of these programs contained income restrictions. The EOG Program was the first federal grant program, providing federal student assistance in



the form of gift aid that, unlike loans, did not have to be repaid, and, unlike College-Work Study, did not have to be earned through work. EOGs were intended to help the neediest students. The CSS methodology was still permitted to calculate eligibility for aid under the federal programs. Higher Education Amendments of 1972 By the 1970s, the college-age population had greatly increased, but many needy students were still unable to attend postsecondary institutions because of limited funds and uneven distribution of funds among schools. In an attempt to respond to this problem, the Higher Education Amendments of 1972 created the Basic Educational Opportunity Grant (BEOG, or Basic Grant) Program, which is now known as the Federal Pell Grant Program. Basic Grants were intended to serve as the “floor” or “foundation” of an undergraduate student’s financial aid package. Other available financial aid would be added to the Basic Grant, up to the limit of the student’s financial need.

Portability. The BEOG Program introduced the concept of portability in the federal student financial aid programs. Portability meant that once a student had

applied and qualified for a grant, she could receive a Basic Grant at any participating school. So, by providing portability, BEOG offered students not only access to postsecondary education, but choice among institutions. In addition to portability, BEOG had its own federal method for rationing and awarding funds. However, the federal government continued to permit colleges and universities to use the CSS methodology and other campus-based methodologies for awarding funds from the other federal programs. Colleges were also permitted to use a new form and methodology developed by American College Testing (ACT) to award campus-based funds. Uniform Methodology. Although many methods were available for awarding funds, the predominant methods were the BEOG method and the Uniform Methodology. The Uniform Methodology was an

approach developed collectively by the financial aid community and was used by most need analysis services and a majority of institutions and state student assistance programs.

“By 1980, federal funds

accounted for over 80 percent

of all aid awarded

for postsecondary study.”

Centralized Multiple Data Entry—1976

In 1976, both the CSS and ACT became federal multiple data entry processors of application need analysis data. The CSS Financial Aid Form and the ACT Family

Financial Statement were complete financial aid applications used to collect student and family demographic and financial data with:

• Core federal questions; and • Supplemental institutional questions. This data was later used for calculating BEOG eligibility. By 1980, federal funds accounted for over 80 percent of all aid awarded for postsecondary study. As the major stakeholder in the student aid system, the federal government began to play a more dominant role in decisions about the structure and goals of the need analysis system. Federal Control of Need Analysis. The shift toward greater federal control actually began with the Higher Education Amendments of 1980. The 1980 Amendments directed the creation of a free common federal aid application. Congress also mandated a single need analysis methodology for federal programs in 1980, but subsequently suspended that mandate before it went into effect. The 1980 Amendments identified cost of attendance components and made changes to the need analysis parameters used to develop EFCs.



Quick Quiz 1 Now it’s time to check what you have learned so far. Answer the following questions and check your responses using the Answer Key on page 19.

1. In the early 1950s, which of the following elements were included in the first comprehensive system of need analysis: (check all that apply) Parents’ income, taxes, business expenses, and unusual medical expenses Professional judgment Parents’ assets, including home equity (value and debt) Parents’ jobs and/or types of business Children in public school Children in private school Student’s earnings Student’s assets

2. Fill in the basic formula for determining financial need below:

3. Define cost of attendance, including some of the costs it covers:

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________ 4. Fill in each blank in the following statement using one of the options presented:

The first federal student grant program was called the _______________________created in

_________ under the ______________________.

=

–

• National Defense Education Act (NDEA); • Economic Opportunity Act; or • Higher Education Act (HEA)

• 1958; • 1964; or • 1965

•Educational Opportunity Grant (EOG); •Basic Opportunity Grant (BOG); or • Federal Pell Grant



Higher Education Amendments of 1986

The shift from a community-developed to a federally-controlled need analysis system was fully realized by the Higher Education Amendments of 1986, which

signaled the start of a major effort by Congress to standardize and simplify the Title IV programs. For the first time, Congress spelled out in statute:

• The definition of independent student;

• A definition of the COA components; and

• Detailed need analysis formulas for determining the EFC.

Because the statute was so specific in its definitions of independent student, cost of attendance, and need analysis, Congress prohibited ED from issuing regulations in these three areas. The definition of independent student was consistent between the Pell Grant and the other Title IV programs; however, the COA and the EFC formulas used for Pell Grants differed from the COA and EFC formula used for the other programs. Thus, two methodologies were defined. They were the:

• Congressional Methodology (CM), used to determine need for the campus-based and GSL programs; and

• Pell Grant methodology, used only to determine need for Pell Grants.

Remember that all current federal student aid programs are defined in the Lesson 1 Glossary on Page 17.

Three models under each methodology were defined and linked to the classification of the student with regard to dependency status. One model was created for a dependent student. For the independent student, two models were differentiated based on whether the student had dependents of his own. However, the definition of dependent differed between the two methodologies, in that a spouse was considered a dependent under CM but not a dependent under the Pell Grant methodology.

Congressional Methodology. Under CM, the three models were the:

• Dependent student;

• Independent student with dependents (including a spouse); and

• Independent student without dependents. These three models remain the same three models used today under FM. Under CM, a spouse was defined as a dependent, so a married student with no other dependents fell under the same model as a student (single or married) with dependents other than a spouse. The model for independent students without dependents included only single students with no dependents. Each model allowed for calculation of the EFC by one of four formulas:

• Regular formula;

• Simplified Needs Test (SNT);

• Dislocated worker formula; and

• Displaced homemaker formula.

The current need analysis formulas and their data elements are detailed in Lessons 2 and 3. Relevant terms are defined in the Lesson 1 Glossary.

All formulas considered base-year income, which is the income corresponding to the most recently completed calendar tax year. An exception was



made for dislocated workers, for whom current-year income was used. The regular, dislocated worker, and displaced homemaker formulas were full data element formulas, or “long” formulas. The Simplified Needs Test, which used fewer data elements, was a “short” formula. The simplified, dislocated worker, and displaced homemaker formulas were also referred to as variant formulas. There was no Automatic Zero EFC provision under CM, as there is under the current FM. CM codified in statute the use of the following in need analysis:

• Base-year (calendar-year) income; • Calculation tables for allowances for state and

other taxes, Social Security taxes, standard maintenance for basic living expenses, employment expenses, medical expenses, and educational expenses for dependent elementary and secondary tuition;

• Net value of cash, savings, checking accounts, businesses (including small family-owned businesses), farms, real estate, and home and family farm equity;

• Parents in college; • Veteran’s benefits received; • Minimum student contribution; and • Professional judgment. Higher Education Amendments of 1992

A Single Application. To help simplify program administration, the Higher Education Amendments of 1992 required the sole use of a single, free application

for Title IV funds, which would later become the Free Application for Federal Student Aid (FAFSA). The 1992 amendments also established a single set of COA components for all Title IV programs.

Federal Methodology. The 1992 amendments also established a single need analysis methodology—the FM—for the campus-based programs, FFEL

Program, and newly renamed Federal Pell Grant Program. The Simplified Needs Test was expanded to increase the number of students who qualified based on income, while the dislocated worker and

displaced homemaker formulas were eliminated. The Automatic Zero EFC formula was created for families whose adjusted gross incomes were less than or equal to the earned income tax credit. The following elements were also eliminated from the need analysis: • Minimum student contribution; and • Home and family farm equity.

Institutional Methodology. The CSS then retired the Financial Aid Form and introduced its CSS/Financial Aid PROFILE application for use by some

schools to collect student and family data beyond the FM need analysis requirements. This additional need analysis became known as Institutional Methodology (IM), used to award institutional funds, particularly institutional grants and scholarships. Unlike the FM, the IM continued to use financial information like home equity and private elementary and secondary school tuition payments in its assessment of a family’s EFC. Some schools continue to use different variations beyond this institutional methodology model.

Institutional Methodology is detailed in Lesson 5.

Higher Education Statutes—2006 to 2008 The need analysis formula exists today largely as it did in the years right after the Higher Education Amendments of 1992. Since then, higher education statutory changes have made relatively minor changes to need analysis.



In particular, the Higher Education Reconciliation Act of 2005 (HERA) and the College Cost Reduction and Access Act of 2007 (CCRAA) modified the Simplified Needs Test and Automatic Zero EFC calculations in the FM. HERA also eliminated family owned and controlled small businesses from the calculation of assets in the FM. The CCRAA also made the following changes to need analysis:

• Scheduled increases to the Income Protection Allowance (IPA) to account for cost of living increases based on Bureau of Labor Statistics data;

• Expansion of the independent student definition for consideration of orphans, wards of the court, emancipated minors, and homeless youth;

• Removal of certain forms of untaxed income and benefits, such as welfare benefits, untaxed Social Security benefits, additional child tax credit, and earned income credit; and

• Expansion of the use of professional judgment to include loss of employment by independent students, dislocated worker status, and homelessness.

Lessons 2 and 3 will next provide greater detail of how these relatively recent need analysis changes impact the current need analysis formulas and EFC calculations. Underlying Principles of Need Analysis Earlier, we pointed out a number of concepts that were reflected in the need analysis of the student financial aid programs as they were developed and enacted into law. The first was providing access to postsecondary education for students of ability who wish to enroll. A second was providing students with choice among institutions, regardless of the cost of attendance. Financial aid is therefore the means to provide access and choice by helping students meet their unmet costs.

Part F of the HEA contains the statutory provisions governing need analysis. Although the law prohibits ED from regulating need analysis, there are some

long-standing guiding principles which serve as the

foundation on which the Federal Methodology for determining the EFC formulas was developed. These principles are as follows:

1. Parents and students have the primary responsibility for meeting postsecondary education costs.

2. The distribution of financial aid resources should be based on the family’s ability to pay, not willingness to pay.

3. The assessment of a family’s ability to pay should be independent of the amount of financial aid available and the cost of attending postsecondary school.

4. There should be horizontal equity (also referred to as equity across the board) in the distribution of limited financial aid resources. That is, families in similar circumstances with similar resources should be expected to make similar contributions.

5. Families in different circumstances should be expected to make contributions appropriate to their financial resources. This is known as vertical equity, and sometimes is referred to as leveling the playing field.

6. The need analysis formula should provide a “snapshot” of the family’s financial circumstances at the time of application.

7. The need analysis results are a benchmark. As such, the final assessment of the family’s ability to contribute to the student’s postsecondary education costs is subject to the professional judgment of the financial aid administrator.

Keep these underlying principles in mind as you review the need analysis formulas in the following lessons.

An Underlying Principles of Need Analysis chart is included on page 15 for ease of reference.




1. The history of need analysis can be divided into two distinct stages: the early years of community consensus, and the more recent years of federal domination, structure, and control. True False

2. Describe horizontal equity as it relates to need analysis: __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

3. Describe vertical equity as it relates to need analysis: __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

4. The distribution of financial aid resources should be based on the family’s willingness to pay, not ability to pay. True False

5. The need analysis results are a benchmark. As such, the final assessment of the family’s ability to contribute to the student’s postsecondary education costs is subject to the professional judgment of the financial aid administrator. True False

6. Under Congressional Methodology, what were the three need analysis models? __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

7. The three need analysis models under Congressional Methodology remain the same three models used today under Federal Methodology. True False



Learning Activity: Interview Interview colleagues in your office to answer the following questions:

1. Does your institution use Institutional Methodology (IM) in addition to Federal Methodology (FM) to award institutional funds? Why? Why not? __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________ 2. If yes, list the IM calculation data used in addition the FM calculation. Keep these in mind as you review

Lessons 2 through 5. __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________



Learning Activity: Brief Evolution of Need Analysis Timeline

Fill in the Evolution of Need Analysis timeline below. Include the most significant years and time frames previously discussed, along with the most significant contributions to need analysis with each of those years/time frames. Check your responses using the Answer Key on page 21.

1643 - _____________________________ __________________________________

Great Depression - ____________________ ____________________________________

____________________________________

____________________________________

__________________________________

__________________________________

____________________________________

____________________________________

Sputnik - ____________________________

____________________________________

__________________________________

__________________________________

____________________________________

____________________________________

____________________________________

____________________________________

__________________________________

__________________________________

____________________________________

____________________________________

2007 - ______________________________

____________________________________



Reflection Questions Take a few moments to reflect on the following questions. There are no right or wrong answers. You can also discuss these questions with a coworker in your office.

1. What should be the federal government’s role in assisting students and their families pay for postsecondary educational costs? __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________ 2. Assuming you believe that the federal government should play a role in assisting students and their

families pay for postsecondary educational costs, what data elements should be included in the need analysis assessment of a family’s financial strength and ability to pay for college? __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________



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Underlying Principles of Need Analysis

Need analysis is the system used to allocate limited financial aid resources. Over the years, the statements listed below have become the underlying principles for need analysis.






6. The need analysis formula should provide a “snapshot” of the family’s financial circumstance at the time of application.




Lesson 1 Glossary Campus-based programs: The term commonly applied to federal student aid programs administered directly by schools. These programs include Federal Supplemental Educational Opportunity Grant (FSEOG), Federal Work-Study (FWS), and Federal Perkins Loan. Cost of attendance (COA): Costs the student is expected to incur during the period of enrollment, including but not limited to tuition, fees, room, board, books, supplies, transportation, and miscellaneous personal expenses. The COA usually is calculated for a full academic year. Dislocated worker: A person who: • Meets all of the following: Was terminated or laid off from employment or received a notice of termination or layoff, Is eligible for or has exhausted his or her unemployment compensation, or he or she is not eligible

because, even though he or she has been employed long enough to demonstrate attachment to the workforce, he or she had insufficient earnings or performed services for an employer that were not covered under a state’s unemployment compensation law, and

Is unlikely to return to a previous occupation; • Was terminated or laid off from employment or received a notice of termination or layoff as a result of any

permanent closure of, or any substantial layoff at, a plant, facility, or enterprise; • Is employed at a facility at which the employer made a general announcement that it will close within 180

days; • Was self-employed but is now unemployed due to general economic conditions in his community or natural

disaster; or • Is a displaced homemaker. Displaced homemaker: A person who: • Previously provided unpaid services to the family (e.g., a stay-at-home parent); • Is no longer supported by another family member’s income; and • Is unemployed or underemployed and is having trouble finding or upgrading employment. Expected family contribution (EFC): Estimate of a family’s ability to contribute toward postsecondary educational costs, derived by a formula known as Federal Methodology. Federal Direct Student Loan (Direct Loan) Program: The collective name for the Direct Subsidized Loan, Direct Unsubsidized Loan, Direct PLUS, and Direct Consolidation Loan programs. These federal funds are administered by the Department of Education (ED) and participating schools. Federal Family Education Loan (FFEL) Program: The collective name for the Federal Stafford Loan (subsidized and unsubsidized), Federal PLUS, and Federal Consolidation Loan programs. Funds from these programs were provided by private lenders and guaranteed by the federal government. Federal Pell Grant Program: A Title IV program for needy postsecondary students who have not yet received a baccalaureate or for postbaccalaureate students who are enrolled in a teaching certificate or licensing program at an eligible institution. Federal Perkins Loan Program: A Title IV campus-based program that provides low-interest loans to students with financial need.



Federal Supplemental Educational Opportunity Grant (FSEOG) Program: One of the Title IV campus-based programs, providing grants to undergraduate students with exceptional financial need and who have not completed their first baccalaureate or professional degree. Federal Work-Study (FWS) Program: One of the campus-based programs, providing part-time employment for undergraduate and graduate students who are in need of such earnings to meet a portion of their educational expenses. Financial need: The difference between the institution’s cost of attendance and the family’s ability to pay (i.e., EFC). Ability to pay is represented by the EFC for federal need-based aid and for many state and institutional programs. Free Application for Federal Student Aid (FAFSA): The application used to apply for all federal Title IV student financial aid. The FAFSA collects financial and other information used to calculate the EFC and to confirm a student’s eligibility via various database matches with other federal agencies. Gift aid: Grant (and scholarship aid at some institutions) that does not usually have to be paid back. Higher Education Act of 1965, as amended (HEA): The authorizing legislation for most of the federal student financial assistance programs. Established in 1965 by Congress, Title IV of the HEA authorizes the following programs: Federal Pell Grant, Iraq and Afghanistan Service Grant (IASG), Teacher Education Assistance for College and Higher Education (TEACH) Grant, Federal Supplemental Educational Opportunity Grant (FSEOG), Federal Work-Study (FWS), Federal Perkins Loan, and Federal Direct Student Loan (Direct Loan). Collectively, these programs are known as the Title IV programs and are administered by ED. Iraq and Afghanistan Service Grant (IASG) Program: A non-need based federal grant program for students whose parent or guardian died as the result of military service in Iraq or Afghanistan after September 11, 2001. If a student is eligible for a Federal Pell Grant, he or she cannot receive IASG. Professional judgment (PJ): The authority provided under the HEA for financial aid administrators to exercise discretion and deal with unique circumstances affecting individual students on a case-by-case basis in a number of specific areas of federal student aid administration. Teacher Education Assistance for College and Higher Education (TEACH) Grant Program: Grants are for undergraduate and graduate students, awarded in exchange for specific future teaching service in designated high-need fields and low-income elementary and secondary schools. If a student does not complete the required teaching service, the grant becomes a Direct Unsubsidized Loan, which must be repaid. Underemployed individual: A person who is working part time but wants to work full time, or one who is working below the demonstrated level of his or her education or job skills.



Lesson 1 Answer Keys Quick Quiz 1

1. In the early 1950s, which of the following elements were included in the first comprehensive system of need analysis: (check all that apply) Parents’ income, taxes, business expenses, and unusual medical expenses Professional judgment Parents’ assets, including home equity (value and debt) Parents’ jobs and/or types of business Children in public school Children in private school Student’s earnings Student’s assets

2. Fill in the basic formula for determining financial need below:

3. Define cost of attendance, including some of the costs it covers:

The COA is a school’s estimate of the costs a student is expected to incur during the period of enrollment, usually a full academic year. The COA includes but is not limited to tuition, fees, room, board, books, supplies, transportation, and miscellaneous personal expenses.

4. Fill in each blank in the following statement using one of the options presented:

The first federal student grant program was called the _Educational Opportunity Grant (EOG) created

in _1965_ under the _Higher Education Act (HEA)_.

Cost of attendance

= Financial need

– Expected family contribution

• National Defense Education Act (NDEA); • Economic Opportunity Act; or • Higher Education Act (HEA)

• 1958; • 1964; or • 1965

•Educational Opportunity Grant (EOG); •Basic Opportunity Grant (BOG); or • Federal Pell Grant



Quick Quiz 2

1. The history of need analysis can be divided into two distinct stages: the early years of community

consensus, and the more recent years of federal domination, structure, and control. True

False

2. Describe horizontal equity as it relates to need analysis: Horizontal equity is also referred to as equity across the board in the distribution of limited financial aid resources. Families in similar circumstances with similar resources should be expected to make similar contributions.

3. Describe vertical equity as it relates to need analysis: Vertical equity is sometimes referred to as leveling the playing field. Families in different circumstances should be expected to make contributions appropriate to their financial resources.

4. The distribution of financial aid resources should be based on the family’s willingness to pay, not ability to pay.

True

False

5. The need analysis results are a benchmark. As such, the final assessment of the family’s ability to contribute to the student’s postsecondary education costs is subject to the professional judgment of the financial aid administrator. True

False

6. Under Congressional Methodology, what were the three need analysis models? Under CM, the three models were the dependent student, independent student with dependents (including a spouse), and independent student without dependents.

7. The three need analysis models under Congressional Methodology remain the same three models used today under Federal Methodology. True

False



Learning Activity: Brief Evolution of Need Analysis Timeline

1643 - 1st college scholarship at Harvard College

Great Depression - National Youth Administration &

student employment program

1944 - WWII & creation of GI Bill for returning service members

Early 1950s - John Monro created 1st need analysis

1954 - College Scholarship Service centralized application form & consensus need analysis

1957/1958 - Sputnik/National Defense Education Act created

1st national loan program

1965 - Higher Education Act created umbrella for Title IV Programs

1972 - Higher Education Amendments created Basic Educational Opportunity Grants

1976 - CSS and ACT became Multiple Data Entry Processors for federal purposes

1986 - Higher Education Amendments federally controlled need analysis & created Congressional Methodology

1992 - Higher Education Amendments created single application form

and need analysis formula (Federal Methodology)

2007 - College Cost Reduction and Access Act modified need analysis

data elements & formulas



Lesson 2: The Regular Formula

Learning Objectives After completing this lesson you will: • Recognize the three

models used to calculate the EFC;

• Identify the model which should be used to calculate a student’s EFC; and

• Understand the steps used to calculate the EFC using the regular formula.

Key Concepts The key concepts you will learn in this lesson: • Expected family

contribution (EFC); • Dependency status; • Dependent; • Formula models; • Specified year; • Additional financial

information; • Total income and

allowances against income;

• Available income; • Assets and allowances

against assets; • Adjusted available

income; • Number in college; • Parents’ contribution; • Student’s contribution;

and • Available income

assessment rate.

The Regular Formula Overview

The Federal Methodology (FM) regular formula is a full data element formula used to calculate a student’s expected family contribution (EFC). The EFC is both a measure of a family’s financial strength and a key element in determinating a student’s

financial need. Schools use the EFC when they award Title IV aid. The regular formula calculates the EFC using income and asset information provided by a student and his family on the Free Application for Federal Student Aid (FAFSA). The FAFSA is the standard form used to apply for federal financial aid. The regular formula also assumes a student will be enrolled for nine months, which is the length of an academic year at a traditional standard semester, trimester, or quarter based institution. Therefore, FM calculates a nine-month EFC as the standard EFC. The regular formula distinguishes students based on dependency status. A student’s dependency status determines whether or not parental information must be included on the FAFSA and used in the calculation of the EFC. If a student is dependent, the regular formula assumes the presence of parental support. If a student is independent, the formula does not take into account any parental information. A student is considered dependent unless she meets the definition of an independent student. A student is independent if she:

• Will be 24 by December 31 of the award year;

• Is an orphan, in foster care, or a ward of the court, at any time when the student was 13 years of age or older;

• Is an emancipated minor or is in legal guardianship as determined by a court in the student’s state of legal residence;

• Is an unaccompanied youth who is determined to be homeless, or at risk of homelessness and self-supporting, at any point on or after July 1, 2015;

• Is a veteran;

• Is serving on active duty in the U.S. Armed Forces for purposes other than training;

• Is married;

• Is a graduate or professional student;

• Has legal dependents other than a spouse;

• Has dependent children; or

• Has been determined to be independent by a financial aid administrator based on unusual circumstances while exercising professional judgment.




• Overview of 2016–17 Federal Methodology Formulas

• Worksheets and tables from The EFC Formula, 2016–2017

• Lesson 2 Glossary


• Key concept

• Quick quiz



• Helpful hint

In the context of dependency status, a dependent is a child or other person for whom the student will provide more than half of her support during the award year covered by the FAFSA and for which the EFC is calculated. Examples of a dependents other

than children include older relatives such as grandparents, parents, aunts, uncles, or younger siblings supported by the student.

For more guidance on dependency status, refer to NASFAA’s self-study guide, The Application Process. For more on how professional judgment may be used for dependency status overrides, refer to NASFAA’s Self-Study Guide, Professional

Judgment, available on the NASFAA website at www.nasfaa.org. Formula Models

The regular formula uses three models to classify students and to calculate the EFC. A model is a description of a complex system.

Model A is used for dependent students and takes into account the income and asset information of both the student and his parents. Model B is used to calculate the EFC of independent students without dependents other than a spouse. If the student is married, his spouse’s income and asset information is included in the calculation. The final model, Model C, is for independent students with dependents other than a spouse. The three models differ somewhat in terms of treatment of certain types of income, number and types of income and asset allowances, and rates at which available income and assets are assessed as being available to contribute toward postsecondary education costs. For each of the student models, the regular formula first calculates a contribution from available income, and then a contribution from assets. In deriving these amounts, a portion of the family’s income and assets are protected through the application of various allowances. The protected amount is assumed to be unavailable for educational expenses. The FM formula also equally distributes the calculated amount of family resources available for postsecondary education among all family members, other than the parents of dependent students, who are attending postsecondary school on at least a half-time basis during the award year covered by the FAFSA. As you learn about the different models used in the regular formula, you will notice similarities in the calculation steps. Specified Year

Specified-year income, assets, and other household data are reported on the student’s FAFSA and used to calculate the EFC. The specified year—sometimes referred to as the “base” year—is established annually by the U.S. Department of Education

(ED) and can be either of the two calendar years immediately preceding the first year of the award year. For Federal Methodology purposes, the specified year for the 2016–17 award year is 2015.



Learning Activity: Selecting the Correct Regular Formula Model Using the information below, select the correct regular formula model to calculate the student’s EFC. Check your answers using the Answer Key on page 61.

1. Alex Alex is a 22-year-old senior at Big State University. He works part time and earns enough money to pay for most of his living expenses. Alex’s parents no longer claim him on their tax return, but still pay for his health and car insurance.

Model A Model B Model C 2. Leila

At 21, Leila works as the manager of a popular pizza delivery business and supports herself financially. Her younger brother Nathan had a huge fight with their stepfather last year and now lives with Leila. Leila will provide more than half of Nathan’s financial support during the award year, and claimed Nathan on her 2015 tax return. This fall, she plans to enroll at Wood College to pursue a degree in business.

Model A Model B Model C 3. Carlos

Carlos is enrolled in the astrophysics doctoral program at National Science University. He and his wife Maria have no children, and they now live with her parents because the stipend from his research assistantship no longer covers the rent for an apartment close to campus.

Model A Model B Model C



Regular Formula: Model A—Dependent Student

As mentioned earlier, Model A is used for dependent students and takes into account the income and asset information of both the student and his parents. For a

dependent student, the EFC is the sum of the:

• Parents’ contribution;

• Student’s contribution from available income; and

• Student’s contribution from assets. The calculation of the EFC using Model A consists of 10 steps, as described below.

Refer to the EFC worksheet and tables for Model A starting on page 45 as you review the calculation steps. The Overview of 2016–17 Federal

Methodology Formulas on page 41 is also a helpful reference. Step 1: Parents’ Total Income The first step in Model A of the EFC formula is to calculate parents’ total income. Dependent students must include income and other information from their legal parents (biological or adoptive) if those parents live together, regardless of the parents’ marital status. In addition, both parents report income and other information on the FAFSA if the parents were legally married in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country, without regard to whether the marriage was between persons of the same sex or opposite sex, where the couple resides, or where the student will be attending school. As such, the references in the EFC formula worksheets are for “Parent 1” and “Parent 2”, instead of “Mother” and “Father”. If the parents filed or are required to file a federal income tax return, the adjusted gross income (AGI) from the appropriate federal tax year is used. If the AGI is a negative amount, it is set to zero. If the parents are not required to file a federal tax return, the formula uses income earned from work instead. AGI or income earned from work is then added to

the amount of reported untaxed income and benefits.

The total of the additional financial information reported on the FAFSA is then subtracted from the total of taxable and untaxed income amount. The

additional financial information reported on the FAFSA represents income and other items that are not factored into the calculation of the EFC (i.e., excludable income). Additional financial information includes:

• Education tax credits (i.e., American Opportunity Tax Credit and Lifetime Learning Tax Credit);

• Child support paid because of death, separation, or a legal requirement;

• Taxable earnings from need-based employment programs (e.g., Federal Work-Study and need-based employment portions of fellowships and assistantships);

• Taxable student grant and scholarship aid (including AmeriCorps awards, living allowances, and interest accrual payments) reported to the Internal Revenue Service (IRS) in the tax filer’s AGI;

• Taxable portions of combat or special combat pay included in the tax filer’s AGI; and

• Earnings from work under a cooperative education program offered by a college or university.

The difference between the income reported on the FAFSA and additional financial information is known as the parents’ total income. Total income can

be a negative amount and will be used later in the formula. Step 2: Parents’ Allowances Against Income After calculating parents’ total income, the formula determines the parents’ total allowances against income. Allowances represent money that is not available to pay for educational expenses. The EFC formula includes the following allowances for parents:

• U.S income tax paid for tax filers;



• State and other taxes (calculated using Table A1);

• Social Security tax allowance for each parent (calculated using Table A2);

• Income protection allowance (calculated using Table A3); and

• Employment expense allowance. Some of the allowances, like U.S. income tax paid and Social Security tax, are self-explanatory. For example, you can see taxes paid on the tax return. A couple of the allowances require more explanation. State and Other Taxes. The formula builds in a general allowance for the payment of state and other taxes. It is calculated using a table (A1) based on the parents’ state of legal residence and total income (not AGI). A negative amount is set to zero in the calculation. Income Protection Allowance (IPA). The IPA is an allowance which accounts for the family’s basic living expenses. It is calculated using a table (A3), and is based on the size of the family and the number of family members enrolled at least half-time in college during the award year. It excludes the student’s parents who are enrolled in college. The IPA also does not consider regional differences in the cost of living and assumes a low standard of living. Employment Expense Allowance. This allowance factors in expenses parents have because they work. These expenses include clothing, meals, and transportation costs. The amount of the allowance depends on whether there are one or two parents in the household and whether one or both work. The maximum amount of the allowance is capped at 35 percent of the lesser of the earned incomes or $4,000, whichever is less. The employment expense allowance is:

• Zero if there are two parents in the household (parents’ marital status is “married” or “unmarried and both parents living together”) and one parent is working;

• 35 percent of the lesser earned income, up to a maximum of $4,000, if there are two parents in the household and both parents work; or

• 35 percent of earned income, up to a maximum of $4,000, if it is a single-parent household.

Parents’ total allowances against income is the sum of all allowances. Step 3: Parents’ Available Income

Parents’ available income represents the income potentially available to cover educational expenses after allowances for required expenses are considered. The

formula calculates available income by subtracting total allowances from total income. Step 4: Parents’ Contribution from Assets After calculating parents’ available income, the formula determines parents’ contribution from assets.

Assets. Assets are items of ownership that either have cash value or which can be converted into cash. Depending on the applicant, the following assets are

reported on the FAFSA and included in the calculation of the EFC:

• Current balance of cash, savings, and checking accounts;

• Net worth of investments, including real estate; and

• Net worth of businesses and investment farms. The family’s primary residence, family farms, and family–owned and controlled small businesses with 100 or fewer full-time or full-time equivalent employees are not considered assets for the purposes of the EFC calculation. Any qualified education benefits owned by the dependent student, such as an IRS 529 plan or state prepaid tuition plan, are considered assets of the parents. The net worth of an asset is its value minus any debt owed against it as of the date the FAFSA is filed. Adjusted Net Worth. When calculating the value of a business or investment farm to be included in the calculation of the student’s EFC, the formula looks at the asset’s adjusted net worth. The adjusted net



worth of the business or investment farm is calculated using a table (A4) which protects a percentage of an asset’s value from consideration in the formula. Net Worth. The parents’ net worth is the total of reported cash, savings, and checking; the net worth of investments and real estate; and the adjusted net worth of a business or investment farm. Education Savings and Asset Protection Allowance. After calculating net worth, the formula next subtracts an education savings and asset protection allowance to determine the parents’ discretionary net worth. The education savings and asset protection allowance is designed to protect a portion of the family’s assets for the parents’ retirement, emergencies, and personal educational expenses. It is calculated using Table A5 and based on the age of the older parent. Discretionary Net Worth. Parents’ discretionary net worth is the value of assets after the application of the education savings and asset protection allowance. Asset Conversion Rate. After determining the parents’ discretionary net worth, the formula multiplies the figure by an asset conversion rate to calculate the parents’ contribution from assets. The asset conversion rate is the amount of the parents’ assets that are assumed to be available to contribute towards the student’s educational costs. For the 2016–17 award year, the statute sets the asset conversion rate for parents at 12 percent. If application of the asset conversion rate yields a negative number, the value is set to zero. Step 5: Parents’ Contribution

Adjusted Available Income. After determining parents’ contribution from assets, the next step of the formula calculates the parents’ contribution. First,

the value of the parents’ available income is added to the value of the parents’ contribution from assets. The resulting figure is known as the parents’ adjusted available income. This number may be negative. A negative adjusted available income occurs when the parents’ income is insufficient to cover basic living expenses, so some of the student’s income may be necessary to

support the family, including the parents. It is included in Step 7 below. The parents’ contribution from adjusted available income is calculated using Table A6. If the number is negative, it is set to zero. Number in College. The number in college includes the members of the parents’ household, excluding the parents, who will be enrolled at least half time in a program that leads to a degree or certificate during the award year.

Parent’s Contribution. Once the parents’ contribution from available income is calculated, any number greater than zero is divided by the number in college to

determine the parents’ contribution for the individual student.

Student’s Contribution. After calculating the parents’ contribution, the formula next calculates the student’s contribution. The student’s contribution is the amount the

student is expected to contribute towards the cost of his education from both income and assets. Step 6: Student’s Total Income As with the calculation of parents’ total income, the formula uses either the student’s AGI or income earned from work depending on whether or not the student is required to file a tax return. If the AGI is negative, it is set to zero. The student’s AGI or income earned from work is then added to any untaxed income and benefits reported on the FAFSA. The total amount of the student’s additional financial information from the FAFSA is subtracted from this amount to calculate the student’s total income, which may be a negative amount. Step 7: Student’s Allowances Against Income The formula next subtracts allowances from the student’s total income. These allowances are:

• U.S. income tax paid for tax filers;

• State and other taxes based on the student’s state of legal residence (calculated using Table A7);



• Social Security tax allowance (calculated using Table A2);

• Income protection allowance; and • Allowance for parents’ negative adjusted

available income. Some of the allowances subtracted from student income are identical to the allowances discussed earlier when calculating the parents’ contribution. However, some are different. Income Protection Allowance (IPA). As you recall, the IPA for the parents of a dependent student is calculated using a table which takes into account household size and number in college. For the dependent student, the IPA is a fixed amount. For the 2016–17 award year, the IPA is set at $6,400. Allowance for Parents’ Negative Adjusted Available Income. The allowance for parents’ negative adjusted available income is unique to Model A of the regular formula. It recognizes that the dependent student’s income may be needed to help support the family when the parents’ income is insufficient to cover basic family living expenses. The student’s total allowances is the sum of all allowances. This figure is subtracted from the student’s total income. Step 8: Student’s Contribution from Available Income The student’s available income is the difference between the student’s total income and total allowances. The formula calculates the student’s contribution from available income by multiplying available income by an assessment rate.

Available Income Assessment Rate. The available income assessment rate is the percentage of the student’s income which is available to cover his educational

expenses for the award year. The assessment rate for calculating the dependent student’s contribution from available income is 50 percent. If the application of the assessment rate yields a negative number, the student’s contribution from available income is set to zero.

Step 9: Student’s Contribution from Assets Net Worth. The first step in determining a student’s contribution from assets is to calculate her net worth. As with the parents, the dependent student’s net worth is the sum of the following:

• Value of cash, savings, and checking;


• Net worth of businesses and investment farms.

Remember that the value of a primary residence, family farm, and family-owned and controlled small businesses with 100 or fewer full-time or full-time equivalent

employees are not assets for the purpose of calculating the EFC. Asset Conversion Rate. After calculating the student’s net worth, the formula applies an assessment rate of 20 percent to determine the student’s contribution from assets. Unlike the calculation of parents’ contribution from assets, the formula does not subtract an education savings and asset protection allowance from the student’s net worth, nor does it adjust the value of the student’s businesses or investment farms. Step 10: Expected Family Contribution The final step in the formula calculates the student’s EFC. The dependent student’s EFC is the sum of the parents’ contribution (Step 5), the student’s contribution from available income (Step 8), and the student’s contribution from assets (Step 9). If this number is negative, the student’s EFC is zero.




1. Which model or models of the regular formula are used to calculate the EFC of independent students? ___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 2. What allowances are subtracted from parents’ total income to calculate parents’ available income?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 3. What is the purpose of the education savings and asset protection allowance?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 4. What is the purpose of the allowance for negative parents’ adjusted available income?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 5. What assessment rates are used to calculate the dependent student’s contributions from available

income and assets? ___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________



Learning Activity: Hand Calculation Using Model A

Using the case study below and the worksheet and tables for Model A, beginning on page 45, calculate the dependent student’s EFC. Check your answer using the Answer Key on page 63.

All calculations should be carried out to three decimal places. The result is rounded to the nearest whole number: • .001 through .499 is rounded down; and • .500 through .999 is rounded up.

Melanie Knox Melanie will be a second-year, undergraduate student starting in Fall 2016. Her date of birth is June 25, 1997. She lives in Syracuse, New York with her mother, stepfather, and younger stepbrother, Michael, who is a high school junior. Melanie’s mother, Ann, and stepfather, David, have been married 10 years. David is an Air Force reservist who was called for active duty November 2015. Ann’s date of birth is June 3, 1969. David’s date of birth is August 1, 1968. Melanie’s mother and stepfather filed an IRS Form 1040 for the 2015 tax year, as required. Ann owns and operates a small coffee shop with five full-time employees. In 2015, she earned $21,386 in business income (as reported on Schedule C of the 1040). David works as an electrician and earned $53,000 in 2015. They reported an adjusted gross income (AGI) of $74,386, a $2,500 American Opportunity Tax Credit, an $800 taxable combat pay, and a tax liability of $6,829. Ann and David claimed Melanie and her stepbrother as exemptions. David contributed $2,500 to an IRA tax-deferred pension plan. No one in the family received benefits from a means-tested federal program in 2014 or 2015. On Melanie’s FAFSA, Ann reported the value of her coffee shop as $500,000 with debt of $436,000, $12,848 in a joint savings account, $1,563 in her checking account, and $2,367 in David’s checking account. Melanie’s parents divorced in 1998. Per the terms of the divorce, Melanie’s father paid Ann $600 a month in child support for Melanie until she turned 18. Ann received six months’ worth on child support in 2015, in the amount of $3,600. Melanie earned $2,340 in 2015 working part time over the summer. She is not required to file a tax return for 2015, so she did not file one. She used the money in her savings account to pay her tuition for the 2015–16 academic year, so she has no assets.



Regular Formula: Model B—Independent Student Without Dependents Other Than a Spouse Now that you have learned the steps to calculating the EFC of a dependent student, it is time to look at how the EFC is calculated for an independent student. As you will recall from the discussion at the beginning of the lesson, the regular formula uses two models for independent students. Model B is used for students without dependents other than a spouse. Remember, if the student is married, his spouse’s information is included in all steps of the EFC calculation, if the student was legally married in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country, without regard to whether the marriage was between persons of the same sex or opposite sex, where the couple resides, or where the student will be attending school.

Refer to the EFC worksheet and tables for Model B starting on page 51 as you review the calculation steps. The Overview of 2016–17 Federal Methodology Formulas,

beginning on page 41, is also a handy reference. Also keep in mind that certain calculation steps are similar across the models. Step 1: Student’s Total Income The first step in Model B is calculating the student’s total income. The formula will consider either the student’s AGI or income earned from work, depending on whether or not the student is required to file a tax return. To this number, the formula adds any untaxed income and benefits reported on the FAFSA. Finally, the formula subtracts the amount of any additional financial information from the FAFSA to calculate the student’s total income. Step 2: Student’s Allowances Against Income Under Model B, independent students are eligible for the following allowances:

• U.S. income tax paid (tax filers only);

• State and other taxes (calculated using Table B1);

• Student (and spouse) Social Security tax (calculated using Table B2);

• Income protection allowance; and

• Employment expense allowance. Income Protection Allowance (IPA). Like the IPA of the dependent student in Model A, the IPA of independent students without dependents other than a spouse is a standard amount. The amount depends on the student’s marital status and, if the student is married, the enrollment status of her spouse. Standard IPA amounts for the 2016–17 award year are:

• $9,960 for a single, separated, divorced, or widowed student;

• $9,960 for a married student if her spouse is enrolled at least half time; and

• $15,960 for a married student if her spouse is not enrolled at least half time.

“Remember, if the student

is married, his spouse’s

information is included

in all steps of the EFC

calculation...”

Employment Expense Allowance. Unlike dependent students, independent students qualify for an employment expense allowance. However, under Model B, the students who qualify for this allowance are limited to married students when both the student and his spouse work. The maximum amount of the allowance is capped at 35 percent of the lesser of the earned incomes or $4,000, whichever is less. The student’s total allowances is the sum of all allowances.



Step 3: Student’s Contribution from Available Income To calculate the student’s available income, the formula subtracts the student’s total allowances from the student’s total income. To determine the student’s contribution from available income, available income is multiplied by an assessment rate of 50 percent (the same assessment rate used to calculate a dependent student’s contribution from available income). The student’s contribution from available income may be negative; a negative amount can be offset by a positive contribution from assets. Step 4: Student’s Contribution from Assets Adjusted Net Worth. Before calculating the student’s net worth, the formula determines the adjusted net worth of any reported business or investment farm. As with the parents of a dependent student, this calculation uses a table (Table B3) which protects some of the asset’s value. Net Worth. A student’s net worth is the sum of her:

• Cash, savings, and checking;


• Adjusted net worth of businesses and investment farms.

Remember that a primary residence, family farm, and family-owned and controlled small business with 100 or fewer full-time or full-time equivalent employees are not assets for the purpose of calculating the EFC. The adjusted net worth of a business or investment farm owned by an independent student is calculated in the same way as it is for a parent under Model A (using a table which protects a portion of the asset’s value). Asset Protection Allowance and Discretionary Net Worth. After calculating the student’s net worth, the formula subtracts an asset protection allowance from the figure to determine the student’s discretionary net worth. The asset protection allowance protects a portion of the student’s assets for retirement planning and emergencies. The

amount of the asset protection allowance is calculated using Table B4 and the student’s age. Asset Conversion Rate. Finally, the student’s discretionary net worth is multiplied by an asset conversion rate to determine her contribution from assets. The conversion rate is 20 percent. If the student’s contribution from assets is negative, the value is set to zero.

“Remember that a primary

residence, family farm,

and family-owned and controlled

small business with

100 or fewer full-time or

full-time equivalent employees

are not assets for the purpose

of calculating the EFC.” Step 5: Expected Family Contribution In the final step, the formula totals the student’s (and spouse’s) contribution from available income (Step 3) and contribution from assets (Step 4).The resulting figure is divided by the number in college to determine the EFC for each student in the household. A negative EFC is set to zero.




1. Why do you think the regular formula has three models? ___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 2. Is it fair to assess student income and assets at higher rates than for the parents of dependent students?

Why or why not? ___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 3. Do you believe the IPA is an adequate representation of basic living expenses? Why or why not?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________



Learning Activity: Hand Calculation Using Model B Using the case study below and the worksheet and tables for Model B, beginning on page 51, calculate the independent student’s EFC. Check your answer using the Answer Key on page 66.


Michael Rogers Michael will be a fourth-year undergraduate student in Fall 2016. He is married, and his wife, Tasha, also will enroll half time as a fourth-year undergraduate student. They have no children. Michael’s date of birth is June 1, 1989. Michael and Tasha live in Philadelphia, Pennsylvania. Michael and Tasha filed an IRS Form 1040 for the 2015 tax year. Because they itemized deductions, they could not file a 1040A or 1040EZ. They reported an adjusted gross income (AGI) of $46,159, 2 exemptions, $159 in interest income, no dividend income, a $600 American Opportunity tax credit, and a tax liability of $1,750. They have no untaxed income. Michael earned $22,000 in 2015, $4,000 of which was through the Federal Work-Study (FWS) Program. Tasha earned $24,000 in 2015, $2,500 of which was earned through FWS. Neither Michael nor Tasha received benefits from a means-tested federal benefit program in 2014 or 2015. The couple’s only assets are $1,300 in a joint checking account and $4,000 in a joint savings account, which Michael reported on his FAFSA.



Regular Formula: Model C—Independent Student With Dependents Other Than a Spouse The final model used in the regular formula, Model C, is for independent students with dependents other than a spouse. As you review the steps to calculate a student’s EFC under this model, note the similarities to the calculation of the parents’ contribution in Model A. As with Model B, if the student is married, and was legally married in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country, without regard to whether the marriage was between persons of the same sex or opposite sex or where the couple resides or where the student will be attending school, his spouse’s information must be included in all steps of the EFC calculation.

Refer to the EFC worksheet and tables for Model C starting on page 55 as you review the calculation steps. The Overview of 2016–17 Federal

Methodology Formulas, beginning on page 41, is also a handy reference. Step 1: Student’s Total Income Under Model C, the student’s total income is calculated in the same manner as it is in Model B. The formula uses either the student’s AGI (which may be negative) or income earned from work, depending on whether or not the student was required to file a federal tax return. Next, the amount of any untaxed income and benefits reported on the FAFSA is added to the student’s AGI or income earned from work. From this figure, the formula subtracts the amount of any additional financial information included on the FAFSA. The resulting figure is the student’s total income. This figure may be negative. Step 2: Student’s Allowances Against Income Under Model C, the independent student is eligible for the following allowances:

• U.S. income tax paid (for tax filers only);

• State and other taxes (calculated using Table C1);

• Student (and spouse) Social Security tax (calculated using Table C2);

• Income protection allowance; and

• Employment expense allowance. Income Protection Allowance (IPA). For independent students with dependents other than a spouse, the IPA is calculated using Table C3. The table takes into account family size as well as the number in college.

“The employment expense

allowance takes into account

job-related expenses the working

student (and her spouse, if

married) may experience.” Employment Expense Allowance. The employment expense allowance takes into account job-related expenses the working student (and her spouse, if married) may experience. As with Models A and B, these expenses include items such as meals, clothing, and transportation. To qualify for this allowance under Model C, both the student and her spouse (if married) must work, or the student must be in a one-parent household. The maximum amount of the allowance is 35 percent of the lesser of the earned incomes or $4,000, whichever is less. If the student is unmarried, the maximum allowance is 35 percent of the student’s earned income or $4,000, whichever is less.The student’s total allowances is the sum of all allowances. Step 3: Student’s Available Income The student’s available income is calculated by subtracting total allowances from total income. A student’s available income can be negative; it can be offset by a positive contribution from assets.



Step 4: Student’s Contribution from Assets Net Worth. The following assets are included in the EFC calculation for the independent student under Model C:

• Cash, savings, and checking;


• Adjusted net worth of businesses and investments farms.

Remember that a primary residence, family farm, and family-owned and controlled small businesses with 100 or fewer full-time or full-time equivalent

employees, are not assets for the purpose of calculating the EFC. The adjusted net worth of a business or investment farm owned by an independent student is calculated in the same way as it is for a parent under Model A (using Table C4, which protects a portion of the asset’s value).

“If application of the asset

conversion rate yields

a negative number,

the student’s contribution

from assets is set to zero.” Asset Protection Allowance and Discretionary Net Worth. The student’s net worth is the combined value of the three asset types listed above. From this figure, the formula subtracts an asset protection allowance to calculate the student’s discretionary net worth. The asset protection allowance is calculated using Table C5 and the student’s age. As with the asset protection allowance used in Model B, the allowance protects a portion of the student’s assets for retirement planning and emergencies.

Asset Conversion Rate. Finally, the student’s discretionary net worth is multiplied by an asset conversion rate to determine his contribution from assets. The conversion rate is seven percent. If application of the asset conversion rate yields a negative number, the student’s contribution from assets is set to zero. Step 5: Expected Family Contribution To calculate the student’s EFC, the formula totals the student’s (and spouse’s) contribution from available income and contribution from assets. Adjusted Available Income. The resulting figure is the student’s adjusted available income. The student’s total contribution from adjusted available income is calculated using Table C6. If the student’s contribution from adjusted available income is negative, the formula sets the value to zero. The student’s total contribution from adjusted available income is divided by the number in college to determine the EFC of each student enrolled in college. A negative EFC defaults to zero.




1. Which model of the regular formula is used to calculate the EFC of an independent student without dependents other than a spouse? __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________ 2. Under Model C, which students qualify for the employment expense allowance?

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________ 3. What is the IPA of a student under Model B?

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________ 4. What is the asset conversion rate for Model C?

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________ 5. Which independent student model uses adjusted available income?

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________




1. Why do you think two models are used to calculate the EFC of independent students? __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________ 2. Why do you think the asset conversion rate for independent students under Model C is lower than the

asset conversion rate for the parents of dependent students under Model A? __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________ 3. Do you think it is fair to calculate the IPA of independent students under Models B and C differently?

Why or why not? __________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

Overview of 2016–17 Federal Methodology Formulas

DEPENDENT INDEPENDENT WITHOUT DEPENDENTS

OTHER THAN A SPOUSE INDEPENDENT WITH DEPENDENTS

OTHER THAN A SPOUSE

Model A – Automatic Zero EFC Model B – Automatic Zero EFC Model C – Automatic Zero EFC Expected family contribution (EFC) automatically set to zero if student’s parents meet certain status and income criteria.

Automatic Zero EFC is not applicable. EFC automatically set to zero if student (and spouse, if married) meets certain status and income criteria.

Model A – Simplified Needs Test Model B – Simplified Needs Test Model C – Simplified Needs Test

EFC calculation excludes student’s and parents’ assets if student’s parents meet certain status and income criteria.

EFC calculation excludes student’s and, if married, spouse’s assets if student (and spouse) meet certain status and income criteria.

EFC calculation excludes student’s and, if married, spouse’s assets if student (and spouse) meet certain status and income criteria.

Model A – Regular Formula Model B – Regular Formula Model C – Regular Formula EFC calculated using student’s and parents’ income and assets.

EFC calculated using student’s and, if married, spouse’s income and assets.

EFC calculated using student’s and, if married, spouse’s income and assets.

Expected Family Contribution (EFC) Parents’ contribution + Student’s contribution from available

income + Student’s contribution from assets

Expected Family Contribution (EFC) (Contribution from available income + Contribution from assets) ÷ Number in college

Expected Family Contribution (EFC) (Total contribution from adjusted available income) ÷ Number in college

Student’s Contribution from Available Income (Total income – Total allowances) x .50

Contribution from Available Income (Total income – Total allowances) x .50

Total Contribution from Adjusted Available Income Application of Table C6 to (Available income + Contribution from assets) Adjusted Available Income (Total income – Total allowances) + Contribution from assets

Total Income (Student) Taxable income + Untaxed income and benefits – Total additional financial information (excluded income)

Total Income Taxable income + Untaxed income and benefits – Total additional financial information (excluded income)

Total Income Taxable income + Untaxed income and benefits – Total additional financial information (excluded income)

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DEPENDENT INDEPENDENT WITHOUT DEPENDENTS OTHER THAN A SPOUSE

INDEPENDENT WITH DEPENDENTS OTHER THAN A SPOUSE

Model A – Regular Formula Model B – Regular Formula Model C – Regular Formula Total Allowances (Student) U.S. income tax paid + State and other tax allowance + Social Security tax allowance + Income protection allowance + Allowance for parents’ negative adjusted available income

Total Allowances U.S. income tax paid + State and other tax allowance + Student’s Social Security tax + Spouse’s Social Security tax + Income protection allowance + Employment expense allowance

Total Allowances U.S. income tax paid + State and other tax allowance + Student’s Social Security tax + Spouse’s Social Security tax + Income protection allowance + Employment expense allowance

Student’s Contribution from Assets Net worth x .20

Contribution from Assets Discretionary net worth x .20

Contribution from Assets Discretionary net worth x .07

Net Worth (Student) Cash, savings, and checking + Net worth of investments and real estate + Net worth of business and/or investment farm

Discretionary Net Worth Cash, savings, and checking + Net worth of investments and real estate + Net worth of business and/or investment farm – Asset protection allowance

Discretionary Net Worth Cash, savings, and checking + Net worth of investments and real estate + Net worth of business and/or investment farm – Asset protection allowance

Parents’ Contribution Total parents’ contribution from adjusted available income ÷ Number in college

Parents’ Contribution—Not applicable Parents’ Contribution—Not applicable

Available Income (Parents) Total income – Total allowances

Adjusted Available Income (Parents) Available income + Contribution from assets

Total Contribution from Adjusted Available Income (Parents) Application of Table A6 to (Available income + Contribution from assets)

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INDEPENDENT WITH DEPENDENTS OTHER THAN A SPOUSE

Model A – Regular Formula Model B – Regular Formula Model C – Regular Formula

Total Income (Parents) Taxable income + Untaxed income and benefits – Total additional financial information (excluded income)

Total Allowances (Parents) U.S. income tax paid + State and other tax allowance + Parent 1 Social Security tax allowance + Parent 2 Social Security tax allowance + Income protection allowance + Employment expense allowance

Contribution from Assets (Parents) Discretionary net worth x .12

Discretionary Net Worth (Parents) Cash, savings, and checking + Net worth of investments and real estate + Net worth of business and/or investment farm – Education savings and asset protection allowance

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43

continued on the next page

**Do notincludethefamily’shome.

***Tocalculatetheparents’contributionforotherthannine-monthenrollment, see page 11.

2016–2017 EFC FORMULA A : DEPENDENT STUDENT REGULAR WORKSHEETPage 1 A

*STOPHEREifthefollowingaretrue:Line 3 is $25,000 or less and

• Theparentsareeligibletofilea2015IRSForm1040Aor1040EZ(theyarenotrequiredtofilea2015Form1040)ortheyarenotrequiredtofileanyincometaxreturnor

• Anyoneincludedintheparents’householdsize(asdefinedontheFAFSA)receivedbenefitsduring2014or2015fromanyofthedesignatedmeans-testedfederalbenefitprogramsor

• Eitheroftheparentsisadislocatedworker.Ifthesecircumstancesaretrue,theExpectedFamilyContributionisautomaticallyzero.

ALLOWANCES AGAINST PARENTS’ INCOME

8. 2015U.S. income taxpaid (FAFSA/SAR#86)(taxfilers only) If negative, enter zero.

9. State andother tax allowance(TableA1) If negative, enter zero. +

10. Parent 1 (father/mother/stepparent)SocialSecurity tax allowance (TableA2) +


12. Incomeprotection allowance (TableA3) +

13. Employment expense allowance:

• Twoworkingparents (Parents’ MaritalStatusis “married”or “unmarried andbothparentsliving together”): 35%of the lesser of theearned incomes, or $4,000,whichever is less

• One-parent families: 35%of earned income,or $4,000,whichever is less

• Two-parent families, oneworkingparent:enter zero +

14. TOTAL ALLOWANCES =

PARENTS’ INCOME IN 20151. Parents’AdjustedGrossIncome(FAFSA/SAR#85)

Ifnegative,enterzero.

2. a. Parent1(father/mother/stepparent)incomeearnedfromwork(FAFSA/SAR#88) __________

2. b. Parent2(father/mother/stepparent)incomeearnedfromwork(FAFSA/SAR#89) + __________

Totalparents’incomeearnedfromwork =3. Parents’TaxableIncome

(Iftaxfilers,entertheamountfromline1above.Ifnon-taxfilers,entertheamountfromline2.)*

4. Totaluntaxedincomeandbenefits:(TotalofFAFSA/SAR#94a.through94i.) +

5. Taxableanduntaxedincome(sumofline3andline4) =

6. Totaladditionalfinancialinformation(TotalofFAFSA/SAR#93a.through93f.) −

7. TOTAL INCOME(line5minusline6)Maybeanegativenumber. =

PARENTS’ CONTRIBUTION

AVAILABLE INCOME (AI) (fromline15)

CONTRIBUTION FROM ASSETS (fromline24) +

25. Adjusted Available Income (AAI) Maybeanegativenumber. =

26. Total parents’ contribution from AAI(CalculateusingTableA6.)Ifnegative,enterzero.

27. Number in college in 2016–2017 (Excludeparents)(FAFSA/SAR#74) ÷

28. PARENTS’ CONTRIBUTION (standardcontributionfornine-monthenrollment)***Ifnegative,enterzero. =

AVAILABLE INCOME

Total income (from line7)

Total allowances (from line14) −

15. AVAILABLE INCOME (AI)Maybe a negativenumber. =

PARENTS’ CONTRIBUTION FROM ASSETS

16. Cash,savings&checking(FAFSA/SAR#90)

17. Networthofinvestments**(FAFSA/SAR#91)Ifnegative,enterzero.

18. Networthofbusinessand/orinvestmentfarm(FAFSA/SAR#92)


19. Adjustednetworthofbusiness/farm(CalculateusingTableA4.) +

20. Net worth (sumoflines16,17,and19) =

21. Educationsavingsandassetprotectionallowance(TableA5) −

22. Discretionarynetworth(line20minusline21) =

23. Asset conversion rate × .12

24. CONTRIBUTION FROM ASSETSIfnegative,enterzero. =

+

+

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Reprinted from The EFC Formula, 2016-17 Need Analysis: Lesson 2 45

AREGULAR WORKSHEET Page 2

STUDENT’S INCOME IN 2015

29. AdjustedGrossIncome(FAFSA/SAR#36)Ifnegative,enterzero.

30. Incomeearnedfromwork(FAFSA/SAR#39)

31. TaxableIncome(Iftaxfiler,entertheamountfromline29above.Ifnon-taxfiler,entertheamountfromline30.)

32. Totaluntaxedincomeandbenefits(TotalofFAFSA/SAR#45a.through45j.) +



35. TOTAL INCOME(line33minusline34)Maybeanegativenumber.

=

STUDENT’S CONTRIBUTION FROM INCOME



42. Available income (AI) =

43. Assessment of AI × .50

44. STUDENT’S CONTRIBUTION FROM AI Ifnegative,enterzero.

=

ALLOWANCES AGAINST STUDENT INCOME



38. SocialSecurity tax allowance (TableA2) +

39. Incomeprotection allowance + 6,400

40. Allowance for parents’ negativeAdjustedAvailable Income (If line25 is negative, enterline 25 as a positive number in line 40.If line25 is zeroor positive, enter zero inline40.) +


*Do not includethestudent’shome.

**TocalculatetheEFCforotherthannine-monthenrollment,see thenextpage.

EXPECTED FAMILY CONTRIBUTION

PARENTS’ CONTRIBUTION(fromline28)

STUDENT’S CONTRIBUTION FROM AI(fromline44) +

STUDENT’S CONTRIBUTION FROM ASSETS (fromline50) +

51. EXPECTED FAMILY CONTRIBUTION(standardcontributionfornine-monthenrollment)** Ifnegative,enterzero. =

STUDENT’S CONTRIBUTION FROM ASSETS


46. Networthofinvestments*(FAFSA/SAR#42)Ifnegative,enterzero +

47. Networthofbusinessand/orinvestmentfarm(FAFSA/SAR#43)Ifnegative,enterzero. +

48. Net worth (sumoflines45through47) =

49. Assessment rate × .20

50. STUDENT’S CONTRIBUTION FROM ASSETS =

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46 Need Analysis: Lesson 2 Reprinted from The EFC Formula, 2016-17

Table A1: State and Other Tax Allowancefor EFC Formula A Worksheet (parents only)

StatePercent of Total Income


$0 - $14,999 $15,000 or more $0 - $14,999 $15,000 or moreAlabama 3% 2% Montana 4% 3%Alaska 2% 1% Nebraska 5% 4%American Samoa 2% 1% Nevada 2% 1%Arizona 4% 3% NewHampshire 5% 4%Arkansas 4% 3% NewJersey 9% 8%California 7% 6% NewMexico 3% 2%Canadaand CanadianProvinces 2% 1% NewYork 9% 8%

Colorado 4% 3% North Carolina 5% 4%Connecticut 8% 7% North Dakota 2% 1%

Delaware 5% 4% NorthernMarianaIslands 2% 1%

DistrictofColumbia 7% 6% Ohio 5% 4%FederatedStatesofMicronesia 2% 1% Oklahoma 3% 2%

Florida 3% 2% Oregon 7% 6%Georgia 5% 4% Palau 2% 1%Guam 2% 1% Pennsylvania 5% 4%Hawaii 5% 4% Puerto Rico 2% 1%Idaho 5% 4% RhodeIsland 7% 6%Illinois 6% 5% South Carolina 4% 3%Indiana 4% 3% South Dakota 2% 1%Iowa 5% 4% Tennessee 2% 1%Kansas 5% 4% Texas 3% 2%Kentucky 5% 4% Utah 5% 4%Louisiana 3% 2% Vermont 6% 5%Maine 6% 5% VirginIslands 2% 1%MarshallIslands 2% 1% Virginia 6% 5%Maryland 8% 7% Washington 3% 2%Massachusetts 6% 5% West Virginia 3% 2%Mexico 2% 1% Wisconsin 7% 6%Michigan 4% 3% Wyoming 1% 0%Minnesota 6% 5% BlankorInvalidState 2% 1%Mississippi 3% 2% Other 2% 1%Missouri 4% 3%

Tocalculatethestateandothertaxallowance,multiplytheParents’TotalIncome(EFCFormulaAWorksheet,line7)bytheappropriateratefromthetableabovetogetthe“StateandOtherTaxAllowance”(EFCFormulaAWorksheet,line9).Usetheparents’StateofLegalResidence (FAFSA/SAR#70).Ifthisitemisblankorinvalid,usethestudent’sStateofLegalResidence (FAFSA/SAR#18).Ifbothitemsareblankorinvalid,usetheStateintheStudent’sMailingAddress(FAFSA/SAR#6).Ifallthreeitemsareblankorinvalid,usetherateforablankorinvalidstate above.

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Table A2: Social Security Tax

Income Earned from Work* Social Security Tax

$0 – $118,500 7.65%ofincome

$118,501 or greater $9,065.25 +1.45%ofamountover$118,500

Calculate separately the Social Security tax of parent 1, parent 2, and the student.

*Parent1(father/mother/stepparent)2015incomeearnedfromworkisFAFSA/SAR#88Parent2(father/mother/stepparent)2015incomeearnedfromworkisFAFSA/SAR#89Student’s2015incomeearnedfromworkisFAFSA/SAR#39SocialSecurityTaxwillneverbelessthanzero.

Table A4: Business/Farm Net Worth Adjustmentfor EFC Formula A Worksheet (parents only)

If the net worth of a business or farm is— Then the adjusted network is—

Less than $1 $0

$1 to $125,000 40%ofnetworthofbusiness/farm

$125,001 to $380,000 $50,000 +50%ofnetworthover$125,000


$635,000 or more $330,500 +100%ofnetworthover$635,000

Table A3: Income Protection AllowanceNumberinparents’household,includingstudent (FAFSA/SAR#73)

Number of college students in the household (FAFSA/SAR #74)

1 2 3 4 5

2 $17,840 $14,790 not applicable not applicable not applicable

3 $22,220 $19,180 $16,130 not applicable not applicable

4 $27,440 $24,390 $21,350 $18,300 not applicable

5 $32,380 $29,320 $26,290 $23,240 $20,200

6 $37,870 $34,820 $31,780 $28,730 $25,690

Note:Foreachadditionalfamilymember,add$4,270.Foreachadditionalcollegestudent(exceptparents),subtract$3,040.

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Table A5: Parents’ Education Savings and Asset Protection Allowance

for EFC Formula A Worksheet (parents only)

Age of older parent as of 12/31/2016*

Allowance if there are two

parents**

Allowance if there is only one parent



parents**


25 or less $0 $0 46 $17,800 $9,00026 1,000 500 47 18,300 9,20027 2,100 1,100 48 18,700 9,40028 3,100 1,600 49 19,200 9,70029 4,100 2,100 50 19,700 9,90030 5,200 2,600 51 20,200 10,10031 6,200 3,200 52 20,700 10,40032 7,200 3,700 53 21,300 10,60033 8,300 4,200 54 21,800 10,90034 9,300 4,700 55 22,400 11,10035 10,300 5,300 56 23,000 11,40036 11,400 5,800 57 23,700 11,70037 12,400 6,300 58 24,300 12,00038 13,400 6,800 59 25,000 12,30039 14,500 7,400 60 25,700 12,60040 15,500 7,900 61 26,400 12,90041 15,900 8,100 62 27,200 13,20042 16,300 8,300 63 27,900 13,60043 16,600 8,500 64 28,800 13,90044 17,000 8,600 65orolder 29,600 14,30045 17,400 8,800 empty empty empty

*DeterminetheageoftheolderparentlistedinFAFSA/SAR#64and#68asof12/31/2016.Ifnoparentdateofbirthisprovide,useage45.

**UsethetwoparentallowancewhentheParents’MaritalStatuslistedinFAFSA/SAR#59is“marriedorremarried”or“unmarriedandbothparentsarelivingtogether.”

Table A6: Parents’ Contribution from AAI

If the parents’ AAI— Then the parents’ contribution from AAI is—

Lessthan-$3,409 -$750

$-3,409to$15,900 22%ofAAI

$15,901 to $20,000 $3,498 +25%ofAAIover$15,900

$20,001 to $24,100 $4,523 +29%ofAAIover$20,000

$24,101 to $28,200 $5,712 +34%ofAAIover$24,100

$28,201 to $32,200 $7,106 +40%ofAAIover$28,200

$32,201 or more $8,706 +47%ofAAIover$32,200

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Table A7: State and Other Tax Allowancefor EFC Formula A Worksheet (student only)

State Percent State PercentAlabama 2% Montana 3%Alaska 0% Nebraska 3%American Samoa 1% Nevada 1%Arizona 2% NewHampshire 1%Arkansas 3% NewJersey 4%California 5% NewMexico 2%CanadaandCanadianProvinces 1% NewYork 6%Colorado 3% North Carolina 4%Connecticut 5% North Dakota 1%Delaware 3% NorthernMarianaIslands 1%DistrictofColumbia 5% Ohio 3%FederatedStatesofMicronesia 1% Oklahoma 2%Florida 1% Oregon 5%Georgia 3% Palau 1%Guam 1% Pennsylvania 3%Hawaii 4% Puerto Rico 1%Idaho 3% RhodeIsland 3%Illinois 3% South Carolina 3%Indiana 3% South Dakota 1%Iowa 3% Tennessee 1%Kansas 3% Texas 1%Kentucky 4% Utah 3%Louisiana 2% Vermont 3%Maine 4% VirginIslands 1%MarshallIslands 1% Virginia 4%Maryland 5% Washington 1%Massachusetts 4% West Virginia 2%Mexico 1% Wisconsin 4%Michigan 3% Wyoming 1%Minnesota 4% BlankorInvalidState 1%Mississippi 2% Other 1%Missouri 3%

Tocalculatethestateandothertaxallowance,multiplytheStudent’sTotalIncome(EFCFormulaAWorksheet,line35)bytheappropriateratefromthetableabovetogetthe“StateandOtherTaxAllowance”(EFCFormulaAWorksheet,line37).UsetheStudent’sStateofLegalResidence (FAFSA/SAR#18)reportedontheFAFSA.Ifthisitemisblankorinvalid,usethestateinthestudent’smailingaddress(FAFSA/SAR#6).Ifbothitemsareblankorinvalid,usetheParents’sStateofLegalResidence(FAFSA/SAR#70).Ifallthreeitemsareblankorinvalid,usetherateforablankorinvalidstate above.

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BREGULAR WORKSHEETPage 1

2016–2017 EFC FORMULA B : INDEPENDENT STUDENT Without Dependent(s) Other than a Spouse

*Do notincludethestudent’shome.

**TocalculatetheEFCforlessthannine-monthenrollment,seethenextpage.Ifthestudentisenrolledformorethanninemonths,usethenine-monthEFC(line29above).

EXPECTED FAMILY CONTRIBUTION CONTRIBUTION FROM AI (fromline17) Maybeanegativenumber.


27. Contribution from AI and assets =

28. Number in college in 2016–2017(FAFSA/SAR#96) ÷

29. EXPECTED FAMILY CONTRIBUTIONforninemonthenrollment.Ifnegative,enterzero.** =

STUDENT/SPOUSE INCOME IN 2015

1. Student’sandspouse’sAdjustedGrossIncome(FAFSA/SAR#36)Ifnegative,enterzero.

2. a. Student’sincomeearnedfromwork(FAFSA/SAR#39) __________

2. b. Spouse’sincomeearnedfromwork(FAFSA/SAR#40) +__________

Totalstudent/spouseincomeearnedfromwork =

3. Student/spouseTaxableIncome(Iftaxfilers,entertheamountfromline1above.Ifnon-taxfilers,entertheamountfromline2.)

4. Totaluntaxedincomeandbenefits(sumtotalofFAFSA/SAR#45a.through45j.) +


6. Totaladditionalfinancialinformation(sumtotalofFAFSA/SAR#44a.through44f.) −


ALLOWANCES AGAINST STUDENT/SPOUSE INCOME


9. State andother tax allowance(TableB1) If negative, enter zero. +

10. Student’sSocialSecurity tax (TableB2) +

11. Spouse’sSocialSecurity tax (TableB2) +

12. Incomeprotection allowance:

• $9,960 forsingle, separatedor divorced/idowed student;w

• $9,960for marriedstudent if spouse isenrolledat least1/2 time;

• $15,960 formarriedstudent if spouse isnotenrolledat least1/2 time. +

13. Employment expense allowance:• If student isnotmarriedor is separated, the

allowance is zero.

• If student ismarriedbutonlyoneperson isworking (the studentor spouse), theallowance is zero.

• If student ismarriedandboth student andspouseareworking, theallowance is35%of the lesserof theearned incomes, or$4,000,whichever is less. +


CONTRIBUTION FROM AVAILABLE INCOME

TOTAL INCOME (from line7)

TOTAL ALLOWANCES (from line14) −

15. AVAILABLE INCOME (AI) =


17. CONTRIBUTION FROM AIMaybe a negativenumber.

=

STUDENT’S/SPOUSE’S CONTRIBUTION FROM ASSETS


19. Networthofinvestments*(FAFSA/SAR#42)Ifnegative,enterzero.

20. Networthofbusinessand/orinvestmentfarm(FAFSA/SAR#43)Ifnegative,enterzero.

21. Adjustednetworthofbusiness/farm(CalculateusingTableB3.) +


23. Assetprotectionallowance(TableB4) −



26. CONTRIBUTION FROM ASSETS Ifnegative,enterzero. =

+

+

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Table B1: State and Other Tax Allowance


Tocalculatethestateandothertaxallowance,multiplythetotalincomeofthestudentandspouse(EFCFormulaBWorksheet,line7)bytheappropriateratefromthetableabovetodeterminethe“StateandOtherTaxAllowance”(EFCFormulaBWorksheet,line9).UsetheStudent’sStateofLegalResidence (FAFSA/SAR#18)reportedontheFAFSA.Ifthisitemisblankorinvalid,usethestateinthestudent’smailingaddress(FAFSA/SAR#6).Ifbothitemsareblankorinvalid,usetherateforablankorinvalidstate above.

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Table B2: Social Security Tax


$0 – $118,500 7.65%ofincome


Calculate separately the Social Security tax of the student and spouse.

*Student’s2015incomeearnedfromworkisFAFSA/SAR#39Spouse’s2015incomeearnedfromworkisFAFSA/SAR#40SocialSecurityTaxwillneverbelessthanzero.

Table B3: Business/Farm Net Worth Adjustment


Less than $1 $0





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Table B4: Asset Protection AllowanceAge of

Student as of 12/31/2016*

Allowance for Married Student

Allowance for Unmarried

Student

Age of Student as of 12/31/2016*



Student25 or less $0 $0 46 $17,800 $9,000

26 1,000 500 47 18,300 9,20027 2,100 1,100 48 18,700 9,40028 3,100 1,600 49 19,200 9,70029 4,100 2,100 50 19,700 9,90030 5,200 2,600 51 20,200 10,10031 6,200 3,200 52 20,700 10,40032 7,200 3,700 53 21,300 10,60033 8,300 4,200 54 21,800 10,90034 9,300 4,700 55 22,400 11,10035 10,300 5,300 56 23,000 11,40036 11,400 5,800 57 23,700 11,70037 12,400 6,300 58 24,300 12,00038 13,400 6,800 59 25,000 12,30039 14,500 7,400 60 25,700 12,60040 15,500 7,900 61 26,400 12,90041 15,900 8,100 62 27,200 13,20042 16,300 8,300 63 27,900 13,60043 16,600 8,500 64 28,800 13,90044 17,000 8,600 65orolder 29,600 14,30045 17,400 8,800 empty empty empty

*Determinethestudent’sageasof12/31/2016fromthestudent’sdateofbirth(FAFSA/SAR#9).

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2016–2017 EFC FORMULA C : INDEPENDENT STUDENT With Dependent(s) Other than a Spouse

REGULAR WORKSHEETPage 1 C

**Do notincludethestudent’shome.***TocalculatetheEFCforlessthannine-monthenrollment,seethe

nextpage.Ifthestudentisenrolledformorethanninemonths,usethenine-monthEFC(line28above).

*STOPHEREifthefollowingaretrue:

Line 3 is $25,000 or less and

• Thestudent(andthestudent’sspouse,ifany)areeligibletofilea2015IRSForm1040Aor1040EZ(theyarenotrequiredtofilea2015Form1040)ortheyarenotrequiredtofileanyincometaxreturnor

• Anyoneincludedinthestudent’shouseholdsize(asdefinedontheFAFSA)receivedbenefitsduring2014or2015fromanyofthedesignatedmeans-testedfederalbenefitprogramsor

• Thestudent(orthestudent’sspouse,ifany)isadislocatedworker.

Ifthesecircumstancesaretrue,theExpectedFamilyContributionisautomaticallyzero.



9. State andother tax allowance(TableC1) If negative, enter zero. +

10. Student’sSocialSecurity tax (TableC2) +

11. Spouse’sSocialSecurity tax (TableC2) +

12. Incomeprotection allowance (TableC3) +

13. Employment expense allowance:• Student and spousebothworking: 35%ofthe lesser of the earned incomes, or $4,000,whichever is less


• Student or spouseworking (not both): zero +




2. a.Student’sincomeearnedfromwork(FAFSA/SAR#39) __________

2. b.Spouse’sincomeearnedfromwork(FAFSA/SAR#40)+ __________


3. Student/spouseTaxableIncome(Iftaxfilers,entertheamountfromline1above.Ifnon-taxfilers,entertheamountfromline2.)*









19. Adjustednetworthofbusiness/farm(CalculateusingTableC4.) +


21. Assetprotectionallowance(TableC5) −



24. CONTRIBUTION FROM ASSETSIfnegative,enterzero.




25. Adjusted Available Income (AAI)Maybeanegativenumber. =

26. Total contribution from AAI(CalculateusingTableC6.)Ifnegative,enterzero.

÷ 27. Number in college in 2016–2017

(FAFSA/SAR#96)

28. EXPECTED FAMILY CONTRIBUTION forninemonthenrollment.Ifnegative,enterzero.***

AVAILABLE INCOME




=

=

+

+

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Table C1: State and Other Tax Allowance








Tocalculatethestateandothertaxallowance,multiplythetotalincomeofthestudentandspouse(EFCFormulaCWorksheet,line7)bytheappropriateratefromthetableabovetogetthe“StateandOtherTaxAl-lowance”(EFCFormulaCWorksheet,line9).Usethestudent’sStateofLegalResidence (FAFSA/SAR#18)reportedontheFAFSA.Ifthisitemisblankorinvalid,usetheStateintheStudent’sMailingAddress (FAFSA/SAR#6).Ifbothitemsareblankorinvalid,usetherateforablankorinvalidstate above.

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Table C2: Social Security Tax


$0 – $118,500 7.65%ofincome




Table C4: Business/Farm Net Worth Adjustment


Less than $1 $0





Table C3: Income Protection AllowanceNumberinstudent’shousehold,includingstudent (FAFSA/SAR#95)


1 2 3 4 5



4 $38,760 $34,460 $30,170 $25,850 not applicable

5 $45,740 $41,420 $37,130 $32,830 $28,540

6 $53,490 $49,190 $44,910 $40,580 $36,300

Note:Foreachadditionalfamilymember,add$6,040.Foreachadditionalcollegestudent,subtract$4,290.

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Table C5: Asset Protection AllowanceAge of older parent as of 12/31/2016*

Allowance for Married

Student


Student



Student


Student25 or less $0 $0 46 $17,800 $9,000


* Determinethestudent’sageasof12/31/2016fromthestudent’sdateofbirth(FAFSA/SAR#9)

Table C6: Student’s Contribution from AAIIf the student’s AAI— Then the student’s contribution from AAI is—

Lessthan-$3,409 -$750

$-3,409to$15,900 22%ofAAI

$15,901 to $20,000 $3,498 +25%ofAAIover$15,900

$20,001 to $24,100 $4,523 +29%ofAAIover$20,000

$24,101 to $28,200 $5,712 +34%ofAAIover$24,100

$28,201 to $32,200 $7,106 +40%ofAAIover$28,200


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Lesson 2 Glossary Dependent: A student who does not meet the definition of an independent student as prescribed under section 480(d) of the Higher Education Act of 1965 (HEA), as amended. Also an individual for whom an independent student will provide more than 50 percent support during the award year. Expected family contribution (EFC): Estimate of a family’s ability to contribute toward postsecondary educational costs, derived by a formula known as Federal Methodology. Family-owned and controlled small business: Any family-owned and controlled small business with 100 or fewer full-time or full-time equivalent employees. Family-owned and controlled means the student and/or the student’s parents, or other persons directly related, or who are or were related by marriage, own more than 50 percent of the business. Means-tested federal benefit program: A federal mandatory spending program, other than a Title IV program, in which eligibility for benefits or the amount of benefits is determined based on income or resources. Some examples of such programs include: • Supplemental Security Income (SSI); • Supplemental Nutrition Assistance Program (SNAP); • Free and reduced price school lunches; • Temporary Assistance for Needy Families (TANF); • Special Supplemental Nutrition Programs for Women, Infants, and Children (WIC); and • Other programs identified by the Department of Education. Model: A description of a complex system. Parent contribution (PC): The amount the parent(s) of a dependent student are expected to contribute towards the student’s educational costs for an award year. Professional judgment (PJ): The authority provided under the HEA for financial aid administrators to exercise discretion and deal with unique circumstances affecting individual students on a case-by-case basis in a number of specific areas of federal student aid administration. Specified year: Either of the two calendar years preceding the first year covered by an award year and indicates which year’s demographic and financial information will be used to calculate a student’s EFC. Student contribution (SC): The amount the student is expected to contribute towards his or her educational costs for an award year.



Lesson 2 Answer Keys Learning Activity: Selecting the Correct Regular Formula Model

1. Alex Alex is a 22-year-old senior at Big State University. He works part time and earns enough money to pay for most of his living expenses. Alex’s parents no longer claim him on their tax return, but still pay for his health and car insurance.


2. Leila At 21, Leila works as the manager of a popular pizza delivery business and supports herself financially. Her younger brother Nathan had a huge fight with their stepfather last year and now lives with Leila. Leila will provide more than half of Nathan’s financial support during the award year, and claimed Nathan on her 2015 tax return. This fall, she plans to enroll at Wood College to pursue a degree in business.


3. Carlos Carlos is enrolled in the astrophysics doctoral program at National Science University. He and his wife Maria have no children, and they now live with her parents because the stipend from his research assistantship no longer covers the rent for an apartment close to campus.




Quick Quiz 1

1. Which model or models of the regular formula are used to calculate the EFC of independent students?

Models B and C are used to calculate the EFC of independent students. 2. What allowances are subtracted from parents’ total income to calculate parents’ available income?

The following allowances are subtracted from parents’ total income: U.S. income tax paid, state and other taxes, Social Security tax, IPA, and employment expense.

3. What is the purpose of the education savings and asset protection allowance?

The education savings and asset protection allowance protects a portion of the parents’ assets for retirement, emergencies, and personal educational expenses.

4. What is the purpose of the allowance for negative parents’ adjusted available income?

The allowance for negative parents’ adjusted available income recognizes situations where the parents’ income is insufficient to cover basic living expenses, so the student’s income is used to support the family.

5. What assessment rates are used to calculate the dependent student’s contributions from available

income and assets?

The dependent student’s income is assessed at 50 percent and his or her assets are assessed at 20 percent.



Learning Activity: Hand Calculation Using Model A See the worksheet results beginning on page 64.




2016–2017 EFC FORMULA A : DEPENDENT STUDENT REGULAR WORKSHEETPage 1 A

*STOPHEREifthefollowingaretrue:Line 3 is $25,000 or less and

• Theparentsareeligibletofile a2015IRSForm1040Aor1040EZ(theyarenotrequiredtofile a2015Form1040)ortheyarenotrequiredtofilanyincometaxreturnor

• Anyoneincludedintheparents’householdsize(asdefined ontheFAFSA)receivedbenefits during2014or2015fromanyofthedesignatedmeans-testedfederalbenefit programsor



8. 2015U.S. income taxpaid (FAFSA/SAR#86)(tax filers only) If negative, enterzero.

9. State andother taxallowance(TableA1) If negative, enterzero. +




13. Employment expenseallowance:



• Two-parent families, oneworkingparent:enterzero +








4. Totaluntaxedincomeandbenefits(TotalofFAFSA/SAR#94a.through94i.) +


6. Totaladditionalfinancial information(TotalofFAFSA/SAR#93a.through93f.) −









AVAILABLE INCOME




PARENTS’ CONTRIBUTION FROM ASSETS











+

+

74,386

6,829

6,175

77,186

3,300

80,846

6,100

74,386

74,386

21,386

53,000

4,055

1,63627,440

4,00050,135

77,186

0

-1,922

16,7780

0

0

16,778

0

6,715

1

6,715

27,05150,135

18,700

27,051

27,051

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AREGULAR WORKSHEET Page 2









=







=



37. State andother taxallowance(TableA7) If negative, enterzero. +


39. Incomeprotectionallowance + 6,400

40. Allowance forparents’ negativeAdjustedAvailable Income (If line25 is negative,enterline 25 as a positive number in line 40.If line25 is zeroor positive, enter zero inline40.) +
















140

0

2,340

179

2,340

2,3400

0

6,719

2,3406,719-4,379

0

2,340

0

0

0

0

6,715

0

0

0

0

0

6,715

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Learning Activity: Hand Calculation Using Model B See the worksheet results on page 67.

BREGULAR WORKSHEETPage 1

2016–2017 EFC FORMULA B : INDEPENDENT STUDENT Without Dependent(s) Other than a Spouse

*Do notincludethestudent’shome.

**TocalculatetheEFCforlessthannine-monthenrollment,seethenextpage.Ifthestudentisenrolledformorethanninemonths,usethenine-monthEFC(line29above).

EXPECTED FAMILY CONTRIBUTION CONTRIBUTION FROM AI (fromline17) Maybeanegativenumber.








2. b. Spouse’sincomeearnedfromwork(FAFSA/SAR#40) +__________









9. State andother taxallowance(TableB1) If negative, enterzero. +



12. Incomeprotectionallowance:

• $9,960 for single, separatedordivorced/idowed student;w

• $9,960 for marriedstudent if spouse isenrolledat least1/2 time;


13. Employment expenseallowance:• If student isnotmarriedor is separated, the

allowance iszero.

• If student ismarriedbutonlyoneperson isworking (the studentor spouse), theallowance iszero.

• If student ismarriedandboth studentandspouseareworking, theallowance is35%of the lesserof theearned incomes,or$4,000,whichever is less. +







17. CONTRIBUTION FROM AIMaybe a negativenumber.

=











+

+

James Schlichting

46,159

James Schlichting

22,000

James Schlichting

24,000

James Schlichting

46,000

James Schlichting

46,159

James Schlichting

0

James Schlichting

46,159

James Schlichting

6,500

James Schlichting

39,659

James Schlichting

1,750

James Schlichting

1,190

James Schlichting

1,683

James Schlichting

1,836

James Schlichting

9,960

James Schlichting

4,000

James Schlichting

20,419

James Schlichting

5,130

James Schlichting

2

James Schlichting

10,260

James Schlichting

640

James Schlichting

9,620

James Schlichting

640

James Schlichting

3,200

James Schlichting

2,100

James Schlichting

5,300

James Schlichting

0

James Schlichting

0

James Schlichting

0

James Schlichting

5,300

James Schlichting

9,620

James Schlichting

19,240

James Schlichting

20,419

James Schlichting

39,659

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Quick Quiz 2

1. Which model of the regular formula is used to calculate the EFC of an independent student without dependents other than a spouse? Model B is used to calculate the EFC of an independent student without dependents other than a spouse.

2. Under Model C, which students qualify for the employment expense allowance?

Under Model C, married students where both the student and his or her spouse work and one-parent families qualify for the employment expense allowance.

3. What is the IPA of a student under Model B?

The IPA of a student under Model B varies based on the student’s marital status and the enrollment status of his or her spouse, as follows:

• $9,960 for a single, separated, divorced, or widowed student; • $9,960 for a married student if the spouse is enrolled at least half time; and • $15,960 for a married student if only the student is enrolled at least half time.

4. What is the asset conversion rate for Model C?

The asset conversion rate for Model C is seven percent. 5. Which independent student model uses the adjusted available income?

Model C uses adjusted available income.



Lesson 3: Simplified Formulas

Learning Objectives After completing this lesson you will:

• Recognize the differences between the regular formula and the simplified formulas;

• Be able to identify which models qualify for the simplified formulas;

• Understand the eligibility criteria for an Automatic Zero EFC; and

• Understand the eligibility criteria for the Simplified Needs Test.

Key Concepts The key concepts you will learn in this lesson:

• Automatic Zero EFC;

• Simplified Needs Test;

• Means-tested federal benefit program;

• Dislocated worker;

• Income threshold;

• Primary EFC; and

• Secondary EFC.




Simplified Formulas Review of the Regular Formula In Lesson 2, you learned how a student’s expected family contribution (EFC) is calculated under the regular formula. The regular formula is a full data element formula which considers the student’s and his family’s income and assets in the calculation. The regular formula uses three models to account for the difference in treatment of dependent students (Model A), independent students without dependents other than a spouse (Model B), and independent students with dependents other than a spouse (Model C). Although there are differences in the calculation across models, the regular formula consists of the following basic steps:

• Calculation of total income;

• Calculation of total allowances;

• Calculation of available income;

• Calculation of contribution from available income;

• Calculation of net worth;

• Calculation of contribution from assets; and

• Calculation of the student’s EFC. Simplified Formulas Overview Federal Methodology (FM) recognizes that some applicants have limited income and resources. For students who meet certain criteria, their EFCs are calculated using a simplified formula. The simplified formulas are not full data element formulas; they do not consider assets in the calculation of the student’s EFC. There are two simplified formulas:

• Automatic Zero EFC; and

• Simplified Needs Test (SNT). Automatic Zero EFC

The Automatic Zero EFC is exactly what it sounds like. Applicants who meet certain criteria will automatically receive a zero EFC rather than calculate an EFC using the regular formula. Only two of the three formula models qualify for an Automatic Zero EFC:

• Dependent students (Model A); and

• Independent students with dependents other a spouse (Model C).




• Key concept

• Quick quiz



• Helpful hint

Independent students without dependents other a spouse (Model B), are not eligible for an Automatic Zero EFC. Simplified Needs Test

The other simplified formula is the Simplified Needs Test (SNT). The SNT is a short EFC formula for families with moderate incomes, which results in exclusion of assets. All formula models qualify for the SNT.

In the following discussion, note the similarities between the qualifying criteria for the simplified formulas. Eligibility Criteria for an Automatic Zero EFC To qualify for an Automatic Zero EFC, the independent student (and spouse, if married) or the parents of a dependent student must meet certain criteria—both the status criterion and the income criterion. Status Criterion The first criterion looks at the family’s tax filing status, receipt of benefits from a means-tested federal benefit program, or status as a dislocated worker. Meeting any one of these conditions indicates that calculation of the EFC under the regular formula is unnecessary. To meet this criterion through tax filing status, both the independent student and spouse or both parents of a dependent student must:

• File or be eligible to file a 2015 IRS Form 1040A or 1040EZ;

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

• Not be required to file any income tax return. To meet this criterion through receipt of benefits from a means-tested federal benefit program, a member of the independent student’s or parents’ household must have received benefits in either 2014 or 2015.

A means-tested federal benefit program is one for which a recipient demonstrates financial need. For the purposes of qualifying for a simplified formula, the U.S. Department of Education (ED) considers the following means-tested federal

benefit programs:

• Supplemental Security Income (SSI) Program; • Supplemental Nutrition Assistance Program (SNAP); • Free and Reduced Price School Lunch Program;

• Temporary Assistance for Needy Families (TANF) Program; and

• Special Supplemental Nutrition Program for Women, Infants, and Children (WIC).



The third way to meet this criterion is for either the independent student (or spouse, if married) or the parent of a dependent student to be classified as a

dislocated worker. A dislocated worker is a person who:

• Meets all of the following:

Was terminated or laid off from employment or received a notice of termination or layoff,

Is eligible for or has exhausted his unemployment compensation, or he is not eligible because, even though he has been employed long enough to demonstrate attachment to the workforce, he had insufficient earnings or performed services for an employer that were not covered under a state’s unemployment compensation law, and

Is unlikely to return to a previous occupation;

• Was terminated or laid off from employment or received a notice of termination or layoff as a result of any permanent closure of, or any substantial layoff at, a plant, facility, or enterprise;

• Is employed at a facility at which the employer made a general announcement that it will close within 180 days;

• Was self-employed but is now unemployed due to general economic conditions in his community or natural disaster; or

• Is a displaced homemaker.

You will find the definition of a displaced homemaker in the glossary for this lesson on page 95.

Income Criterion In addition to meeting one of the three conditions of the status criterion, to qualify for an Automatic Zero EFC, the independent student (and spouse, if married) or parents of a dependent student must also meet an income threshold.

An income threshold represents the maximum level of income an independent student (and spouse if married) or parent(s) of a dependent student may

have in order to qualify for a simplified formula. This includes income earned from work from all W-2 forms and any other earnings from work not appearing on a W-2. To qualify for an Automatic Zero EFC, the income of an independent student (and spouse if married) or the parents of a dependent student cannot exceed:

• An adjusted gross income (AGI) of $25,000, for tax filers; or

• Income earned work of $25,000, if nontax filers. The income earned from work for nontax filers is determined using the total income from both parents of a dependent student or both the independent student and spouse, as applicable.



Learning Activity: Qualifying for an Automatic Zero EFC Using the information below, determine whether or not each student qualifies for an Automatic Zero EFC. Check your answers using the Answer Key on page 97.

1. Nicholas Nicholas is a dependent student, and his recently widowed mother completed his Free Application for Federal Student Aid (FAFSA) as the parent of record. Nicholas’ mother works part time as a receptionist for the local humane society, and earned $18,000 in 2015. For the 2015 tax year, Nicholas’ mother was required to file a 1040 due to the value of the investments left to her in her late husband’s will. Her AGI was $36,000.

Nicholas is eligible for an Automatic Zero EFC.

Nicholas is not eligible for an Automatic Zero EFC. 2. Priya

Priya is in her second year at Mile High College. She is the single mother of two small children who live with her. Between her off-campus job as a checker in a local grocery store and her on-campus Federal Work-Study (FWS) job, she earned $20,000 in 2015. Based on the advice of her tax professional, she filed a 1040 for the 2015 tax year, even though she could have filed a 1040A. She reported an AGI of $20,000. In 2015, Priya received several months of benefits through TANF.

Priya is eligible for an Automatic Zero EFC.

Priya is not eligible for an Automatic Zero EFC. 3. Lupe

Lupe will be an entering freshman Fall 2016. For 2015, her parents reported an AGI of $48,000. Her father, who works in a local manufacturing plant, just received notice that the plant will be closing in three months.

Lupe is eligible for an Automatic Zero EFC.

Lupe is not eligible for an Automatic Zero EFC.



Eligibility Criteria for the Simplified Needs Test As noted at the beginning of the lesson, the eligibility criteria for the Simplified Needs Test (SNT) and the Automatic Zero EFC are similar. To qualify for the SNT, the independent student (and spouse) or the parents of a dependent student must meet two criteria:

• Status; and

• Income. Meeting both of these criteria indicates it is not necessary to include assets in the calculation of the student’s EFC. Status Criterion

The applicant must meet one of the three status conditions described earlier under the discussion of the Automatic Zero EFC. The three conditions are:

• Tax filing status;

• Receipt of benefits from a means-tested federal benefit program; or

• Status as a dislocated worker (also applies to the spouse of an independent student).

To meet this criterion through tax filing status, both the independent student (and spouse) or both parents of a dependent student must:

• File or be eligible to file a 2015 IRS Form 1040A or 1040EZ;

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

• Not be required to file any income tax return. To meet the criterion through receipt of benefits from a federal means-tested benefit program, a member of either the independent student’s or the parents’ household of a dependent student must have received benefits from one of the following programs:

• SSI Program;

• SNAP;

• Free and Reduced Price School Lunch Program;

• TANF Program; or

• WIC. In order for a student to qualify for the SNT, the benefits had to have been received in either 2014 or 2015.

“To qualify for the SNT, the

independent student (and spouse)

or the parent of a dependent

student must meet two criteria:

• Status; and

• Income.”

The final status criterion that can be met is status as a dislocated worker. The applicant qualifies under this criterion if either the independent student or spouse is a dislocated worker, or if either parent of a dependent student is a dislocated worker. As a reminder, a dislocated worker is an individual who:

• Meets all of the following:

Was terminated or laid off from employment or received a notice of termination or layoff,

Is eligible for or has exhausted her unemployment compensation, or she is not eligible because, even though she has been employed long enough to demonstrate attachment to the workforce, she had insufficient earnings or performed services for an employer that were not covered under a state’s unemployment compensation law, and

Is unlikely to return to a previous occupation;

• Was terminated or laid off from employment or received a notice of termination or layoff as a result of any permanent closure of, or any



substantial layoff at, a plant, facility, or enterprise;

• Is employed at a facility at which the employer made a general announcement that it will close within 180 days;

• Was self-employed but is now unemployed due to general economic conditions in his community or natural disaster; or

• Is a displaced homemaker.

You can find the definition of a displaced homemaker in the glossary for this lesson.

Income Criterion

As with the Automatic Zero EFC, there is an income threshold which applicants cannot exceed to be eligible for the SNT.

To qualify, the income of the independent student (and spouse, if married) or parents of a dependent student cannot be greater than:

• An AGI of $49,999 for tax filers; or

• Income earned from work of $49,999 for nontax filers.

The income earned from work for nontax filers is determined using the total income from both parents of a dependent student or both the independent student and spouse, as applicable. This includes income earned from work from all W-2 forms and any other earnings from work not appearing on the W-2s. Next, you will learn the steps for calculating a dependent student’s EFC when he meets the criteria for the SNT (using Model A). Simplified Needs Test: Model A Step 1: Parents’ Total Income The process for calculating parents’ total income under the SNT is the same as it is under the regular formula. The formula will use either the parents’ AGI or income earned from work, depending on the parents’ tax filing status. To this number is added any untaxed income and benefits reported on the

FAFSA. Finally, the amount of additional financial information from the FAFSA is subtracted to determine the parents’ total income. This may be a negative number. Step 2: Parents’ Total Allowances As with the regular formula, the next step is to calculate the parents’ allowances against income. Under the SNT, parents are eligible for the following allowances:

• U.S. income tax paid;

• State and other taxes;

• Social Security tax;

• Income protection allowance (IPA); and

• Employment expense allowance. The values of these allowances are calculated the same way as under the regular formula. The value of U.S. income tax paid is taken from the FAFSA. The allowance for state and other taxes is calculated using a table (A1). The Social Security tax for each parent is calculated using a specified percentage of income earned from work and Table A2. Income Protection Allowance. The formula determines the IPA using a table (A3) which factors in both the size of the family and the number in college. Employment Expense Allowance. The value of the employment expense allowance is based on the number of parents in the household, which parents work, and income. The allowance is either 35 percent of the lower income or $4,000, whichever is less. In a two-parent household, if only one parent works, the allowance is zero. The value of the parents’ total allowances is the sum of all applicable allowances. Step 3: Parents’ Available Income After calculating the parents’ total allowances, the formula next calculates the parents’ available income by subtracting total allowances from total income (calculated in Step 1).



Step 4: Parents’ Contribution Under the SNT, parents’ available income is the same as parents’ adjusted available income under the regular formula (because no assets are factored into the calculation). The parents’ total contribution from adjusted available income is calculated using the table (A6) which protects a certain portion of income. To calculate the contribution for an individual student, the formula divides the parents’ total contribution by the number in college, excluding the parents.

“Under the SNT, parents’

available income is the same

as parents’ adjusted available

income under the regular formula

(because no assets are

factored into the calculation).

The parents’ total contribution

from adjusted available income

is calculated using the table

which protects a certain

portion of income.”

Step 5: Student’s Income After calculating the parents’ contribution, the formula next calculates the student’s contribution. First, the student’s income is calculated. This process should sound familiar to you. Depending on the student’s tax filing status, the formula uses either the student’s AGI or income earned from work. To this figure is added any untaxed income and benefits reported on the FAFSA. After this figure is calculated, the amount of any reported additional financial information (such as education tax credits, FWS wages, or child support paid) is subtracted to calculate the student’s total income. The student’s total income may be a negative number.

Step 6: Student’s Total Allowances The student is eligible for the following allowances:




• IPA; and

• Parents’ negative adjusted available income. The first three allowances are self-explanatory. The IPA of the dependent student is a standard allowance of $6,400, just as it is under the regular formula. The SNT, like the regular formula, provides a student allowance for parents’ negative adjusted available income. As noted in the previous lesson, this allowance accounts for situations where the student’s income is needed to support the family. The student’s total allowances are the sum of all applicable allowances. Step 7: Student’s Contribution from Income The first step in calculating the student’s contribution from income is determining her available income. This is done by subtracting the student’s total allowances from her total income. The student’s available income is then assessed at a rate of 50 percent to calculate the student’s contribution from available income. The contribution may not be a negative number. Step 8: Expected Family Contribution To calculate the student’s EFC, the formula totals the parents’ contribution and the student’s contribution from available income. No student contribution from assets is included. The resulting figure is the student’s EFC.



Quick Quiz Now it’s time to check what you have learned so far. Answer the following questions and check your responses using the Answer Key on page 98.

1. What are the names of the two simplified formulas?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

2. What is the maximum AGI or, in the case of a nontax filer, maximum income earned from work an

independent student (and spouse, if married) or the parents of a dependent student can have and qualify for an Automatic Zero EFC?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

3. Receiving benefits from which means-tested federal benefit programs partially qualifies a student for the

SNT?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

4. Which formula model is not eligible for an Automatic Zero EFC?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

5. What is the maximum AGI or, in the case of a nontax filer, maximum income earned from work an

independent student (and spouse, if married) or the parents of a dependent student can have and qualify for the SNT?

___________________________________________________________________________________

___________________________________________________________________________________



Simplified Needs Test: Model B Under the SNT, the steps for calculating the indepndent student’s EFC are similar to the steps used to calculate the student’s contribution from income under the regular formula.

If the student is married, his spouse’s income is included throughout the calculation.

Step 1: Student’s Total Income As with Model B under the regular formula, the first step in calculating the student’s EFC is determining his total income. The formula uses either AGI or income earned from work, depending on whether or not the student (and spouse, if married) are required to file a tax return. To this amount, the formula adds any untaxed income and benefits the student reported on his FAFSA. Finally, any additional financial information included on the FAFSA is subtracted to calculate the student’s total income. This may be a negative number. Step 2: Student Total Allowances The independent student is eligible for the following allowances:




• IPA; and

• Employment expense allowance. Income Protection Allowance. The calculation of the IPA for students whose EFC is calculated under Model B using the SNT is the same as it is under the regular formula. The IPA is a standard amount based on the student’s marital status and enrollment status of her spouse, if married. The standard IPA amounts are as follows:

• $9,960 for a single, separated, divorced, or widowed student;

• $9,960 for a married student if her spouse is enrolled at least half time; and

• $15,960 for a married student if only she is enrolled at least half time.

Employment Expense Allowance. The value of this allowance is also calculated the same way as it is under the regular formula. Only married students are eligible for this allowance if both the student and her spouse work. The value is 35 percent of the lesser earned income or $4,000, whichever is less. The student’s total allowances is the sum of all applicable allowances.

“The independent student is

eligible for the following

allowances:




• IPA; and

• Employment expense

allowance.”

Step 3: Student’s Contribution from Available Income The student’s available income is the result of subtracting his total allowances from total income. Available income is assessed at a rate of 50 percent to calculate the student’s contribution from available income. Step 4: Expected Family Contribution To calculate the student’s EFC, the formula divides the student’s conribution from available income by the number in college. No assets are included in the EFC calculation.



Simplified Needs Test: Model C The calculation of the independent student’s EFC under Model C is the same as calculating the parents’ contribution under Model A. To review the steps, see the discussion beginning on page 74. Primary and Secondary EFCs Occasionally, a student who is eligible for the SNT will submit her FAFSA with asset information. When this occurs, the Central Processing System (CPS) will calculate two EFCs: a primary EFC and a secondary EFC. This situation is most likely to occur if a student submits a paper FAFSA, because FAFSA on the Web allows the applicant to skip the asset questions when they are not required. The student’s primary EFC is calculated using the SNT; the formula does not include any reported assets. You should always use a student’s primary EFC to calculate her eligibility for Title IV aid.

“The student’s primary EFC

is calculated using the SNT;

the formula does not include

any reported assets.” To calculate the student’s secondary EFC, the CPS uses the appropriate model of the regular formula, including the reported assets. A student’s secondary EFC will appear in the “Information for Financial Aid Professionals” section of the Student Aid Report (SAR) and Institutional Student Information Record (ISIR). While you cannot use the secondary EFC to award Title IV aid, it may be used to award institutional aid.



Learning Activity: SNT Hand Calculation Using Model A Using the case study below and the worksheet and tables for Model A, beginning on page 81, calculate the dependent student’s EFC using the Simplified Needs Test (SNT). Check your answer using the Answer Key on page 99.


Amani Parker Amani will be a second-year undergraduate student at My State University starting Fall 2016. Her date of birth is May 15, 1997. She lives in Chicago, Illinois with her mother and two younger brothers, Jonathan and Jeremiah. Her brothers are both in high school. Amani’s mother, Mary Anne, was widowed in 2006. She was born on August 20, 1973. Amani’s mother filed an IRS Form 1040A for the 2015 tax year. She works as an administrative assistant and earned $45,000 in 2015. Mary Anne reported an AGI of $44,600 after an individual retirement account deduction of $400, and she had a tax liability of $2,954. Mary Anne claimed all three of her children as dependents. No one in the family received benefits from a means-tested federal benefit program in 2014 or 2015. She reported that she claimed an American Opportunity Tax Credit of $1,200 for Amani’s first-year postsecondary expenses on the FAFSA. She has 15,000 in a savings account. Amani earned $2,500 in 2015 working at a fast food restaurant. She filed a 1040EZ with an AGI of $2,500 and no tax liability. She has $500 in a savings account, which she plans to use to buy books for the fall semester. She reported no additional financial information on the FAFSA.




1. Do you agree with the rationale for the simplified formulas? Why or why not?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

2. In your opinion, is the maximum AGI or, for nontax filers, maximum income earned from work used to

qualify for the simplified formulas set at the appropriate levels? Why or why not?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

3. If an applicant who qualifies for the SNT reports assets on the FAFSA, should they be included in the

calculation of the EFC? Why or why not?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________


Note: Do not complete the shaded areas; asset information is not required in the simplified formula.

2016–2017 EFC FORMULA A : DEPENDENT STUDENT



*STOPHEREifthefollowingaretrue:Line 3 is $25,000 or less and• Theparentsareeligibletofilea2015IRSForm1040Aor1040EZ(theyarenotrequiredtofilea2015Form1040)ortheyarenotrequiredtofileanyincometaxreturnor



PARENTS’ CONTRIBUTION FROM ASSETSPARENTS’ CONTRIBUTION FROM ASSETS









23. Asset conversion rate ×


ASIMPLIFIEDWORKSHEET Page 1




















6. Totaladditionalfinancialinformation

(TotalofFAFSA/SAR#93a.through93f.) −

7. TOTAL INCOME (line5minusline6)Maybeanegativenumber. =








AVAILABLE INCOME




+

+

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ASIMPLIFIED WORKSHEETPage 2









=







=












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Table A1: State and Other Tax Allowancefor EFC Formula A Worksheet (parents only)








Tocalculatethestateandothertaxallowance,multiplytheParents’TotalIncome(EFCFormulaAWorksheet,line7)bytheappropriateratefromthetableabovetogetthe“StateandOtherTaxAllowance”(EFCFormulaAWorksheet,line9).Usetheparents’StateofLegalResidence (FAFSA/SAR#70).Ifthisitemisblankorinvalid,usethestudent’sStateofLegalResidence (FAFSA/SAR#18).Ifbothitemsareblankorinvalid,usetheStateintheStudent’sMailingAddress(FAFSA/SAR#6).Ifallthreeitemsareblankorinvalid,usetherateforablankorinvalidstate above.

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Table A2: Social Security Tax


$0 – $118,500 7.65%ofincome


Calculate separately the Social Security tax of parent 1, parent 2, and the student.

*Parent1(father/mother/stepparent)2015incomeearnedfromworkisFAFSA/SAR#88Parent2(father/mother/stepparent)2015incomeearnedfromworkisFAFSA/SAR#89Student’s2015incomeearnedfromworkisFAFSA/SAR#39SocialSecurityTaxwillneverbelessthanzero.

Table A4: Business/Farm Net Worth Adjustmentfor EFC Formula A Worksheet (parents only)


Less than $1 $0





Table A3: Income Protection AllowanceNumberinparents’household,includingstudent (FAFSA/SAR#73)


1 2 3 4 5



4 $27,440 $24,390 $21,350 $18,300 not applicable

5 $32,380 $29,320 $26,290 $23,240 $20,200

6 $37,870 $34,820 $31,780 $28,730 $25,690

Note:Foreachadditionalfamilymember,add$4,270.Foreachadditionalcollegestudent(exceptparents),subtract$3,040.

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parents**




parents**







Lessthan-$3,409 -$750

$-3,409to$15,900 22%ofAAI

$15,901 to $20,000 $3,498 +25%ofAAIover$15,900

$20,001 to $24,100 $4,523 +29%ofAAIover$20,000

$24,101 to $28,200 $5,712 +34%ofAAIover$24,100

$28,201 to $32,200 $7,106 +40%ofAAIover$28,200


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Table A7: State and Other Tax Allowancefor EFC Formula A Worksheet (student only)


Tocalculatethestateandothertaxallowance,multiplytheStudent’sTotalIncome(EFCFormulaAWorksheet,line35)bytheappropriateratefromthetableabovetogetthe“StateandOtherTaxAllowance”(EFCFormulaAWorksheet,line37).UsetheStudent’sStateofLegalResidence (FAFSA/SAR#18)reportedontheFAFSA.Ifthisitemisblankorinvalid,usethestateinthestudent’smailingaddress(FAFSA/SAR#6).Ifbothitemsareblankorinvalid,usetheParents’sStateofLegalResidence(FAFSA/SAR#70).Ifallthreeitemsareblankorinvalid,usetherateforablankorinvalidstate above.

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2016–2017 EFC FORMULA B : INDEPENDENT STUDENT Without Dependent(s) Other than a Spouse BSIMPLIFIED

WORKSHEETPage 1










26. CONTRIBUTION FROM ASSETS Ifnegative,enterzero.



*Donotincludethestudent’shome.**TocalculatetheEFCforlessthannine-monthenrollment,seethenextpage.Ifthestudentisenrolledformorethanninemonths,usethenine-monthEFC(line29above).






17. CONTRIBUTION FROM AIMaybe a negativenumber. =


CONTRIBUTION FROM AI (fromline17) Maybeanegativenumber.







2. b. Spouse’sincomeearnedfromwork(FAFSA/SAR#40) + __________








8. 2015U.S. income taxpaid (FAFSA/SAR#37) (taxfilers only) If negative, enter zero.

9. State andother tax allowance(TableB1) If negative, enter zero. +



12. Incomeprotection allowance:

• $9,960 forsingle, separatedor divorced/widowed student;

• $9,960 for marriedstudent if spouse is enrolledat least1/2 time;


13. Employment expense allowance:• If student isnotmarriedor is separated, the

allowance is zero.

• If student ismarriedbutonlyoneperson isworking (the studentor spouse), theallowanceis zero.

• If student ismarriedandboth student andspouseareworking, theallowance is35%ofthe lesserof theearned incomes, or$4,000,whichever is less. +


=

+

+

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Table B1: State and Other Tax Allowance


Tocalculatethestateandothertaxallowance,multiplythetotalincomeofthestudentandspouse(EFCFormulaBWorksheet,line7)bytheappropriateratefromthetableabovetodeterminethe“StateandOtherTaxAllowance”(EFCFormulaBWorksheet,line9).UsetheStudent’sStateofLegalResidence (FAFSA/SAR#18)reportedontheFAFSA.Ifthisitemisblankorinvalid,usethestateinthestudent’smailingaddress(FAFSA/SAR#6).Ifbothitemsareblankorinvalid,usetherateforablankorinvalidstate above.

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Table B2: Social Security Tax


$0 – $118,500 7.65%ofincome




Table B3: Business/Farm Net Worth Adjustment


Less than $1 $0





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Table B4: Asset Protection AllowanceAge of

Student as of 12/31/2016*



Student

Age of Student as of 12/31/2016*



Student25 or less $0 $0 46 $17,800 $9,000


*Determinethestudent’sageasof12/31/2016fromthestudent’sdateofbirth(FAFSA/SAR#9).

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2016–2017 EFC FORMULA C : INDEPENDENT STUDENT With Dependent(s) Other than a Spouse





19. Adjustednetworthofbusiness/farm(CalculateusingTableC4.) +


21. Assetprotectionallowance(TableC5) −



24. CONTRIBUTION FROM ASSETSIfnegative,enterzero.

*STOPHEREifthefollowingaretrue:

Line 3 is $25,000 or less and

• Thestudent(andthestudent’sspouse,ifany)areeligibletofilea2015IRSForm1040Aor1040EZ(theyarenotrequiredtofilea2015Form1040)ortheyarenotrequiredtofileanyincometaxreturnor

• Anyoneincludedinthestudent’shouseholdsize(asdefinedontheFAFSA)receivedbenefitsduring2014or2015fromanyofthedesignatedmeans-testedfederalbenefitprogramsor

• Thestudent(orthestudent’sspouse,ifany)isadislocatedworker.

Ifthesecircumstancesaretrue,theExpectedFamilyContributionisautomaticallyzero.


**Do not includethestudent’shome.***TocalculatetheEFCforlessthannine-monthenrollment,seethenext

page.Ifthestudentisenrolledformorethanninemonths,usethenine-monthEFC(line28above).


CSIMPLIFIEDWORKSHEETPage 1



9. State andother tax allowance(TableC1) If negative, enter zero. +

10. Student’sSocialSecurity tax (TableC2) +

11. Spouse’sSocialSecurity tax (TableC2) +

12. Incomeprotection allowance (TableC3) +

13. Employment expense allowance:• Student and spousebothworking: 35%of

the lesser of the earned incomes, or $4,000,whichever is less


• Student or spouseworking (not both): zero +





2. b. Spouse’sincomeearnedfromwork(FAFSA/SAR#40) + __________


3. Student/spouseTaxableIncome(Iftaxfilers,entertheamountfromline1above.Ifnon-taxfilers,entertheamountfromline2.)*








26. Total contribution from AAI(CalculateusingTableC6.)Ifnegative,enterzero.


28. EXPECTED FAMILY CONTRIBUTION forninemonthenrollment.Ifnegative,enterzero.***

AVAILABLE INCOME




=

=

+

+

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Table C1: State and Other Tax Allowance








Tocalculatethestateandothertaxallowance,multiplythetotalincomeofthestudentandspouse(EFCFormulaCWorksheet,line7)bytheappropriateratefromthetableabovetogetthe“StateandOtherTaxAl-lowance”(EFCFormulaCWorksheet,line9).Usethestudent’sStateofLegalResidence (FAFSA/SAR#18)reportedontheFAFSA.Ifthisitemisblankorinvalid,usetheStateintheStudent’sMailingAddress (FAFSA/SAR#6).Ifbothitemsareblankorinvalid,usetherateforablankorinvalidstate above.

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Table C2: Social Security Tax


$0 – $118,500 7.65%ofincome




Table C4: Business/Farm Net Worth Adjustment


Less than $1 $0





Table C3: Income Protection AllowanceNumberinstudent’shousehold,includingstudent (FAFSA/SAR#95)


1 2 3 4 5



4 $38,760 $34,460 $30,170 $25,850 not applicable

5 $45,740 $41,420 $37,130 $32,830 $28,540

6 $53,490 $49,190 $44,910 $40,580 $36,300

Note:Foreachadditionalfamilymember,add$6,040.Foreachadditionalcollegestudent,subtract$4,290.

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Table C5: Asset Protection AllowanceAge of older parent as of 12/31/2016*


Student


Student



Student


Student25 or less $0 $0 46 $17,800 $9,000


* Determinethestudent’sageasof12/31/2016fromthestudent’sdateofbirth(FAFSA/SAR#9)

Table C6: Student’s Contribution from AAIIf the student’s AAI— Then the student’s contribution from AAI is—

Lessthan-$3,409 -$750

$-3,409to$15,900 22%ofAAI

$15,901 to $20,000 $3,498 +25%ofAAIover$15,900

$20,001 to $24,100 $4,523 +29%ofAAIover$20,000

$24,101 to $28,200 $5,712 +34%ofAAIover$24,100

$28,201 to $32,200 $7,106 +40%ofAAIover$28,200


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Lesson 3 Glossary Dislocated worker: A person who: • Meets all of the following: Was terminated or laid off from employment or received a notice of termination or layoff, Is eligible for or has exhausted his or her unemployment compensation, or he or she is not eligible

because, even though he or she has been employed long enough to demonstrate attachment to the workforce, he or she had insufficient earnings or performed services for an employer that were not covered under a state’s unemployment compensation law, and

Is unlikely to return to a previous occupation; • Was terminated or laid off from employment or received a notice of termination or layoff as a result of any

permanent closure of, or any substantial layoff at, a plant, facility, or enterprise; • Is employed at a facility at which the employer made a general announcement that it will close within 180

days; • Was self-employed but is now unemployed due to general economic conditions in his community or natural

disaster; or • Is a displaced homemaker. Displaced homemaker: A person who: • Previously provided unpaid services to the family (e.g., a stay-at-home parent); • Is no longer supported by another family member’s income; and • Is unemployed or underemployed, and is having trouble finding or upgrading employment. Means-tested federal benefit program: A federal mandatory spending program, other than a Title IV program, in which eligibility for benefits or the amount of benefits is determined based on income or resources. Some examples of such programs include: • Supplemental Security Income (SSI) Program; • Supplemental Nutrition Assistance Program (SNAP); • Free and Reduced Price School Lunch Program; • Temporary Assistance for Needy Families (TANF) Program; • Special Supplemental Nutrition Programs for Women, Infants, and Children (WIC); and • Other programs identified by the U.S. Department of Education. Underemployed individual: A person who is working part time but wants to work full time, or one who is working below the demonstrated level of his or her education or job skills.



Lesson 3 Answer Keys

Learning Activity: Qualifying for an Automatic Zero EFC

1. Nicholas Nicholas is a dependent student, and his recently widowed mother completed his Free Application for Federal Student Aid (FAFSA) as the parent of record. Nicholas’ mother works part time as a receptionist for the local humane society, and earned $18,000 in 2015. For the 2015 tax year, Nicholas’ mother was required to file a 1040 due to the value of the investments left to her in her late husband’s will. Her AGI was $36,000.

Nicholas is eligible for an Automatic Zero EFC.

Nicholas is not eligible for an Automatic Zero EFC. 2. Priya

Priya is in her second year at Mile High College. She is the single mother of two small children who live with her. Between her off-campus job as a checker in a local grocery store and her on-campus Federal Work-Study (FWS) job, she earned $20,000 in 2015. Based on the advice of her tax professional, she filed a 1040 for the 2015 tax year, even though she could have filed a 1040A. She reported an AGI of $20,000. In 2015, Priya received several months of benefits through TANF.

Priya is eligible for an Automatic Zero EFC.

Priya is not eligible for an Automatic Zero EFC. 3. Lupe

Lupe will be an entering freshman Fall 2016. For 2015, her parents reported an AGI of $48,000. Her father, who works in a local manufacturing plant, just received notice that the plant will be closing in three months.

Lupe is eligible for an Automatic Zero EFC.

Lupe is not eligible for an Automatic Zero EFC.



Quick Quiz

1. What are the names of the two simplified formulas?

The two simplified formulas are the Automatic Zero EFC and the Simplified Needs Test. 2. What is the maximum AGI or, in the case of a nontax filer, maximum income earned from work an

independent student (and spouse, if married) or the parents of a dependent student can have and qualify for an Automatic Zero EFC?

The maximum AGI or income earned from work an independent student (and spouse) or parents of a dependent student can have and qualify for an Automatic Zero EFC is $25,000.

3. Receiving benefits from which means-tested federal benefit programs partially qualifies a student for

the SNT?

Receipt of benefits from SSI, SNAP, Free and Reduced Price School Lunch, TANF, and WIC by a member of a dependent student’s parents’ household or an independent student’s household during either of the two years prior to the award year for which the student is applying partially qualifies an applicant for the SNT.

4. Which formula model is not eligible for an Automatic Zero EFC?

Model B is not eligible for the Automatic Zero EFC. 5. What is the maximum AGI or, in the case of a nontax filer, maximum income earned from work an

independent student (and spouse, if married) or the parents of a dependent student can have and still qualify for the SNT?

The maximum AGI or income earned from work an independent student (and spouse) or parents of a dependent student can have and qualify for SNT is $49,999.



Learning Activity Answer Key: SNT Hand Calculation Using Model A See the worksheet results beginning on page 100.



2016–2017 EFC FORMULA A : DEPENDENT STUDENT



*STOPHEREifthefollowingaretrue:Line 3 is $25,000 or less and• Theparentsareeligibletofilea2015IRSForm1040Aor1040EZ(theyarenotrequiredtofilea2015Form1040)ortheyarenotrequiredtofileanyincometaxreturnor



PARENTS’ CONTRIBUTION FROM ASSETSPARENTS’ CONTRIBUTION FROM ASSETS











ASIMPLIFIEDWORKSHEET Page 1




















6. Totaladditionalfinancialinformation

(TotalofFAFSA/SAR#93a.through93f.) −

7. TOTAL INCOME (line5minusline6)Maybeanegativenumber. =








AVAILABLE INCOME




+

+

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James Schlichting

44,600

James Schlichting

45,000

James Schlichting

0

James Schlichting

45,000

James Schlichting

44,600

James Schlichting

400

James Schlichting

45,000

James Schlichting

1,200

James Schlichting

43,800

James Schlichting

2,954

James Schlichting

2,190

James Schlichting

3,443

James Schlichting

0

James Schlichting

27,440

James Schlichting

4,000

James Schlichting

40,027

James Schlichting

830

James Schlichting

1

James Schlichting

830

James Schlichting

3,773

James Schlichting

3,773

James Schlichting

3,773

James Schlichting

40,027

James Schlichting

43,800












ASIMPLIFIED WORKSHEETPage 2









=







=












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James Schlichting

2,500

James Schlichting

2,500

James Schlichting

2,500

James Schlichting

0

James Schlichting

2,500

James Schlichting

0

James Schlichting

2,500

James Schlichting

0

James Schlichting

75

James Schlichting

191

James Schlichting

0

James Schlichting

6,666

James Schlichting

2,500

James Schlichting

6,666

James Schlichting

-4,166

James Schlichting

0

James Schlichting

830

James Schlichting

830

James Schlichting

0



Lesson 4: Recalculating the EFC

Learning Objectives After completing this lesson you will understand: • How to recalculate the

EFC for enrollment periods other than nine months; and

• Approaches for calculating the EFC for summer periods of enrollment.

Key Concepts The key concepts you will learn in this lesson: • Dependency status; • Simplified formulas; • Proration; • Alternate EFC; • Double counting; and • Rounding.



• Calculating Summer Expected Family Contributions handout



• Key concept

• Quick quiz

Quick Review During Lessons 2 and 3, you were introduced to the three models of the formula used to calculate the expected family contribution (EFC) and identified which model (Model A, B, or C) should be used. Income, asset, and other family information collected on the Free Application for Federal Student Aid (FAFSA) form the basis of the EFC calculation.

The EFC formula uses dependency status as a distinguishing characteristic. If a student is dependent, the formula assumes the student will receive parental support. Therefore, information is collected from both the parents and the student, and the EFC

is comprised of both the parents’ contribution (PC) and the student’s contribution (SC). If a student is independent, income and asset information is only evaluated for the student and spouse (if married), and the EFC includes only a SC. The EFC calculation is based upon nine months of enrollment. Regular Formula Under the regular, formula, a student’s EFC is calculated using both income and asset information. Simplified Formulas Federal Methodology (FM) recognizes that the circumstances of certain applicants do not warrant the use of the regular formula. These students have their EFCs calculated using a simplified formula. Key Aspects to Remember

The simplified formulas consist of an Automatic Zero EFC and Simplified Needs Test (SNT). Neither formula considers assets in the calculation of a student’s EFC. Applicants who meet certain criteria will receive an automatic zero EFC instead of

having the formula calculate an EFC. Students who come from a family with a moderate income level have their EFC calculated using the SNT, which excludes the value of assets that otherwise would have been included in the calculation. Recalculating and Prorating the EFC

What is proration? Proration is literally the dividing, assessing, or distribution of something proportionately. In this case, the EFC is being divided, assessed, or distributed proportionately to a student’s actual enrollment.




• Helpful hint

For more information, refer to excerpts from The 2016–2017 EFC Formula Guide included on pages 115 to 117, as well as the full version on the Information for Financial Aid Professionals (IFAP) website at www.ifap.ed.gov.

“Proration is literally the dividing,

assessing, or distribution of

something proportionately.” Criteria for Prorating the EFC Both the regular and simplified formulas result in an EFC that is based upon a standard nine-month period of enrollment. However, sometimes students enroll for a period other than nine months. A student’s EFC is prorated when he is enrolled for less than nine months or more than nine months. Some students enter school during the spring semester, others graduate during the fall semester, and still others make the decision to attend school year round. Why is it necessary that the EFC be prorated if a student is attending less than or more than nine months? The basic formula for determining financial need is:


= Financial need

Usually, cost of attendance (COA) and EFC are based upon a nine-month period of enrollment. As a result, so is financial need. Adjustments to all three components—COA, EFC, and financial need—are necessary to ensure the most accurate financial picture possible for students.

This adjustment is required for all Title IV programs other than the Federal Pell Grant and the Iraq and Afghanistan Service Grant (IASG) programs. Schools always use a nine-month EFC to determine a student’s Scheduled Award for the Federal Pell

Grant and the IASG programs. The EFC is never prorated for purposes of determining eligibility for these grants, even if a student is enrolled for a period other than nine months. For other programs, such as the campus-based and Federal Direct Student Loan (Direct Loan) programs, the EFC needs to be prorated to reflect the number of months a student will actually be enrolled.



Alternate EFC

When it processes a FAFSA, the Central Processing System (CPS) calculates alternate EFCs for the number of months a student could be enrolled during an

award year—that is, 1 through 12 months. Alternate EFCs covering periods of enrollment other than nine months appear in the “Only for Use by Financial Aid Office” section of the Student Aid Report (SAR) and the “FAA Information” section of the Institutional Student Information Report (ISIR). Although a school has the option to use the alternate EFC from the student’s ISIR or SAR corresponding to the number of months the student will be enrolled, the use of an alternate EFC for a summer enrollment period may result in double counting the student contribution portion of the EFC.

“The student’s contribution for

dependent and independent

students remains the same

for periods of more than nine

months. The parents’ contribution

must be adjusted for periods

of enrollment less than or

more than nine months.” Double Counting of the EFC

Double counting of the student’s contribution to the EFC can occur when the EFC is not properly adjusted for her period of enrollment, such as for 3 months, 4 months, or 12 months.

Occurrence of Double Counting. Double counting is likely to occur when an alternate EFC is used in addition to the nine-month EFC. When this is done, a student’s contribution is counted twice. The result is an inflated EFC.

Addressing Double Counting. The student’s contribution for dependent and independent students remains the same for periods of enrollment more than nine months. The parents’ contribution must be adjusted for periods of enrollment less than or more than nine months. This speaks to the necessity of prorating correctly.

Refer to the Calculating Summer Expected Family Contributions handout included in this lesson on page 115 for more information on avoiding double counting.

Rounding

Rounding when calculating the EFC is very different from when you use rounding for the return of Title IV funds, as an example. An EFC is calculated only for

periods of enrollment expressed as full months. In some cases, a student’s period of enrollment may not correspond neatly to a monthly format. For example, a student may be enrolled for 10 weeks during the summer. Per verbal guidance from the U.S. Department of Education (ED), schools can round the number of months of enrollment either up or down, so long as schools do not exceed the 12-month EFC in a 12-month period. So, in this case, a school may treat a 10-week summer session as either two or three months in length.



Quick Quiz Now it’s time to check what you have learned so far. Answer the following questions and check your responses using the Answer Key on page 123.

1. _________________ is the dividing, assessing, and distribution of the expected family contribution. (fill

in the blank) 2. The EFC must be prorated if a student is enrolled for periods less than or greater than

_________________ months. (fill in the blank) 3. The student contribution remains unchanged for periods of enrollment of more than nine months.

True

False 4. For periods of enrollment that do not fit evenly into a monthly format, ED guidance states that a school

can round the number of months in the enrollment period up or down.

True

False



Learning Activity: Evaluating When Proration is Needed In the following scenarios, indicate if you believe proration of the EFC is necessary and why. Check your answers using the key on page 124.

1. Miracle finishes high school in December and decides she would like to start college immediately, during the spring semester. Miracle was already accepted for admission, but everything was set for the following fall. She spoke with an admissions counselor and she can begin attending as a regular student early.

Yes, proration is necessary.

No, proration is not necessary. Why?

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 2. Philip is a senior in college and realizes he needs two more classes to graduate. Those courses are only

offered during the summer term. He already has a full fall and spring schedule. He has notified the Office of the Registrar and updated his application for graduation. He also contacts the Office of Financial Aid to inquire about additional funding.



___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________



Enrollment Periods Less than Nine Months As mentioned earlier, the EFC for a student must be prorated for periods of enrollment less than or more than nine months. This is to prevent double counting of the student’s contribution and to ensure an EFC is not inflated for an enrollment period. The steps taken to recalculate the EFC vary based upon the dependency status of the student as well as the formula (regular or simplified) used. We will begin our discussion with dependent students. Dependent Students Prorating the EFC for a dependent student whose EFC was initially calculated using the regular formula (income and assets included) involves:

• Recalculation of the parents’ contribution;

• Recalculation of the student’s contribution from available income; and then

• Adding the results to the student’s contribution from assets to obtain the EFC.

Refer to The EFC Formula, 2016–2017 excerpt on pages 115 and 116.

Recalculating the Parents’ Contribution. The first step in the process involves dividing the nine-month PC by nine. This provides the PC for one month of enrollment. Next, multiply the PC for one month by the number of months the student will be enrolled. For example, if a student’s enrollment period begins on September 1, and the student anticipates graduating in December, the PC for one month would be multiplied by four. Completing these steps will provide the parents’ contribution for the student’s period of enrollment. Recalculating the Student’s Contribution from Available Income. Begin this step with dividing the nine-month SC from available income by nine. This provides the SC from available income for one month of enrollment. Next, multiply the SC from available income for one month by the number of months of enrollment. Completing these steps will provide the student’s contribution from available income for the period of enrollment.

Add the Contributions. In this final step, add the prorated PC and the prorated SC from available income, and then add the student’s contribution from assets (which is not prorated). This will provide the new EFC for the student’s period of enrollment that is less than nine months. Simplified Formula. The proration of the EFC for students evaluated using the simplified formula is nearly identical to prorating the EFC for students using the regular formula. What is the difference? Assets are not included in the EFC calculation using the simplified formula, therefore, once the prorated PC and the prorated SC from available income are added, you stop.

“As mentioned earlier, the EFC

for a student must be prorated for

periods of enrollment less than or

more than nine months. This is to

prevent double counting of the

student’s contribution and to

ensure an EFC is not inflated

for an enrollment period.”

Independent Students Prorating the EFC for independent students whose EFC was initially calculated based upon a nine-month period of enrollment involves fewer steps. Income and assets are treated equally when prorating the EFC for independent students enrolled less than nine months, so you simply prorate the student’s total EFC. The steps are the same whether or not the EFC was initially calculated using the regular or simplified formula. Recalculating the Student’s EFC. Begin this step with dividing the student’s nine-month EFC by nine. This provides the EFC for one month of enrollment. Next, multiply the EFC for one month by the number of months of enrollment. Completing these steps will provide the student’s EFC for the period of enrollment.



Learning Activity: Calculating the EFC for Periods Less Than Nine Months In the following scenario, use the information provided to calculate the expected family contribution for Lydia, who will be enrolled for six months. She does not qualify for the use of a simplified formula. Use the appropriate tables from The EFC Guide, 2016–2017 on page 115. Standard rounding rules apply. Check your answers using the key on page 125.

1. Lydia, a dependent student, has decided to enroll for the summer term. The institution treats the summer term as a “header”. The summer term lasts nine weeks. The institution equates nine weeks to two months. In addition to attending summer, Lydia will enroll during the fall term, which begins in early September, and plans to graduate in December. Lydia’s EFC must be recalculated based on her early graduation date. Some information is prepopulated in the table below to assist in the calculation.

Calculation of Parents’ Contribution for a Student Enrolled LESS than Nine Months

A1. Parent’s contribution (standard contribution for nine-month enrollment, from line 28) 9,595

A2. Divide by 9 ÷ 9

A3. Parents’ contribution per month =

A4. Multiply by number of months of enrollment ×

A5. Parents’ contribution for LESS than nine-month enrollment =

Calculation of Student’s Contribution from Available Income (AI) for a Student Enrolled LESS than Nine Months

C1. Student’s contribution from AI (standard contribution for nine-month enrollment, from line 44) 938

C2. Divide by 9 ÷ 9

C3. Student’s contribution from AI per month =

C4. Multiply by number of months of enrollment ×

C5. Student’s contribution from AI for LESS than nine-month enrollment =

Calculation of Total Expected Family Contribution for a Student Enrolled LESS than Nine Months

Parents’ contribution for LESS than nine-month enrollment (from A5) =

Student’s contribution from AI for LESS than nine-month enrollment (from C5) +

Student’s contribution from assets (from line 50) + 527

Total EFC for LESS than Nine-Month Enrollment =



Enrollment Periods Greater than Nine Months It is important to note that the student’s contribution to the EFC does not change for enrollment periods of more than nine months. This means, no adjustment is needed for independent students enrolled for a period longer than nine months. Dependent Students Recalculating the Parents’ Contribution. The first step in calculating the parents’ contribution for a student enrolled more than nine months is to start with the parent’s adjusted available income (AAI) from line 25 of the Model A worksheet. This is derived from calculating the EFC. The next step is to add 4,940 (this is the difference between the income protection allowance for a family of four and a family of five, with one in college) to the AAI. This provides the alternate AAI for the parents.

“It is important to note

that the student contribution

to the EFC does not change

for enrollment periods

of more than nine months.

This means, no adjustment is

needed for independent students

enrolled for a period

longer than nine months.” Then, calculate the total PC from alternate AAI using Table A6 from The EFC Formula, 2016–2017. Divide the result by the number of students in college, which you can find on the student’s ISIR. The result is the alternate parents’ contribution for the student.

Next, subtract the standard PC for nine-month enrollment from the alternate parents’ contribution calculated above. Divide the result by 12 months to get the one-month parents’ contribution. Multiply this number by the months of enrollment that exceed nine to get the adjustment to the PC for enrollment periods greater than nine months. Add the adjustment amount to the standard parents’ contribution for nine-month enrollment. This provides the total parents’ contribution for a period of enrollment more than nine months. Add the total PC for more than nine months to the total student’s contribution from available income for a standard nine-month period of enrollment. When using the regular formula for dependent students, also add the student’s contribution from assets to get the EFC. Complete the learning activity on the following page for practice in applying these steps to calculate the parents’ contribution and EFC for enrollment periods longer than nine months.



Learning Activity: Calculating the EFC for Periods More Than Nine Months In the following dependent student scenario, use the information provided to calculate the expected family contribution for Franco, who will be enrolled for 11 months. Use Table A6 from The EFC Formula, 2016–2017 on page 117. Standard rounding rules apply. Check your answers using the key on page 126.

2. Franco has decided to enroll for the summer term, which lasts nine weeks. Franco’s institution equates the nine weeks to two months. His EFC is calculated using the regular formula, so assets are included. Franco’s older sister Linda is also enrolled in college. The total household size is four, including Franco’s parents. Some information is prepopulated in the table below to assist in the calculation.

Calculation of Parents’ Contribution for a Student Enrolled MORE than Nine Months

B1. Parents’ Adjusted Available Income (AAI) (from line 25) 53,395 B2. Difference between the income protection allowance for a

family of four and a family of five, with one in college + 4,940

B3. Alternate parents’ AAI for more than 9-month enrollment (B1 + B2) =

B4. Total parents’ contribution from alternate AAI (calculate using Table A6)

B5. Number in college ÷

B6. Alternate parents’ contribution for student (B4 ÷ B5) =

B7. Standard parents’ contribution for the student for 9-month enrollment (from line 28) – 9,595

B8. Difference (B6 ̶ B7) =

B9. Divide line B8 by 12 months ÷ 12

B10. Parents’ contribution per month =

B11. Number of months student will be enrolled that exceed 9 ×

B12. Adjustment to parents’ contribution for months that exceed 9 (B10 x B11) =

B13. Standard parents’ contribution for 9-month enrollment + 9,595

B14. Parents’ contribution for MORE than 9-month enrollment =

Student’s contribution from available income for 9-month enrollment (from line 44) + 333

Student’s contribution from assets for 9-month enrollment (from line 50) + 17

Total EFC for MORE than Nine-Month Enrollment =



Calculating EFCs for Summer Periods of Enrollment Many schools offer classes during a summer term in which students can enroll. This is often an optional term for students and as such, it is not anticipated when looking at a student’s EFC for the year, nor is it considered when initially packaging the student. Summer Packaging General Rules When awarding aid for the summer, the first consideration is the award year from which the student will be awarded. Once the school decides this, it can prorate the EFC for the summer period of enrollment. Since an institution always uses a nine-month EFC to determine a student’s Scheduled Award for the Federal Pell Grant and IASG programs, a student’s EFC is not prorated to determine his Federal Pell Grant or IASG award. For the other programs, such as the campus-based and Federal Direct Student Loan (Direct Loan) programs, the EFC may need to be prorated to reflect the number of months a student will actually be enrolled. As discussed earlier, the ISIR lists alternate EFCs by corresponding months of enrollment, which can be helpful in some situations. Unfortunately, the length of a summer term may not be equivalent to the weeks in a specific number of months. As mentioned earlier, there are numerous formats institutions can use to define a term. Some of these fit neatly into a monthly format, others do not. If the only term in which a student will enroll during the award year is the summer term, it is appropriate to use the alternate EFC from the ISIR that matches the number of months in the summer term. If a student will be enrolled in all or part of the regular academic year in addition to the summer, schools may either offer aid for the entire award year at one time using the appropriate alternate EFC, or package the summer and the academic year separately. Each packaging approach has different impacts on the proration of the EFC.

Additional Approaches to Calculating the Summer EFC As we pointed out earlier, the student contribution for both dependent and independent students is not adjusted for enrollment periods more than nine months. The nine-month student contribution is used for any enrollment period that is nine to 12 months long. For a student enrolled during the regular academic year and the summer, this can result in a portion of the student’s contribution being double counted if the school packages summer separately from the regular academic year and uses an alternate EFC in addition to the nine-month EFC.

“When awarding aid for the

summer, the first consideration

is the award year from which

the student will be awarded.

Once the school decides this,

it can prorate the EFC for the

summer period of enrollment.” For example, suppose Ralph decides in April to attend the upcoming three-month summer term, and the school’s policy for packaging summer is to use the prior award year’s EFC. Ralph’s nine-month student contribution is $900 and his alternate three-month EFC is $300. In this example, had the school used the 12-month alternate EFC and packaged the summer period together with the regular academic year, Ralph’s correct student contribution for the 12-month period would be $900. However, if the school packaged the summer period separately from the regular academic year, Ralph’s student contribution for the 12-month period would be $1,200. That is, the nine-month student contribution of $900 plus the three-month student contribution of $300 equals $1,200. This would double count a portion of the student’s contribution, since only a nine-month student contribution is supposed to be used.



To avoid double counting the student’s contribution when summer is packaged separately from the regular academic year, there are two other approaches schools may use as standard packaging policy for both dependent and independent students. These are the Alternate EFC Approach and the Monthly EFC Share Approach.

Refer to page 119, Calculating Summer Expected Family Contributions, for the following discussion of the two approaches to calculating the EFC for a

summer term. Alternate EFC Approach. This approach begins by determining the total number of months a student will be enrolled during the award year. The process differs slightly depending upon if summer is considered the last term in your school’s award year or the first term in your school’s award year. These are sometimes referred to as a “trailer” or a “header,” respectively. Let’s start with the process if summer is the last term in the award year.

“If the only term in which

a student will enroll during the

award year is the summer term,

it is appropriate to use the

alternate EFC from the ISIR

that matches the number of

months in the summer term.” If you recall, an ISIR not only provides the nine-month EFC, but it also provides alternate EFCs for different periods of enrollment. In this case, since summer is the last term in the award year, refer to the alternate EFC that corresponds with the student’s total enrollment. For example, this may be 10, 11, or 12 months, depending on the length of the summer term. Subtract the EFC that corresponds to the total months in fall and spring from the alternate EFC that corresponds to the number of months the student will be enrolled

during the award year. The result is the summer EFC. For example, Bobbi is enrolled for summer. Her total enrollment is 12 months. Her alternate EFC for a 12-month enrollment is 10,542. The EFC that corresponds to her total fall through spring enrollment is 10,230. If you subtract 10,230 from 10,542, Bobbi’s summer EFC is 312. Remember, this does not make Bobbi eligible for any additional Federal Pell Grant because Pell eligibility is calculated based upon the full-time, nine-month COA. Now, let’s look at the process if summer is the first term in the award year—that is, a header. The school packages for summer using the alternate EFC corresponding to the number of months in the summer period. Later, when packaging the student for the regular academic year, the school calculates the EFC for the regular academic year period by subtracting the alternate EFC used for the summer from the alternate EFC that corresponds to the total number of months the student will be enrolled during the regular academic year. This will provide the regular academic year EFC. For example, Troy is enrolled in the summer period, which is one-month long. It is the first term in his school’s academic year. The regular academic year consists of the fall, winter, and spring quarters, and it is nine months in length. The alternate EFC that corresponds to his total period of enrollment, 10 months, is 7,543. The alternate EFC that corresponds to the total months in summer is 326 for one month. Subtract 326 from 7,543 to get the fall through spring EFC of 7,217. Monthly EFC Share Approach. The purpose of the monthly EFC share approach is to calculate the monthly share of the student’s EFC applicable to the student’s period of enrollment. It can be used regardless of whether the summer is the first or the last term of the award year. Under this approach, the alternate EFC that corresponds to the total period of enrollment is divided by the total number of months a student is enrolled in an award year.



Monthly Share =

Alternate EFC Total months enrolled

The summer EFC is calculated by taking the monthly share of the EFC and multiplying it by the number of months a student is enrolled in the summer term.

Monthly Share X

Number of months

enrolled in summer

= Summer EFC

Likewise, the fall through spring EFC equals the monthly share multiplied by the number of months a student is enrolled in the fall through spring terms.

Fall-Spring

EFC =

Monthly Share X

Number of months

enrolled fall through spring

You may find that the two approaches give you different answers. The guidance from ED is that schools can pick which approach to use. Of course, many schools have software that can assist in the calculations and adjustments covered in this lesson. However, it is important to understand the components of need analysis and the formulas to see how all the pieces fit together.

REGULARWORKSHEET Page 3 A

Note: Use this additional page to prorate the EFC only if the student will be enrolled for other than nine months and only to determine the student’s need for Campus-Based aid or a Federal Direct Subsidized Loan. Do not use this page to prorate the EFC for a Federal Pell Grant or TEACH Grant. The EFC for the Federal Pell Grant Program is the nine-month EFC used in conjunction with the cost of attendance to determine a Federal Pell Grant award from the Payment or Disbursement Schedule.

*Forstudentsenrolledmorethanninemonths,thestandardcontributionfromAIisused(theamountfromline44).Use next page to calculate total EFC for enrollment periods other than nine months


B1. Parents’AdjustedAvailableIncome(AAI)(fromline25—maybeanegativenumber)

B2. Differencebetweentheincomeprotectionallowanceforafamilyoffourandafamilyoffive,withoneincollege + 4,940

B3. Alternateparents’AAIformorethannine-monthenrollment(lineB1+lineB2) =

B4. Totalparents’contributionfromalternateAAI(calculateusingTableA6)

B5. Numberincollege(FAFSA/SAR#74) ÷

B6. Alternateparents’contributionforstudent(lineB4dividedbylineB5) =

B7. Standardparents’contributionforthestudentfornine-monthenrollment(fromline28) −

B8. Difference(lineB6minuslineB7) =

B9. DividelineB8by12months ÷ 12

B10.Parents’contributionpermonth =

B11.Numberofmonthsstudentwillbeenrolledthatexceed9 ×

B12.Adjustmenttoparents’contributionformonthsthatexceednine(multiplylineB10bylineB11) =

B13.Standardparents’contributionfornine-monthenrollment(fromline28) +

B14. Parents’ contribution for MORE than nine-month enrollment =

Calculation of Parents’ Contribution for a Student Enrolled LESS than Nine Months

A1. Parents’contribution

(standardcontributionfornine-monthenrollment,fromline28)

A2. Divideby9 ÷ 9

A3. Parents’contributionpermonth =

A4. Multiplybynumberofmonthsofenrollment ×

A5. Parents’ contribution for LESS than nine-month enrollment =

Calculation of Student’s Contribution from Available Income (AI) for a Student Enrolled LESS than Nine Months*

C1. Student’scontributionfromAI(standardcontributionfornine-monthenrollment,fromline44)

C2. Divideby9 ÷ 9

C3. Student’scontributionfromAIpermonth =

C4. Multiplybynumberofmonthsofenrollment ×

C5. Student’s contribution from AI for LESS than nine-month enrollment =

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Dakotadtp

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AREGULAR WORKSHEETPage 4

Calculation of Total Expected Family Contribution for Periods of Enrollment Other than Nine Months

Parents’ Contribution—use ONE appropriate amount from previous page: • EnteramountfromlineA5forenrollmentperiodslessthanninemonthsOR• EnteramountfromlineB14forenrollmentperiodsgreaterthanninemonths

Student’s Contribution from Available Income—use ONE appropriate amount from previous page:• EnteramountfromlineC5forenrollmentperiodslessthanninemonthsOR +• Enteramountfromline44forenrollmentperiodsgreaterthanninemonths

Student’s Contribution from Assets• Enteramountfromline50 +

Expected Family Contribution for periods of enrollment other than nine months =

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parents**




parents**







Lessthan-$3,409 -$750

$-3,409to$15,900 22%ofAAI

$15,901 to $20,000 $3,498 +25%ofAAIover$15,900

$20,001 to $24,100 $4,523 +29%ofAAIover$20,000

$24,101 to $28,200 $5,712 +34%ofAAIover$24,100

$28,201 to $32,200 $7,106 +40%ofAAIover$28,200


Dakotadtp

Text Box


Dakotadtp

Text Box




Calculating Summer Expected Family Contributions (EFCs)

Summer Packaging General Rules • The institution decides the award year from which the student will be awarded for the summer.

• The EFC used to award campus-based and Federal Direct Student Loans (Direct Loans) must reflect the number of months the student actually will be enrolled.

• If summer is the only period the student is attending, use the appropriate alternate EFC value from the student’s Institutional Student Information Record (ISIR) that corresponds to number of months in the summer term.

• If packaging for entire award year, use the appropriate alternate EFC that corresponds to total number of months in student’s enrollment period.

• If packaging for the summer separately from the regular academic year (e.g., fall through spring), use of the alternate EFC in addition to the nine-month EFC could result in double counting the student’s contribution.

Additional Approaches to Calculating the Summer EFC To avoid double counting the student’s contribution when summer is packaged separately from the regular academic year, there are two other approaches schools may use as standard packaging policies for both dependent and independent students. Alternate EFC Approach • Determine total number of months student will be enrolled during award year.

• If summer is last term in award year:

Alternate EFC corresponding to total months enrolled – 9-month EFC corresponding to total months in fall through spring = Summer EFC

• If summer is first term in award year:

Alternate EFC corresponding to total months enrolled – Alternate EFC corresponding to total months in summer = Regular academic year EFC

Monthly EFC Share Approach

• Calculate monthly share of EFC:

Monthly share = Alternate EFC corresponding to total months enrolled in award year Total months enrolled in award year Summer EFC = Monthly share X Number of months enrolled in summer. Fall through spring EFC = Monthly share X Number of months enrolled fall through spring.



Lesson 4 Glossary Cost of attendance (COA): Costs the student is expected to incur during the period of enrollment, including but not limited to tuition, fees, room, board, books, supplies, transportation, and miscellaneous personal expenses. The COA usually is calculated for a full academic year. Dependent: A student who does not meet the definition of an independent student as prescribed under section 480(d) of the Higher Education Act of 1965 (HEA), as amended. Also an individual for whom an independent student will provide more than 50 percent support during the award year. Double counting: Counting a portion of the student contribution to the EFC more than once. It can occur when a student’s EFC is not properly adjusted for the period of enrollment. Enrollment status: A measure of the amount of coursework a student is attempting, usually expressed in credit or clock hours. Common enrollment statuses include full time, three-quarter time, half time, and less than half time. Expected family contribution (EFC): Estimate of a family’s ability to contribute toward postsecondary educational costs, derived by a formula known as Federal Methodology. Financial need: The difference between the institution’s cost of attendance and the family’s ability to pay (i.e., EFC). Ability to pay is represented by the EFC for federal need-based aid and for many state and institutional programs. Institutional Student Information Record (ISIR): The electronic record the school receives as the result of the student listing that school on the FAFSA. If sufficient data is provided to the Central Processing System (CPS), when the school receives the ISIR, it should contain information about the student’s EFC, verification selection, database matches, and financial aid history. Parents’ contribution (PC): The amount the parent(s) of a dependent student are expected to contribute towards the student’s educational costs for an award year. Period of enrollment: Except for nonterm programs, the period of time coinciding with an academic term established by the school for which institutional charges are generally assessed (e.g., semester, trimester, quarter, length of the student’s program, or academic year). Proration: The dividing, assessing, and distribution of the EFC to reflect periods of enrollment other than nine months. Rounding: The process of adjusting a number up or down, as applicable, to the next whole number or to a specified number of decimal places. For periods of enrollment that do not equate to whole months, U.S. Department of Education (ED) guidance allows rounding to calculate an EFC. For example, 2.5 months becomes either 2 months or 3 months. Student’s contribution (SC): The amount the student is expected to contribute towards his or her educational costs for an award year.




Quick Quiz

1. Proration is the dividing, assessing, and distribution of the expected family contribution proportionally.

(fill in the blank) 2. The EFC must be prorated if a student is enrolled for periods less than or greater than nine months.

(fill in the blank) 3. The student contribution remains unchanged for periods of enrollment of more than nine months.

True

False 4. For periods of enrollment that do not fit evenly into a monthly format, ED guidance states that a school

can round the number of months in the enrollment period up or down.

True

False



Learning Activity: Evaluating When Proration is Needed

1. Miracle finished high school in December and decides she would like to start college immediately, during the spring semester. Miracle was already accepted for admission, but everything was set for the following fall. She spoke with an Admissions Counselor and she can begin attending as a regular student early.



Proration is needed for Miracle because she will only be attending college for the spring and possibly the summer terms, so her expected family contribution would need to be adjusted to reflect her enrollment period.

2. Philip is a senior in college and realizes he needs two more classes to graduate. Those courses are

only offered during the summer term. He already has a full fall and spring schedule. He has notified the Office of the Registrar and updated his application for graduation. He also contacts the Office of Financial Aid to inquire about additional funding.



Proration is also needed for Philip. He will be enrolled for more than nine months.



Learning Activity: Calculating the EFC for Periods Less Than Nine Months

Calculation of Parents’ Contribution for a Student Enrolled LESS than Nine Months A1. Parent’s contribution

(standard contribution for nine-month enrollment, from line 28) 9,595

A2. Divide by 9 ÷ 9

A3. Parents’ contribution per month = 1,066

A4. Multiply by number of months of enrollment × 6

A5. Parents’ contribution for LESS than nine-month enrollment = 6,396

Calculation of Student’s Contribution from Available Income (AI) for a Student Enrolled LESS than Nine Months

C1. Student’s contribution from AI (standard contribution for nine-month enrollment) 938

C2. Divide by 9 ÷ 9

C3. Student’s contribution from AI per month = 104

C4. Multiply by number of months of enrollment × 6

C5. Student’s contribution from AI for LESS than nine-month enrollment = 624

Calculation of Total Expected Family Contribution for a Student Enrolled LESS than Nine Months

Parents’ Contribution for LESS than nine-month enrollment (from A5) = 6,396

Student’s Contribution from AI for LESS than nine-month enrollment (from C5) + 624

Student’s Contribution from assets (from line 50) + 527

Total EFC for LESS than Nine-Month Enrollment = 7,547



Learning Activity: Calculating the EFC for Periods More Than Nine Months


B1. Parents’ Adjusted Available Income (AAI) (from line 25) 53,395

B2. Difference between the income protection allowance for a family of four and a family of five, with one in college +

4,940

B3. Alternate parents’ AAI for more than 9-month enrollment (B1 + B2) = 58,335

B4. Total parents’ contribution from alternate AAI (calculate using Table A6). 20,989

B5. Number in college ÷ 2

B6. Alternate parents’ contribution for student (B4 ÷ B5) = 10,495

B7. Standard parents’ contribution for the student for 9-month enrollment (from line 28) – 9,595

B8. Difference (B6 ̶ B7) = 900

B9. Divide line B8 by 12 months ÷ 12

B10. Parents’ contribution per month = 75

B11. Number of months student will be enrolled that exceed 9 × 2

B12. Adjustment to parents’ contribution for months that exceed 9 (B10 x B11) = 150

B13. Standard parents’ contribution for 9-month enrollment + 9,595

B14. Parents’ contribution for MORE than 9-month enrollment = 9,745

Student’s contribution from available income for 9-month enrollment (from line 44) + 333

Student’s contribution from assets for 9-month enrollment (from line 50) + 17

Total EFC for MORE than Nine-Month Enrollment = 10,095



Lesson 5: Institutional Methodology (IM)

Learning Objectives After completing this lesson, you will:

• Identify the principles of IM and why schools use it;

• Understand the various IM data elements and how schools might use them; and

• Recognize the differences between the FM and IM calculations of the EFC.

Key Concepts The key concepts you will learn in this lesson:

• Principles of IM;

• Financial need;

• Parents’ total income;

• Parents’ standard allowances against income;

• Total parent contribution from income;

• Parents’ total net worth;

• Parents’ asset allowances;

• Parent contribution from assets;

• Total parent contribution;

• Family members in college;

• Dependent student’s total income;

• Dependent student’s income allowances;

Introduction Lessons 2 and 3 discussed the regular and simplified formulas of the Federal Methodology (FM) used to calculate a student’s expected family contribution (EFC) for purposes of making awards from the federal student aid programs. Lesson 4 also reviewed recalculations involving the various FM formulas. This lesson will move the discussion beyond the federal need analysis calculations and into the area of institutional methodology (IM) used by many schools to calculate eligibility for nonfederal, institutional student financial aid funds. We will review the IM calculation developed by the College Board, as well as discuss other IM variations that may also be used for awarding nonfederal institutional financial aid funds. Principles of IM

In Lesson 1, we pointed out a number of principles that are reflected in the need analysis for the federal student financial aid programs. Those same principles, which apply to the FM, also apply to the IM. As a reminder, those principles are:






6. The need analysis formula should provide a “snapshot” of the family’s financial circumstance at the time of application.




• Dependent student’s contribution from income;

• Dependent student contribution from assets;

• Total dependent student contribution;

• Dependent student’s total family contribution;

• Independent student’s total income;

• Independent student’s allowances against income;

• Independent student’s total net worth;

• Total independent student contribution; and

• Institutional IM choices.


• Formula Differences: Federal Methodology vs. Institutional Methodology



• Key concept

• Quick quiz



• Helpful hint

The chart, Underlying Principles of Need Analysis, is included in Lesson 1 for ease of reference.

So, if the principles are the same, why have two different methodologies for need analysis? Why is IM necessary? The primary reason is that many financial aid administrators believe the IM is a more thorough and accurate assessment of a family’s ability to contribute toward educational costs and, therefore, a better way to distribute institutional resources (i.e., grants, scholarships, and loans) among eligible students. This is because IM considers a more robust set of data than is considered under FM, which allows IM to explore more fully the family’s financial strength and capabilities. Factors that may be considered in using IM include, but are not limited to, the following:

• The institution’s mission and enrollment goals;

• The desire to distribute institutional resources more accurately;

• The impact of student financial aid on student access, enrollments, and retention;

• Competition among peer institutions and resources available to recruit qualified students; and

• Limited institutional resources available to assist in meeting students’ financial need.

Under IM, the basic need analysis formula for determining financial need remains the same:


= Financial need

The COA components are outlined in the Overview of the Financial Aid Programs Self-Study Guide. Details on COA construction may be found in NASFAA Monograph 24—Developing the Cost of Attendance—under Tools & Resources at http://www.nasfaa.org.

The difference between the FM and the IM is in the calculation of the EFC. Those data elements, which represent differences between FM and IM, are highlighted in yellow throughout the following discussions.

A complete FM versus IM side-by-side comparison is included on page 145.



Like the EFC calculated under the FM, the EFC under the IM calculation uses an assessment of available student and parent income and assets. Unlike the FM, the IM does not use either the Simplified Needs Test or the Automatic Zero EFC calculations, which were described in Lesson 3. Dependent Student Family Contribution under IM Parent Contribution from Income

Parent’s Total Income. Like the FM formula, the IM formula for a dependent student’s parents includes a calculation of total income, which heavily relies on the

parents’ adjusted gross income (AGI) and taxable income. That IM calculation is:

Adjusted gross income (AGI)/ taxable income

+ Untaxed income + Business, rental, and other taxable

losses – Income exclusions = Total parents’ income

IM collects all the same types of untaxed income that FM does (e.g., child support received, tax-deferred payments to pension and savings plans, tax exempt interest) plus additional untaxed income items such as untaxed Social Security benefits, foreign income exclusion, flexible spending benefits, etc. Unlike the FM formula, IM does not allow certain business, rental, and other taxable losses, which are otherwise allowed under the U.S. tax code. Many types of business, rental, or other taxable losses are considered to be “paper” losses and not actual losses of income. As such, they do not impact a family’s ability to contribute toward educational costs. Such business, rental, and other taxable losses are added back into the calculation of the parent’s total income under IM. These losses are added back in at their absolute values—that is, negative values are not subtracted from positive values. Nothing is added back in if the business,

rental, and other taxable income values are positive. Additionally, a set of income exclusions similar to those considered under FM, such as prior-year student Federal Work-Study earnings and taxable combat pay, are also allowed under the IM calculation of total income.

Parents’ Standard Allowances Against Income. Under IM, the allowances against income include the following nondiscretionary expenses incurred by

the parents:

• U.S income tax paid;

• State and local taxes (income, sales, and property);

• Social Security taxes (FICA);

• Income Protection Allowance (IPA);

• An employment expense allowance;

• Annual Education Savings Allowance (AESA);

• A medical and dental expense allowance;

• A secondary and/or elementary tuition paid allowance, at the option of the institution; and

• Education tax credits, at the option of the institution.

State and Local Tax Allowance. The IM state and local tax rates (including income, sales, and property taxes) vary by income and are therefore somewhat more generous than the FM rates. The FM rates, which are based on Schedule A of the federal tax return, do not include sales taxes and include only two income bands (less than $15,000 and $15,000 or more). In an example provided by the College Board for New York state residents, the 2016-17 IM rates ranged between 9 and 11.5 percent (across 16 income bands); the same rates were only between 8 and 9 percent under FM. Income Protection Allowance (IPA). Like FM, under IM, there is a standard income protection allowance. The IPA represents the point of zero contribution, below which the family has no discretionary income left to cover postsecondary educational expenses. The IPA does not represent the exact amount of money required by most



families to cover their living expenses; it is simply an assessment of a base level of living expenses based on the family’s size and number in college. Under FM, these living expense allowances are based on 1967 Bureau of Labor Statistics (BLS) data which is updated annually to account for inflation. Under IM, on the other hand, these allowances are updated annually and averaged over the preceding three years of federal Consumer Expenditure Survey (CES) data to control for out of the ordinary fluctuations in living costs. This way, the IM figures may prove a more accurate and timely representation of current standard living expenses and spending patterns.

“Unlike FM, the IM also includes

an Annual Education Savings

Allowance. The AESA is an

allowance which protects a set

amount of the parents’ income in

recognition that the family must

save for the educational expenses

of younger children while sending

older children to college.”

Annual Education Savings Allowance (AESA). Unlike FM, the IM also includes an Annual Education Savings Allowance. The AESA is an allowance which protects a set amount of the parents’ income in recognition that the family must save for the educational expenses of younger children while sending older children to college. It assumes families who have saved a specified amount of their annual income (approximately 1.5 percent annually) will have accumulated approximately one-third of the parent contribution for a private four-year college education by the time the student enrolls. It also assumes the expected parent contribution for children will come from income, savings, and borrowing against future earnings.

Medical and Dental Expense Allowance. Under FM, the financial aid administrator must exercise professional judgment (PJ) to include unusually high medical and dental expenses. Under IM, there is a medical and dental expense allowance to account for exceptionally high medical and dental expenses reported by the family. Education Tax Credits Allowance. The federal tax calculation reduces the individual’s tax liability by subtracting the amount of education tax credits from the taxes due. At the discretion of the institution, under IM this amount is added back to the amount of taxes paid, thereby acting as an allowance against income. This means that the education tax credit is handled at the tax level and does not directly reduce the income. This also means that the state tax allowance is properly applied against the total income in IM and not against a reduced amount as in FM, which means the family does not realize the full benefit of the education tax credits in the FM allowance.

Total Parent Contribution from Income. The total contribution from parental income under the IM formula is calculated as:

Total income

– Total allowances

= Parents’ available income (AI)

x Specified progressive % rate

= Total parent contribution from income

The parents’ available income is then assessed at a specified percentage rate, which gets progressively higher depending on the dollar amounts of discretionary income. The assessment rate starts at 22 percent on the first dollars of discretionary income and progressively increases up to 46 percent for those families with the highest amounts of available discretionary income. FM uses a similar progressive scale for this available income assessment, but does not allow for as many income bands as does IM.



Parent Contribution from Assets

Parents’ Total Net Worth. Like the FM formula, the IM formula for a dependent student’s parents includes a calculation of parental net worth by evaluating the

parents’ assets and liabilities against those assets. That IM asset calculation is:

Cash, checking, and savings

+ Real estate and investment equity

+ Business equity (including small businesses < 101 employees)

+ Farm equity (including family farm as principal place of residence)

+ Home equity

+ Parent assets in student siblings’ names

= Total parents’ net worth

Those assets included above should seem familiar. As indicated in Lesson 2, the FM calculation also includes the values of cash, savings, and checking accounts. The FM also includes real estate and investment equity, and may include business and farm equity. The differences in the FM and IM calculations of asset net worth include the following:

• IM includes all business and farm equity, while FM excludes family farm equity if it is the family’s principal place of residence and the family owns and materially participates in its operation;

• FM also excludes the net worth of any family-owned and controlled small businesses of 100 or fewer full-time or full-time equivalent employees, while IM includes them;

• FM does not include home equity, but IM does; and

• FM does not include the value of parental assets that are in the names of the student’s siblings, but IM does.

Remember: A complete FM versus IM side-by-side comparison is included on page 145.

IM includes the equity in a family farm and the family’s home, as well as the value of family owned small businesses, in the need analysis calculation because these too are indicators of a family’s financial strength. Families with such assets are in a stronger financial position and may be better able to afford college costs than those families without such assets. Home ownership, in particular, carries with it certain advantages in the tax system. For example, homeowners receive a substantial tax deduction for the amount of interest paid on a home mortgage loan. Homeowners accrue home equity against which they may borrow; renters do not. Additionally, according to the College Board, homeowners spend a little less than 20 percent of their income on housing costs, while renters spend approximately 33 percent of their income on rent—a substantial economic advantage for homeowners. It is not unusual for parents to save a portion of their assets in the names of younger siblings to receive the benefit of a lower tax rate. IM includes the net worth of these assets, as these are also an indication of a family’s financial strength and are accessible to the parents if needed.

Parents’ Asset Allowances. As discussed in Lesson 2, the FM calculation contains an education savings and asset protection allowance based on the age of the older

parent, in order to protect a portion of the parents’ assets for education savings and for low-income families to draw from to cover basic living expenses. Likewise, the IM calculation also contains several allowances for the student’s parents’ assets. They include the:

• Emergency Reserve Allowance;

• Cumulative Education Savings Allowance; and

• Low income asset allowance. Emergency Reserve Allowance (ERA): The ERA is intended to protect a set amount of the parental assets, holding them in reserve for such possible occasions as medical emergencies, illness, or



unemployment the family may experience. The ERA amount protects six months of average family expenses based on the number of family members, in accordance with the CES. Cumulative Education Savings Allowance (CESA): The CESA is an allowance that recognizes a family’s need to save towards postsecondary educational costs for all children in the family. The allowance protects an amount of assets equal to the amount the family would have accumulated if they had saved the amount of the annual savings goal each year for each child. In doing so, it protects parental savings for the college expenses of all children in the family while still assuming that family savings are available for financing an education. This allowance is calculated on a per child basis in relation to the average cost of college. Low Income Asset Allowance: IM has a low income asset allowance, which provides for the additional protection of assets for low income families. It takes into account that low income families may need to rely on their assets in order to cover basic living expenses—something less likely for higher income families.

Parent Contribution from Assets. Thus, the parent contribution from assets is reflected as:

Net worth – Asset allowances

= Discretionary net worth

x Asset conversion rate

= Total parent contribution from assets

IM assesses assets at a rate of between three and five percent. FM initially assesses the parents’ assets at 12 percent; however, calculation of the parents’ Adjusted Available Income, effectively reduces the assessment rate to about 5.64 percent. The 5.64 percent comes from multiplying 47 percent (the highest marginal rate in the FM Adjusted Available Income table) by this 12 percent asset assessment rate (47 x 12 percent = 5.64 percent).

Total Parent Contribution

Finally, in the same basic formula as the FM, the IM formula yields a parent contribution from income and a parent contribution from assets that are added

together to derive the dependent student’s total parent contribution:

Parent contribution from income + Parent contribution from assets

= Total IM parent contribution (PC)

Family Members in College

While the FM formula equally distributes the calculated parent contribution among all dependent students who are attending postsecondary school on at least a half-

time basis at the same time, the IM formula recognizes the greater responsibility of parents with more than one child in college. With more children in college, more is expected to pay for college. If more than one child is enrolled in college at the same time, IM reduces the expected contribution for each child. If two children are in college, IM expects the family to pay 60 percent of the parent contribution for each child. If three children are enrolled at the same time, IM expects the family to pay 45 percent of the parent contribution for each child. Dependent Student Contribution from Income

Dependent Student’s Total Income. Like the FM formula, the IM formula for a dependent student includes a calculation of total income. That IM calculation is:

AGI/Taxable income + Untaxed income – Income exclusions

= Total income



Dependent Student’s Income Allowances. Also like FM, the IM provides certain allowances against income. That IM calculation includes:

U.S. Income tax paid + State and local taxes paid + Social Security taxes (FICA)

= Total allowances

Dependent Student’s Contribution from Income. The student’s contribution from income in the IM calculation is:

Total income – Total allowances

= Total available income

x Parents’ assessment rate up to maximum of 46% (IM only)

x 50% (FM only)

= Total student contribution from income (or minimum student contribution if higher)

This result cannot be greater than 50% of the parents’ total contribution

Like the FM formula, the IM formula assesses the student’s available income because financing his college expenses is the student’s primary responsibility while enrolled. However, unlike FM, for low income families, a student’s earnings may go toward supporting the family and be on par with the parent’s earnings. In these situations, the student’s earnings are assessed at the lower parental assessment rate and are capped at 50 percent of the parents’ total contribution. IM does allow colleges to continue to define a minimum contribution from each student. This contribution is based on the prevailing minimum wage times the number of weeks the student will work during his summer period.

Dependent Student Contribution from Assets

The IM formula includes primarily the same categories of assets as for parents. Once the dependent student’s net worth is determined, it is assessed at 25 percent

to obtain the student’s total contribution from assets. The FM formula assesses the student’s net worth at 20 percent. The IM calculation of the dependent student’s contribution from assets is:

Cash, checking, and savings + Real estate and investment equity + Business equity (including small

businesses < 101 employees) + Farm equity (including family farm as

principal place of residence) + Home equity + Other student assets and trusts

= Student net worth

x 25%

= Student contribution from assets

Total Dependent Student Contribution

The IM formula then adds the total student contribution from income and the total contribution from assets in the resulting formula:

Student contribution from income + Student contribution from assets

= Total student contribution (SC)



Dependent Student’s Total Family Contribution

Finally, as with FM, the IM formula for the dependent student’s total family contribution is:

Total Parent Contribution

+ Total Student Contribution

= Total IM Family Contribution

Take a few moments to review the FM versus IM Calculation Scenario Comparison at the end of this lesson. Note the highlighted differences in data

elements used by the two formulas, as well as the difference between the bottom-line EFCs under both formula calculations.




1. What is the primary reason that institutions use IM in addition to FM? ___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

2. Fill in the IM formula for determining a dependent student’s parents’ total income below:

3. What are some of the advantages of home ownership, indicating why home equity is included in the IM calculation? (check all that apply)

Mortgage interest deductions

Home equity loans

Lower total percentage of income spent on housing

All of the above

4. If two children are enrolled in college, the IM formula expects the family to pay what percentage of the parent contribution for each child?

10%

25%

50%

60%

= Total parents’ income

–

+

+



Quick Quiz 1 (cont’d)

5. For the dependent student’s contribution in the IM calculation, what percentage of the student’s net worth is used to arrive at the student’s total contribution from assets?

10%

20%

25%

50%

75%

6. What is the Cumulative Education Savings Allowance and what does it recognize? ___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

7. Under the IM formula, an institution may choose to expect a minimum student contribution.

True

False 8. Under IM, the standard income protection allowances are updated annually and averaged over the

preceding three years based on data from the:

Bureau of Labor Statistics

Consumer Expenditure Survey



Independent Student Family Contribution under IM

Remember: A complete FM versus IM side-by-side comparison is on page 145 of the lesson.

Independent Student Contribution from Income

Independent Student’s Total Income. Like the FM formula, the IM formula for an independent student includes a calculation of total income. That IM calculation is:

AGI/Taxable income + Untaxed income – Income exclusions

= Total student income

Independent Student's Allowances Against Income. Like FM and the dependent student’s parents under IM, the IM allowances against income include

the following nondiscretionary expenses incurred by the student and her spouse (if any):

• U.S income tax paid;

• State and local taxes;

• Social Security taxes (FICA);

• An employment expense allowance;

• A medical and dental expense allowance; and

• An AESA for younger children. Other Standard Allowances Against Income. While FM calculates an income protection allowance, the IM has a different approach for calculating a similar allowance for the independent student. IM uses a monthly maintenance allowance (MMA) which is based on maintaining family members when not enrolled in college as follows:

• For the student, a 3-month MMA amount;

• For the student’s spouse, a 3-month MMA amount when enrolled and a 12-month MMA when not enrolled; and

• For the student’s child, a 3-month MMA amount when enrolled and a 12-month MMA when not enrolled.

This approach recognizes that the cost of attendance provides for a student’s living expenses during while enrolled in college. By using the MMA approach, the student’s income is protected for the periods that the student and the student’s family members are not enrolled. Independent Student Contribution from Assets

Independent Student’s Total Net Worth. Like the FM formula, and the IM formula for a dependent student’s parents, the IM for an independent student includes a

calculation of net worth by evaluating the student’s (and spouse’s) assets and liabilities against those assets. That IM asset calculation is:

Cash, checking, and savings + Real estate and investment equity

(including trust fund principal) + Business equity (including small

businesses < 101 employees) + Farm equity (including family farm as

principal place of residence) + Home equity = Total student net worth x 25% conversion rate = Total student contribution from

assets Those assets included above should seem familiar. As indicated in Lesson 2, the FM calculation includes the values of cash, savings, and checking accounts. The FM also includes real estate and investment equity (including trust funds), as well as business and farm equity. The calculation of the independent student’s net worth reflects differing treatment of some assets, specifically: • Home equity;



• Family farm equity if it is the family’s principal place of residence; and

• Family owned and controlled small businesses of 100 or fewer employees.

Total Independent Student Contribution

The IM formula then adds the total student (and spouse) contribution from income and the total contribution from assets in the resulting formula:

Student/spouse contribution from income

+ Student/spouse contribution from assets

= Total student contribution (SC)

Additional Institutional Choices Involving IM

Schools have choice in the use of institutional methodologies. In addition to the College Board’s IM, schools have the option to develop their own methodology

options and may adapt their own IM calculation to include certain, but not all, of the data elements used in the College Board IM calculation. Some schools may add other data elements to their own IM calculations. Private Elementary and Secondary School Tuition As previously mentioned, the College Board’s IM allows the school the option of providing an allowance against income for the payment of private elementary and secondary school tuition for the student’s siblings. Under IM, this would be a direct offset of the lower of actual tuition paid or an allowance for tuition paid for the student’s siblings. On the other hand, a high cost private university choosing not to use the College Board’s IM formula, might instead opt to adopt and/or adapt just this particular allowance in recognition of the

higher costs of private school attendance at any level—particularly private elementary or secondary schools versus free public schools. Furthermore, different private colleges might decide to implement this tuition allowance differently. Some may use an allowance offsetting for actual tuition payment amounts; others may use average tuition ranges on a per-child basis (e.g., $5,000 per year for one child; $10,000 per year for two children, and so forth up to a maximum of $20,000). Noncustodial Parent Contribution Under the FM formula in divorced or separated parent situations, the parent with whom the student lived more than half of the year (usually the “custodial” parent) and that parent’s spouse (the stepparent) are considered responsible for educational costs. Therefore, the parent’s and stepparent’s household, income, and asset information are used in the calculation of the dependent student’s EFC. The income and asset information of the biological parent with whom the student does not live (usually the “noncustodial” parent) are excluded from the FM calculation. There is no FM flexibility in this regard, except under professional judgment (PJ). Conversely, the IM philosophy is that both biological parents are responsible for the education of the student, regardless of the parents’ marital status. Institutions using IM may collect income, asset, and household information on both the custodial parent (and stepparent/domestic partner, if present) and on the noncustodial parent (and stepparent/domestic partner, if present) and may opt to use the information on only the biological parents or on one of the biological parents and the stepparent. Typically, the information on only two parents is used in the IM calculation of the parent contribution; however, in IM, schools have discretion about which parents’ contributions to include. Student and Parent Assets Some schools implement an IM calculation, which either imputes asset values or uses higher asset conversion rates.



Implied Assets. Institutional Methodology offers an option to look at reported dividend and interest income and compare these values to reported assets. If the reported assets are insufficient to yield the reported interest and dividend amounts, the school might divide the total interest and dividend income by the current average investment earnings rate in order to calculate the amount of assets necessary to yield this amount. In this example, such a calculation might look like this:

$1,500 Total student interest & dividend income from tax return

÷ 5% Current investment earnings rate (estimated)

= $30,000 Implied asset value

$3,000 = Cash/checking/savings reported

This imputed asset value would then be used in the calculation of the IM contribution from assets. Asset Conversion Rates. Other schools may adopt an IM calculation which includes a higher asset conversion rate for either the parents’ or the student’s assets. For example, instead of using a 7 percent asset conversion rate for an independent student with dependents other than a spouse (in FM), the school may choose to use a higher rate of 25 percent for these students. Income Calculations Minimum Student Contributions. While the College Board’s IM suggests a minimum student contribution, some schools may opt to impose a higher or lower minimum student contribution amount. This amount might also be implemented on a graduated scale—higher for incoming freshmen and lower for juniors and seniors, who might embark on academic endeavors or summer classes during their summer periods.

Sample Alternative IM Calculation for Top Drawer University Some schools may choose to implement other IM variations with different IM data elements. For example, Top Drawer University (TDU) might implement an IM calculation using some elements of the College Board’s Institutional Methodology, some variations on that methodology, or its own methodology. TDU’s IM calculation includes only the following elements:

• Home equity, as included in the College Board IM calculation;

• Private elementary and secondary school tuition payments of up to $5,000 per year per child up to a maximum of $20,000 annually;

• Parent business, real estate, and other investment losses, adding back into the calculation losses and write-offs for depreciation, travel, and entertainment expenses from the tax return and respective tax schedules;

• Student asset conversion rate of 60 percent for independent students without dependents other than a spouse (higher than the 50 percent FM rate);

• Minimum student contribution of $1,200 for all dependent and independent students, regardless of grade level; and

• Imputed asset values based on an average current market return on investment rate of 4 percent, aligning asset values with the yield on reported interest and/or dividends.

As you can see from the discussion in this lesson, multiple IM options are possible. It is the school’s option to use an IM calculation to award its institutional, nonfederal student financial aid funds. Obviously, schools with little or no institutional financial aid funds may indeed have no need for the extra institutional methodology calculation. On the other hand, schools with substantial institutional funds may use IM to target these funds to the students who have the most financial need. As a reminder, IM may be used to calculate need for institutional funds only and not to award federal Title IV student financial aid funds.




1. Draw an arrow to match each of the following monthly maintenance allowances (MMAs) in the left-hand column to each applicable individual in the independent student’s family from the right-hand column:

MMA Student’s Family Member

12-Month MMA Student

3-Month MMA Student’s enrolled spouse

3-Month MMA Student’s enrolled child

3-Month MMA Younger nonenrolled child

2. Under IM, the independent student allowances against income might also include any other allowances stipulated by the institution. True

False

3. Fill in the IM formula for determining an independent student’s total net worth below:

= Total student’s net worth

+

+

+

+




1. Does your institution use Institutional Methodology? Why? Why not?

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

2. If yes, list the IM calculation data elements used by your school in addition the FM calculation. For each

of these data elements, make a determination as to whether you would keep that data element for the purpose of the IM calculation of an EFC.

IM Data Element Would you keep or add it? Why?

3. If your school does not currently use IM, should it? Why? Why not?

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________



Reflection Questions (cont’d)

4. If your school does not currently use IM, and you think it should, what IM data elements would you include in your IM calculation of an EFC? Why?

IM Data Element Why would you include it?



Learning Activity: FM or IM or Both? Referring to Lessons 2 and 5, fill in the table below with the letter of each expected family contribution data element which is included in the FM calculation and in the IM calculation. Duplicate each letter as necessary to reflect those data elements that are included in both the FM and IM calculations. Check your responses using the Answer Key on page 154.

Expected family contribution data elements: a. Taxable income b. Untaxed income c. Home equity d. Income protection allowance e. Investment farm equity f. Family farm which is family’s principal place of residence g. Cash/savings/checking accounts h. Elementary/secondary school tuition allowance i. Real estate and rental properties j. Minimum student contribution k. Annual Education Savings Allowance l. Cumulative Education Savings Allowance m. Emergency Reserve Allowance n. Low Income Asset Allowance o. Education Savings and Asset Protection Allowance (combined) p. Monthly maintenance allowance (MMA) q. Noncustodial parent contribution

FM Calculation IM Calculation

FORMULA DIFFERENCES: FEDERAL METHODOLOGY vs. INSTITUTIONAL METHODOLOGY

DIFFERENCES FEDERAL METHODOLOGY (FM) INSTITUTIONAL METHODOLOGY (IM) Formula

Usage Only approved need analysis system used to determine expected family contribution (EFC) for federal student aid programs

Nonfederal need analysis formula used by some schools and private scholarship agencies to determine need for private, nonfederal student aid

Simplified Formulas Under certain conditions and income levels, uses simplified formulas to exclude assets or set Automatic Zero EFC

Includes all income and assets for all families in calculation

Calculation Tables Uses 1967 Bureau of Labor Statistics (BLS) data, updated annually for inflation

Uses Consumer Expenditure Survey (CES) data updated annually and averaged over preceding 3 years to control for out of ordinary fluctuations

Income Sales Tax Ignores state sales tax and recognizes only

limited number of income levels Accounts for state sales tax and recognizes

differences in income level differences Medical expenses Medical expenses are included in the income

protection allowance (IPA) Includes offset for actual medical and dental

expenses Annual Education Savings Allowance (AESA)

Does not include an income allowance in recognition of family’s need to save for postsecondary educational expenses of children

Includes AESA to protect set amount of annual income for savings toward postsecondary educational expenses of younger children while sending older children to college

Monthly Maintenance Allowance (MMA)

Only includes IPA, no MMA Includes 3-month MMA for student, spouse enrolled in college, and child enrolled in college; 12-month MMA for non-enrolled child or spouse

Adjustments and Losses

Allows for income adjustments and losses (e.g., business losses and write-offs) permitted under U.S. tax code

Does not allow for income adjustments and losses permitted under U.S. tax code; adds them back as untaxed income

Private Elementary & Secondary Tuition

Does not include allowance for elementary and secondary school tuition paid

Allows for elementary and secondary school tuition paid, at institution’s option

Minimum student contribution

Includes no minimum student contribution Suggests minimum student contribution

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DIFFERENCES FEDERAL METHODOLOGY (FM) INSTITUTIONAL METHODOLOGY (IM) Assets

Home Equity Excludes home equity Includes home equity Family Farm Excludes equity of family farm if it is family’s

principal place of residence Includes family farm equity

Small Business Excludes value of family owned and controlled small business with 100 or fewer full-time employees

Includes business equity

Asset Conversion Rates

Dependent student’s parents’ asset net worth assessed at 12%

Dependent student’s and independent student’s (without dependents other than a spouse) asset net worth assessed at 20%

Independent student’s (with dependents other than a spouse) asset net worth assessed at 7%

Dependent student’s parents’ asset net worth assessed at between 3% - 5%

Dependent student’s asset net worth assessed at 25% for all students

Independent student’s asset net worth assessed at 25%

Asset Protection Allowances

Includes education savings and asset protection allowance to progressively preserve portion of family’s assets based on age of older parent

Includes Cumulative Education Savings Allowance (CESA) protection allowance to encourage college savings for younger siblings

Includes Emergency Reserve Allowance (ERA) to protect family assets for unexpected emergency expenses

Includes Low Income Asset Allowance for protection of assets for low income families

Parent Assets in Student’s Siblings’ Name

Does not include parent assets in student’s sibling’s name

Includes parent assets in dependent student’s sibling’s name

Number in College Uses 100% of parent contribution (PC) if one in college; divides PC equally among number of in college, if more than one in college

Prorates EFC based on concurrent enrollment of children in college (e.g., 60% if 2 in college; 45% if 3 in college)

Divorced/Separated Parents

Custodial parent and spouse/domestic partner are considered responsible for educational costs; excludes noncustodial parent’s income and assets

Allows institutional option to collect information on both biological parents and stepparents/ domestic partners, if applicable, to calculate contribution that best reflects family’s resources

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FM versus IM Calculation Scenario Comparison

Earlie Byrd is an 18-year-old dependent student beginning college in the fall of the 2016–17 academic year. She lives with her parents, Mary and David, in Virginia. They are both 49 years old and happily

married. She has one younger sister, Hazel, who is 13 years old. Her family’s income and asset information are provided below for purposes of demonstrating a side-by-side comparison of the FM

versus the IM calculation data elements and bottom-line expected family contributions. Note all bolded key differences.

Family Financial Data FM IM

Household size 4 4

Number in college 1 1

Parents:

Parents’ adjusted gross income (AGI) $114,650 $114,650

Parent 1 earnings from work $75,000 $75,000

Parent 2 earnings from work $50,000 $50,000

Parents’ interest and dividend income --- $1,650

Untaxed income (IRA and pension contributions) $12,000 $12,000

U.S. tax paid jointly $12,088 $12,088

Cash/Savings/Checking $15,000 $15,000

Home equity --- $150,000

Business equity (family-owned; fewer than 100 employees)

--- $75,000

Total value of sibling’s assets --- $5,000

Student (Earlie):

Wages $4,500 $4,500

U.S. tax paid $0 $0

Cash/Savings/Checking $5,300 $5,300

Parent Contribution $25,168 $22,832

Student Contribution $1,060 $3,225

TOTAL Expected Family Contribution (EFC) $26,228 $26,057



Lesson 5 Glossary Annual Education Savings Allowance (AESA): An allowance under institutional methodology (IM) which protects a set amount of annual income in recognition that a family must save for the educational expenses of younger children while sending older children to college. College Board: A nonprofit membership organization dedicated to promoting excellence and equity in education through programs for K–12 and higher education institutions, and by connecting students to college success and opportunity. It also serves the education community through research and advocacy on behalf of students, educators, schools, and colleges. Cost of attendance (COA): Costs the student is expected to incur during the period of enrollment, including but not limited to tuition, fees, room, board, books, supplies, transportation, and miscellaneous personal expenses. The COA usually is calculated for a full academic year. Cumulative Education Savings Allowance (CESA): An IM allowance that recognizes a family’s need to save towards postsecondary education costs. The allowance protects an amount of assets equal to the amount the family would have accumulated if it had saved a specified percentage of its income each year for each child. Emergency Reserve Allowance (ERA): An IM allowance which protects an amount of parental assets equal to six months of average family expenses, holding them in reserve for such possible occasions as family illness, medical emergencies, or unemployment. Expected family contribution (EFC): Estimate of a family’s ability to contribute toward postsecondary educational costs, derived by a formula known as Federal Methodology (FM) for awarding Title IV federal student aid and a formula known as Institutional Methodology (IM) for awarding institutional aid. Financial need: The difference between the institution’s COA and the family’s ability to pay (i.e., EFC). Ability to pay is represented by the EFC for federal need-based aid and for many state and institutional programs. Institutional methodology (IM): A formula developed by the College Board, in conjunction with financial aid administrators and economists, to measure a family’s ability to contribute toward a student’s educational costs. IM is used at the discretion of individual institutions and in addition FM to award nonfederal, institutional student financial aid funds (e.g., grants and scholarships). Low Income Asset Allowance: An IM allowance which protects the assets for low income families, taking into account that they may need to liquidate their assets in order to cover basic living expenses. Professional judgment (PJ): The authority provided under the Higher Education Act of 1965, as amended for financial aid administrators to exercise discretion and deal with unique circumstances affecting individual students on a case-by-case basis in a number of specific areas of federal student aid administration.




Quick Quiz 1

1. What is the primary reason that institutions use IM in addition to FM?

Many financial aid administrators believe IM is a more thorough and accurate assessment of a family’s ability to contribute toward educational costs and, therefore, a better way to ration limited institutional resources (i.e., grants, scholarships, and loans) among eligible students.

2. Fill in the IM formula for determining a dependent student’s parents’ total income below:

3. What are some of the advantages of home ownership, indicating why home equity is included in the IM calculation? (check all that apply)

Mortgage interest deductions

Home equity loans

Lower total percentage of income spent on housing

All of the above

4. If two children are enrolled in college, the IM formula expects the family to pay what percentage of the parent contribution for each child?

10%

25%

50%

60%

AGI/Taxable income

= Total parents’ income

– Income exclusions

+ Untaxed income

+ Business, rental, and other taxable losses



Quick Quiz 1 (cont’d)

5. For the dependent student’s contribution in the IM calculation, what percentage of the student’s net worth is used to arrive at the student’s total contribution from assets?

10%

20%

25%

50%

75%

6. What is the Cumulative Education Savings Allowance and what does it recognize?

The CESA is an allowance that recognizes a family’s need to save towards postsecondary educational costs for all children in the family. The allowance protects an amount of assets equal to the amount the family would have accumulated if they had saved a specified percentage of their income each year for each child. In doing so, it protects parental savings for the college expenses of all children in the family while still assuming that family savings are available for financing an education.

7. Under the IM formula, an institution may choose to expect a minimum student contribution.

True

False

8. Under IM, the standard income and asset protection allowances are updated annually and averaged

over the preceding three years based on data from the:

Bureau of Labor Statistics

Consumer Expenditure Survey



Quick Quiz 2

1. Draw an arrow to match each of the following monthly maintenance allowances (MMAs) in the left-hand column to each applicable individual in the independent student’s family from the right-hand column:

MMA Student’s Family Member

12-Month MMA Student

3-Month MMA Student’s enrolled spouse

3-Month MMA Student’s enrolled child

3-Month MMA Younger nonenrolled child

2. Under IM, the independent student allowances against income might also include any other allowances

stipulated by the institution.

True

False 3. Fill in the IM formula for determining an independent student’s total net worth below:

Cash/Savings/Checking accounts

= Total student’s net worth

+ Farm equity (including family farms)

+ Real estate and investment equity

+ Business equity (including small businesses)

+ Home equity



Learning Activity: FM or IM or Both? Referring to Lessons 2 and 5, fill in the table below with the letter of each expected family contribution data element which is included in the FM calculation and in the IM calculation. Duplicate each letter as necessary to reflect those data elements that are included in both the FM and IM calculations.

Expected family contribution data elements: a. Taxable income b. Untaxed income c. Home equity d. Income protection allowance e. Investment farm equity f. Family farm which is family’s principal place of residence g. Cash/savings/checking accounts h. Elementary/Secondary school tuition allowance i. Real estate and rental properties j. Minimum student contribution k. Annual Education Savings Allowance l. Cumulative Education Savings Allowance m. Emergency Reserve Allowance (ERA) n. Low Income Asset Allowance o. Education Savings and Asset Protection Allowance (combined) p. Monthly maintenance allowance q. Noncustodial parent contribution

FM Calculation IM Calculation a a b b c

d d e e f

g g h i i j k l m n

o p q


© 2016 NASFAA Need Analysis 155

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NASFAAUNIVERSITY

CREDENTIALED TRAINING

Congratulations on completing this Self-Study Guide! What’s next?Continue Your Learning. Earn Credentials. Differentiate Yourself.Benefits to Learners: • Expand your financial aid knowledge.• Improve your job performance and service to students.• Provide tangible evidence of your knowledge to

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DIFFICULTY LEVEL TOPICS BEGINNER INTERMEDIATE ADVANCED

Overview of Financial Aid Programs

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Need Analysis: Federal and Institutional Methodology

Verification

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Campus-Based Programs

TEACH Grant Program

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Professional Judgment

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