Updated October 8, 2023
As families start to dip their toes into the murky waters of the college application process, there’s one thing that’s crystal clear—college is very expensive and getting more expensive every year. A family’s best safeguard against being pulled underwater by college costs is to become fully educated about the college financial aid system.
That education starts with an understanding of a special number, EFC (Expected Family Contribution), a measure of what a family can contribute toward college costs each year. EFC is the base of your need-based financial aid package.The EFC information in this article is relevant for the 2023-24 school year, but many changes are coming to the FAFSA beginning in the 2024-25 school year, including replacing the EFC with the SAI (Student Aid Index) and a new assessment formula. How the SAI formula will differ from the EFC formula is summarized at the end of this article.
COA (Cost of Attendance) – Your EFC = Your Need
Your EFC is generated through an analysis of parent and student income and assets as reported on the FAFSA, the Free Application for Federal Student Aid. Any family wishing to be considered for need-based financial aid must fill out and submit the FAFSA each year. Most families are stunned when they see their EFC for the first time because they feel it’s much too high—that it would be impossible for them to contribute that much money every year toward college costs. And, in fact, they’re right. The EFC reflects a combination of what you can pay now and what you can borrow and pay over time. For this reason, the family’s EFC often contributes heavily to overall college debt.Why Your EFC Matters
The Federal Government uses your EFC to determine your eligibility for federal grants (Pell, FSEOG, TEACH, and IASG), federal student loans (Direct), and federal Work-Study. Many states use your EFC to determine your eligibility for state student aid (grants and student loans). Finally, colleges use your EFC as your minimum contribution to the COA at their college, unless your EFC is greater than the COA or you receive merit aid (scholarships) greater than your financial need.How Is the EFC Calculated?
The formula used to analyze parent and student income and assets on the FAFSA produces your EFC, which consists of:3% – 26% of parent adjusted gross income
plus
50% of student taxed and untaxed income over a fixed income protection allowance ($7,600 for the 2023-24 school year)
plus
2.6% – 5.6% of parent assets
plus
20% of student assets
(A small number of colleges generate a different EFC based on an Institutional Methodology. Since the vast majority of colleges use only the FAFSA to determine your EFC, our discussion here refers only to the FAFSA-generated EFC.)5 Essential Facts All Families Should Know About a FAFSA-Generated EFC
1. The Income reported (both student and parent) is from the prior-prior year—meaning if the student is entering college in fall of 2023, the income reported is from 2021. 2. The net value of both parent and student Assets, on the other hand, is reported as of the day the FAFSA is submitted. 3. Parent assets excluded in the EFC formula are: a. All existing retirement accounts b. Value of a primary residence c. Cash value of insurance policies d. Annuities 4. Cash gifts to students and bills paid on the student’s behalf by anyone other than the custodial parents are considered student untaxed income. 5. The EFC formula does not take into consideration a family’s consumer debt, any previously acquired student debt, mortgage payments you make on your primary residence, or medical debt.*4 Factors That Have the Biggest Impact on the Size of Your FAFSA-Generated EFC
1. Parent Income The EFC formula gives standard income tax, social security tax, and employment expense allowances but an unrealistically low parent income protection allowance. For example, the 2023-24 EFC formula sets the income protection allowance (for 2021 income) for a family of four with one child attending college at a mere $32,610. After these allowances, parents are expected to contribute between a quarter and a half of what’s left to the EFC. This is why parent income often has the largest impact on the EFC. (See our infographic detailing EFC based on parent income alone). 2. The number of children attending college at the same time While each child might have a different contribution to the EFC from his/her own income or assets, the parent contribution in a given year is split between their children who are in college that year, thereby significantly reducing each child’s EFC. This benefit in the EFC formula for siblings attending college at the same time can significantly reduce their overall college costs. (This benefit will be eliminated starting in 2024-25–see below.) 3. Student Income Students have a fixed annual income protection allowance ($7,600 in 2021 income for the 2023-24 school year) and some tax allowances. 50% of any income above this amount is added to the EFC. Although most students probably won’t earn much more than income protection allowance each year, some kids do work hard to save for college—and end up being hurt by this part of the EFC formula. Families also don’t realize that untaxed student income can quickly exceed the student income protection allowance. Untaxed student income includes cash gifts to a student and any money received or paid on the student’s behalf by anyone other than the custodial parents. So, Grandma’s gift of $20,000 to your daughter could raise the family’s EFC by as much as $10,000. (Many types of untaxed student income will no longer be included in the FAFSA assessment starting in 2024-25–see below.) 4. Student Assets 20% of the net value of student assets (savings and checking balances, savings bonds, and other investments) is added to the EFC. Learning what your EFC is and how it’s calculated can help you better prepare for college costs. However, EFC is only one part of a family’s Net Price, the actual dollar amount of the COA you are responsible for paying each year. Net Price includes your EFC, federal and state loans, work-study awards, and the GAP (unmet need). Our article, Discover Your Likely Net Price Before You Apply explains how Net Price is determined at each college. * Special financial circumstances that aren’t taken into consideration in the EFC formula, such as high medical debt, sudden loss of wages, and other unforeseen financial burdens should be discussed with each college’s financial aid office. While not guaranteed, colleges may consider special circumstances and reduce your EFC.Many changes are coming to the FAFSA beginning in the 2024-25 school year. One key change includes replacing the EFC with the SAI (Student Aid Index) and a new assessment formula.
What remains the same:
- Your SAI will still determine your eligibility for federal grants, federal loans, and Work-Study, and for state aid
- Colleges will still determine your Need with the equation:
- Need = COA – SAI (formally EFC)
- Assessment of parent and student assets will remain similar
- Like the EFC, the SAI will be the minimum a family pays toward the cost of college and most families will pay more than their SAI
How the SAI formula will differ from the EFC Formula:
- State tax allowance will be eliminated, hurting families who live in high-tax states
- Parent income protection allowance will increase 20% (over 2021 allowances) and will not be reduced for each additional child in college
- Parent contribution to SAI will NOT be split between children attending college at the same time, making the SAI roughly double for families with two children in college, triple for those with three, etc.
- Student income protection allowance will increase 35% (over the 2021 allowance), allowing students to earn more money without affecting their SAI
- Many types of student untaxed income will no longer be included, thereby allowing people other than the student’s parents to help pay for college without penalty
In addition to changes in the SAI formula, many more changes to the FAFSA and college financial aid will be implemented beginning with the 2024-25 school year. PAY LESS FOR COLLEGE: The Must-Have Guide to Affording Your Degree, 2023 Edition guides and prepares college-bound families for the 2023-24 school year as well as for all the changes to the FAFSA and financial aid coming in the 2024-25 school year. Empowered with the right information and insights, any family can navigate a path to save real money in overall college costs.
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Paying for college shouldn’t be harder than going to college!
