Financial aid for college is anything but expected. But what you can expect is having to determine your Expected Family Contribution (EFC) when applying for financial aid. If your college age son or daughter wants to apply for a student loan, federal grant or any type of needs based assistance, the calculation of your EFC is a process you must learn and a formula you need to understand.
Long story short, the amount of financial aid you'll receive, if any, equals the cost of college at the institution your student will attend minus your EFC. Obviously, the cost of college varies widely from school to school, but your EFC is an exact number that will be used by any school your student has applied for financial aid.
So, the smaller your EFC, the more financial aid you may receive. However, there is no guarantee that your student will get any assistance. Therefore, understanding how your EFC is calculated and what steps you can take to lower your EFC improves your chances of receiving some financial support.
The EFC is figured through a combination of the income and assets of the student, parents, and any other family member contributing to the cost of college. Here’s the simple, basic way to understand it:
Income counts more than assets.
Student money counts more than parent money (i.e., if a student has income from a job, that’s going to be figured as going towards college costs at the highest rate).
You will want to spend down student assets first. Student assets are figured at a high 20% usage rate every year, while parents are down at around 5%-6%. So, if you’re in need of a new laptop to bring to college, save yourself the EFC hit by spending down student savings first.
Don’t take money out of retirement accounts! This will count as income, and boost up your EFC – and at a much worse rate then assets would.
Pay off your debts early – debts typically don’t count against your assets (outside mortgages at certain schools), but you can pay them off to take that money off your balance sheet.
We've only exposed the "tip of the iceberg" as the process, rules and forms to arrive at your EFC are complex. The takeaway here is that if your son or daughter is nearing their college age years, get started with learning more about the EFC calculation and the overall process for applying for financial aid.