How Financial Aid Works

In this article we take a look at how financial aid works.  It all starts with a number called your Expected Family Contribution, or EFC

EFC

Your Expected Family Contribution is calculated by the FAFSA.  The FAFSA is a government form that uses a process called the Needs Analysis Formula to determine the minimum out-of-pocket costs you can pay each and every year.  So your EFC is like a golf score, the lower the better.  Let’s take a simplified look at how the Needs Analysis Formula works.

Four Parts of the Equation

There are four primary parts to the formula.

  • Student’s Income above $3,000 are multiplied by 50%
  • Student’s assets are multiplied by 20%
  • Parent Income is multiplied on a sliding scale (much like our income tax brackets) after deducting a living allowance and their taxes.
  • Parent assets above a certain dollar amount are multiplied by 12% (this dollar amount changes year to year)

Student Income
Student Assets
Parent Income
Parent Assets
Example Figure
$5,000 $10.000 $80,000 (Stocks and Bonds)
$55,000
Allowance
$3,000 $0 Taxes + Allowance
$6,800 + $16,360
$40,300
Sub-total
$2,000 $10,000 $56,810 $14,700
Multiplier
50% 20% 22% 12%
Contribution
$1,000 $2,000 $12,498 $1,764

EFC = $1,000 + $2,000 + $12,498 + $1,764
EFC = $17,262

In this example, the government and colleges will expect this family to pay $17,262 every year the student is in college.  For the right family, there are things we can do to lower your expected family contribution.

Qualifying for Financial Aid

To determine if you qualify for financial aid, simply subtract your EFC from the cost of the college.  Using the same EFC from the example case above, let’s take a look at how this plays out at three tiers of schools.

EFC

Cost of Attendance

School Type
$17,262 $9,000 = Community College
$17,262 $20,000 = State School
$17,262 $30,000 = Private School

As you can see, just because you don’t qualify for financial aid at one school, doesn’t mean you won’t qualify for financial aid at another school.  In certain respects, you may be able to send your student to a private school for around the same cost as a public school, particularly if you consider that a much larger percentage of private school students graduate in four year, whereas state school students average 5.6 years.

Calculating Your Total Out Of Pocket Costs

Just because you qualify for financial aid doesn’t mean that the school will fund 100% of your need.  This is called Gapping.  State schools typically meet about 50% – 60% of your need and private colleges tend to meet about 80% – 90% of your need.  That means you’re going to have to come out of pocket above and beyond your EFC to pay for the school.  Let’s take a practical look at how this works

1) Let’s say the School costs $25,000
2) Your Expected Family Contribution is $15,000.
That means you qualify for $10,000 of financial aid
       
3) BUT the school only meets 60% of your financial need
That means they will award you $6,000 in financial aid

4) But if they only meet 60% of your qualified aid, then that means that they DON’T meet 40% of your qualified aid. That is a difference of $4,000 that you’ll have to come up with above and beyond your EFC
       
5) So to calculate your total out of pocket costs, add your
EFC and this unmet need together

 $25,000
-$15,000
$10,000

 $10,000
x      60%
 $6,000

 $10,000
x      40%
 $4,000

  $15,000
+  $4,000
  $19,000

Calculating Your Total Overall College Costs

The example above only calculated your total out of pocket costs.  It didn’t tell us what your overall costs will be.  Although the college in this example, awarded $6,000 in financial aid, some of that will be in loans and another part will be in scholarships and grants.  Fortunately for us the colleges publish this information as well.  Let’s do a quick example to illustrate this point

1) Let’s say the School costs $25,000
2) Your Expected Family Contribution is $15,000.
That means you qualify for $10,000 of financial aid
       
3) BUT the school only meets 60% of your financial need
That means they will award you $6,000 in financial aid

4) But if they only meet 60% of your qualified aid, then that means that they DON’T meet 40% of your qualified aid. That is a difference of $4,000 that you’ll have to come up with above and beyond your EFC.
       
5) So to calculate your total out of pocket costs, add your
EFC and this unmet need together

 $25,000
-$15,000
$10,000

 $10,000
x      60%
 $6,000

 
  $10,000
x      40%
 $4,000

  $15,000
+  $4,000
  $19,000

Summary

To calculate the costs of college follow these steps:
1.    Find your EFC
2.    Subtract the cost of the school from your EFC
3.    Multiply your financial aid eligibility by the percent of need met
4.    Add your EFC to the percent of Unmet need (total out of pocket expenses)
5.    Multiply your financial aid award by the % in loans
6.    Add your EFC, % of Unmet Need, and % in loans together (total cost of college)

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