Determining the Parent Contribution from Income

So it’s been a few weeks since my last blog post. I apologize for the delay, but I have been busy with Spring Break, conferences, travel, and other meetings. Now that I’m back, though, let’s dive in to the calculation.

Let’s calculate… Full speed ahead!

Now it’s time to begin part one of the breakdown of the individual formulas to determine your EFC, and we begin with parent contribution from income. Parental income is really the single largest source of your expected contribution, and serves as the foundation for our analysis of your families circumstances. What I will try to do here is address the core way in which the Federal Methodology treats parents’ income, and you can feel free to ask any questions which I will then answer for you about the methodology.

The contribution from parent income is broken into three different pieces:

  1. Determining the parents’ total income,
  2. Figuring out allowances against the income, and
  3. Subtracting the allowances from the total income to determine the available income.

I’ll tackle these one step at a time.

For the starting income figure, we take the parents’ adjusted gross income figure as reported on the bottom on the first page of the tax return (for simplicity, I will assume that we are talking about a family with two parents; at the end of this process I will do another post explaining the differences for divorced / separated families). Also keep in mind that tax returns have changed dramatically in 2018, but for the sake of this analysis, we are using 2017 returns (for the 2019-20 application year).

To the AGI, we add non-taxable income (which can include a wide variety of income sources – some are child support received, tax-deferred contributions to retirement programs, tax-exempt interest, etc). [For a more complete list, you may want to look at questions 94a to 94i on the FAFSA application for the appropriate sources].

Next we remove from parent income any items listed as income exclusions on questions 93a to 93f of the FAFSA (child support paid, combat pay, education tax credits, etc).

We add the AGI plus the non-taxable income and subtract the income exclusions to come up with the total income.

Now on to allowances against income. There are five main areas:

  1. US Income Tax Paid – we use the actual income tax paid by your parents as reported on the FAFSA, and as documented by the copy of your tax return,
  2. State Taxes Paid – for this calculation, we use a table to determine how much of your Total Income should be protected to cover state and local taxes,
  3. FICA or Social Security Taxes – again, for this line we allow a deduction based on a formula against wages earned from any employment to cover taxes paid to the Social Security system,
  4. Employment allowance – for families where both parents are working (or, in a single parent household, where the parent is working) a deduction to allow for the cost of having no one at home (based on a formula and capped at a very low value), and
  5. Income Protection Allowance (IPA) – this is meant to be an offset to protect families with particularly low income to protect the entirety of their income before any contribution is expected (even in part) from them.

The difference between total income and total allowances is set aside as Available Income (we will come back to this number later).

So, lots of information, and I’m sure this will generate many questions, so ask away!

Singing in Four Part Harmony — Or What Makes Up Your EFC

I love to sing.

It helps that I sing fairly well (or at least I like to think I do), but I do love to sing.

As for what I sing, it varies from Broadway show-tunes to Abba to Air to Eminem (I have a pretty eclectic taste in music).

And I belong to a choir. My group practices every Wednesday night.

Last Wednesday night in rehearsal, I was thinking about what to put on this blog as we were working on harmonies for one particularly difficult song, and it hit me! The perfect image! Singing in 4 part harmony.

So why is it the perfect metaphor? Well, just like in music you need 4 parts to make up the whole (S, A, T, B), in financial aid, you need four parts to make up the whole as well (PC-I, PC-A, SC-I, SC-A).

So, enough with the metaphor (I feel like I have beat it to death) and on to what I mean.

A rainbow of harmony…

The Expected Family Contribution is made up of four components:

  1. Parent Contribution from Income
  2. Parent Contribution from Assets
  3. Student Contribution from Income
  4. Student Contribution from Assets

(Do note that if you are from a divorced or separated family, there may also be a Non-custodial contribution from income and assets — see my last post for more information on who is considered to be your parent).

What I thought I would do in the coming days is spend a little bit of time on each of these 4 components and answer some questions about each one, providing some information that will help you understand how we conduct our business.

But for today, I need to tackle one issue before we can even get started, and that is the question of who is considered to be an independent student, therefore not requiring a parental contribution of any variety.

There are different rules for FAFSA vs. CSS Proile, so let me tackle the Federal rules first. If you meet any of the following 10 criteria, then you are considered to be an independent student (for Federal purposes only) and do not need to fill out parental information on the FAFSA (although some colleges may ask you to):

  1. You will be 24 by January 1, 2020 (if you are applying for financial aid in the 2020-21 year; each year this moves forward one year).
  2. You are married.
  3. You are a graduate student.
  4. You are currently on active duty in the U.S. armed forces.
  5. You are a veteran of the United States armed forces.
  6. You have children who will receive more than half of their financial support from you.
  7. You have a legal dependent of your own (other than a child or spouse) who lives with you, and for whom you provide more than 1/2 of their support.
  8. Since you were 13 years old, you were either in foster care, both of your parents were deceased, or you were a dependent or ward of the court.
  9. You are an emancipated minor (as determined by a court in your state of legal residence), or someone other than your parent or step-parent has legal guardianship of you.
  10. You are an unaccompanied youth who is homeless, or you are self-supporting and at risk of being homeless as determined by your high school, the director of an emergency shelter, or the director of a runaway or homeless youth basic center.

If any of these are true, then you are an Independent student for Federal aid purposes.

For institutional aid, the rules may be different. You should ask your college if they have different rules for their own financial aid (for example, some may not waive parental information for their own grants or scholarships for students who are over 24).

Also, it is important to remember that the financial aid process measures a family’s ability to pay, not willingness to pay, so whether a parent is or is not willing to make a contribution has no bearing to whether they need to complete the applications.

That is not to say that there are never situations where colleges would waive parental contributions (how is that for a double negative?), but they are rare and handled on a case-by-case basis. The issues would need to be egregious for us to consider them. You should talk to your financial aid counselor if you feel your situation might qualify to be considered this way. In these cases, the financial aid officer will likely require a letter from you and some kind of third-party documentation to explain your situation and may, if they decide, make you independent.

Look next time for more information on the parent contribution from income.

It’s not apparent who is a parent…

So, in good faith, you’ve started the financial aid application process, you’ve gathered paperwork, gotten your pencils sharpened (or more probably, your fingers ready for some furious typing) and you come upon the first challenge to your logic. Who is your parent? Now of course, by “you” I am referring to you, the student. You may think it is fairly easy and straightforward to define who your parents are. Boy, would you be wrong.

In all cases, the main financial aid applications (namely the FAFSA and CSS Financial Aid Profile) should be completed by the custodial family. If your birth parents are married to each other, this is pretty easy: Parent 1 is mom and Parent 2 is dad. If your parents are of the same gender and married, same thing; Parents 1 and 2 are easy to define.

If your birth parents are divorced, separated, or were never married, then you only fill out information about the parent(s) with whom you live (and, here is a tricky part, his or her new spouse, your “stepparent”). When it asks for mom’s information, you will leave it blank if you live only with your dad, and conversely if it asks for dad’s information, you should leave it blank if you only live with your mom. If your parent is remarried, you should put the stepparent’s information under the appropriate heading).

Confused yet? No? Well, “lay on, MacDuff”…

Shakespeare’s custodial family

Well, what if your parents are divorced and you lived with both of them equally during the last twelve months (in other words, the custody arrangement is something like, stay at mom’s from Sunday – Tuesday and every other Saturday, and with dad the rest of the time)? Then you would complete the form based on the parent who provides most of your financial support during the last year.

Does this absolve your other parent from completing any information? NO, A SOLID AND RESOUNDING NO. Colleges may request (and many colleges who use the CSS Profile do request) a Non-custodial parent Profile for students who do not live with both of their birth parents. This form should be completed by the non-custodial parent online. Once you (the student) registers for the CSS Profile and indicate that your birth parents are not married, you will be sent an email with instructions, a temporary password, and a link which you should forward to your non-custodial parent for him or her to complete.

To be clear, most schools who use the FAFSA alone won’t care about the information from your non-custodial parent, but some of the private colleges will. If you are curious whether your college wants your non-custodial parent’s information or not you can take a look at their financial aid website or take a look at the list of colleges who use the CSS Profile (if they want information from your non-custodial parent, there will be a “Yes” under the column entitled “CSS Profile – Noncustodial Parents”).

Does it end yet? Well, sort of…

What about situations where you really don’t live with either parent, or if you are otherwise independent? Well looks like that is a topic for our next blog post!

All the math you need to know

Yeah, I admit it. I like math. I am one of those people who actually enjoyed math classes; something about the logical rules of math appealed to me. But I recognize math isn’t for everyone.

If you are one of the 42% of Americans who doesn’t love math, though, no worries. Because I am about to introduce you to the only math you really need to know when it comes to financial aid.

So the basic formula for financial aid is this: COA – EFC = Need. That’s it. That’s all you need to know. Just some simple subtraction. Oh, and an explanation of the variables. So let’s dive in!

The COA. COA stands for Cost of Attendance. This is an estimate of the costs to attend the college or university where you are planning on attending. It is a number which is calculated for you and based on your estimated expenses, including the obvious costs like tuition and fees as well as books and supplies. But it also includes the not-so-obvious ones like room and board, transportation, and personal / miscellaneous expenses. The COA is personalized based on your profile so it takes into account factors like whether you will live on campus in a dorm, at home, or independently in an apartment, or whether you are in in-state resident or out-of-state resident (for colleges that offer in-state tuition discounts).

The COA isn’t exactly what you are going to be charged because there are both direct and indirect costs included. For example, you might pay room and board directly to the school, or you might be buying groceries and paying rent to a landlord. In either case, your estimated costs are factored into your COA. Keep in mind that your college or university will determine an estimated COA, and the costs are supposed to be reflective of a reasonable (but not luxurious) estimate, so you might find that your costs and actually slightly more (or less) than their estimate. No worries. You can ask for an evaluation of your COA if you have unusual expenses (for example if you are paying for child care so you can go to school or if you need to buy a computer for your educational use) and the college may make an adjustment for you based on your documented expenses. We will talk more about these kinds of adjustments in another post later!

So what’s the EFC? Your Expected Family Contribution (or EFC) is a measure of how much you (and your family) can contribute towards your educational expenses. It is supposed to be an estimate of your ability to contribute but isn’t necessarily the amount you will need to write on a check. If you are a dependent student (and we will talk more about that soon too) this is based on you and your parents’ income and assets. If you are an independent student, then the EFC is only based on your income and assets. We will talk more about the calculation of the EFC (yes, more math) but for now know that the information you put on the FAFSA and the CSS Profile will help colleges and universities determine the amount of your EFC.

The difference between the COA and the EFC is your Financial Need. This is the amount of need-based financial aid for which you can qualify. This means that the college or university will try to put together a financial aid package to meet this need. It also means that colleges who say that they meet full-need will provide this amount in total aid, and that colleges who do not provide merit-based aid (and only give need-based aid) will not exceed this number with their total financial aid.

So now you know some basic financial aid math. Where should we go next? How about we explore why it’s not apparent who is a parent?