Part 3: The Student Contribution – What Do I Have to Pay?

So, much earlier, I began a post about how we determine your family contribution. I started the conversation by describing the four parts of the contribution and discussed how there are really two methodologies used, one for Federal funds, and one for colleges who use the CSS Profile to determine eligibility for their funds.

Next, in two separate posts, I described how the two methodologies handle Parent Income, and Parent Assets.

This post will attempt to address the last two components, the Student Contribution from Income and the Student Contribution from Assets. (Note: this information applies to dependent students only and does not apply either to independent students with or without dependents. If you are unsure as to your dependency status, check out the first post above for some definitions).

It’s All About the Money

When examining student income, we begin at the same place we began on the parent side – with the Adjusted Gross Income from the the base tax year (in the case of students attending in 2019-20, that would be 2017). We add to this any nontaxable income (such as tax-exempt interest, IRA contributions for the current year, tax-deferred contributions, etc). We also subtract out from the income any taxable financial aid which is included in the AGI (this might include Federal Work Study earnings from the previous year or scholarships that were taxable in the previous year).

As with the parent income calculation, there are several items which are removed from the student income as allowances against the income:

  1. US Income Taxes paid — Again, this comes directly from the tax return.
  2. State and other taxes — Again, a percentage of the total income (as determined above). This percentage is determined from two sets of tables, one for the Federal Methodology and one for the Institutional Methodology. As with the parent tables, the IM values are more generous than the FM ones.
  3. FICA Taxes — Based on wages earned, a 7.65% allowance representing Social Security taxes.
  4. Income Protection Allowance (for FM only) — An allowance used in the FM formula against the income representing student costs of living (for FM in 2018-19 the number was $6,570).

Student available income is determined by subtracting the total of the allowances from the total income. In both the IM and the FM formula, this value is then multiplied by 50% to indicate that there are other expenses that students have (but note that this percentage is much higher than the parent conversion rate).

Some institutions (mostly private high-cost colleges) have minimum student contribution levels that they set which reflect the expectation that students will earn money during the summer before the school year begins. Different colleges have different minimum levels and different policies about excess earnings, so you really need to talk to each of them to find out their policies.

An important note about the student IPA though is the high level (relatively) of the standard deduction. Having a $6,570 IPA means that a student has to have earned more than $6,570 after Federal, State and FICA taxes before any of their income would be counted in the contribution. This is a higher than many students would normally earn.

Now on to student assets. Here it is actually fairly simple.

We take into account the same assets for students as we did for parents. Namely:

  1. Cash, savings and checking accounts.
  2. Non-retirement based investments (including trusts).
  3. Real estate owned by the student (don’t laugh).
  4. Home owned by the student (don’t laugh harder — and by the way, home is only considered in IM, not FM).
  5. Business or farm equity (and remember this is also adjusted like the parent one was, somewhere between 40 to 60% of the equity depending upon the amount of the equity).

Once the total asset value is determined, the FM formula says to take 35% of the value and include that in the Student Contribution. The standard IM formula says to take 20%. As you can see, this is a MUCH different treatment than parent assets (which have a much lower assessment rate).

The 568 schools use a different approach. We combine student and parent assets as family assets and subject them all to the parent analysis. This hopefully alleviates the concern that students saving in their own name are penalized for this. For these schools, they believe savings should be treated uniformly. They try to address this in our approach.

So, now I have addressed all of the components of the Family Contribution and how we determine them. Next up, information preparing you for your award notification!

Part 2: Parental Contribution from Assets

I know it has been quite a while since my last post. Tax day has come and gone, and here we are the Spring holiday season. As we enter a time of rebirth and new beginnings, it seemed an appropriate time to return to the blog.

On to my second post on the topic of how we determine your family’s contribution. The first post was on parent contribution from income. This post will be in regard to the parental contribution from assets.

There are lots of kinds of assets… ===

There are some assets that are included in both the IM (Institutional Methodology – used by schools to award their own money) and the FM (Federal Methodology – used to award Federal funds) formulas. These include:

  1. Cash and savings accounts.
  2. Stocks, bonds, mutual funds, and other regular (i.e. non-retirement) investment accounts (including life insurance cash value).
  3. Real estate other than your primary residence (including investment real estate, 2nd homes, etc).
  4. Businesses or farm equity (this amount is not at a 100% assessment rate, you report the total amount on the form and we make an adjustment based on a table, usually somewhere between 40% and 50% depending on the amount of equity). Special note: Businesses not owned by your family OR that have more than 100 employees are included; others are ignored. In order to determine what makes up your business or farm equity, some colleges may require a business or farm supplement for each business you own (this may include a Schedule C, Schedule F, Partnerships, S-Corporations, and regular Corporations tax returns).

Some assets are ignored from both formulas. These include specially designated retirement accounts like 401K accounts, IRAs, KEOGH plans, etc (although remember the amount of the current year’s contribution was added back as non-taxable income before).

One particular asset is included only in the IM formula, and not in the FM formula. This is the home, or the primary residence. Some colleges may use a number of modifications to your reported information to arrive at a reasonable value while other may use your entire home equity as an available asset, so you may want to confirm with the institution what policy they have in place.

Why is the home not included in FM? In 1993-94, the Federal Government removed the home from the financial aid formula. This was done for several reasons, I believe, none of which make particular sense from the point of view of assessing a family’s ability to pay for college. The action of removing this asset from the formula was to, in effect, pretend there is no difference in a family’s financial strength whether they rent an apartment or own their home. Private colleges determined that this analysis wouldn’t work for them, so they created their own process to analyze financial aid (therefore the birth of the Institutional Methodology). There are very many other differences between IM and FM, but the issue of home equity serves as the starting point for their divergent paths. A history book on this subject is just itching to be written…

So enough history, what does colleges actually do?

Some start by looking at what year you purchased your residence and how much the purchase price was in the year in which you purchased it (I say you when in fact, more than probably, it is your parents’ house). Based on a table which eliminates regional variation, they may determine how much the property should be worth today. This table uses a national coefficient so that parents are neither penalized or advantaged by living in an area where values over time have deviated from the national norm. The chart is is not publicly available. The underlying information comes from here though.

Once the college determines the value as shown by the multiplier, they may compare that to your stated value (on the Profile application) and in some cases they will use the multiplier value (or they may use your stated value on a case-by-case basis, usually if it is lower than the multiplier value).

The next item some colleges examine is whether you could access the value in your home. To determine this they cap the total value based on your total income. Let’s say the cap is 240%. So, a family who earns $100,000 a year would have their home value capped at $240,000. In other words, a collge using a 240% cap would cap your home value at 2.40 times your income. This is to protect families who, due to real estate market growth, live in a home that they could not afford to purchase today. The college caps the value of the home at this amount to account for the fact that a family could not afford to qualify for a mortgage to access equity higher than this level.

The college then takes the lower of these two numbers into account as your total home value, and then subtracts debt from that to determine the home equity. Again keep in mind all of this is an example of what a college may do to award their own money. Colleges must use FM (which does not include home value) for Federal funds.

Another asset some colleges consider under IM is the student’s siblings’ assets since they try to get a whole picture of a family’s net worth (they will also later provide an allowance against these assets for the siblings’ savings for college). In addition, under IM, colleges may consider all student assets (with the exception of trusts) to be family assets as well so that students will not be penalized for saving for college (due to the higher rate used in the student-only analysis).

Once all of your assets are in place, the college then subtracts allowances from them to determine your net worth. The allowances are different depending on the formula.

The following allowances are subtracted under the FM formula:

  1. Education Savings and Asset Protection Allowance — An allowance against assets based on the age of the older parent and marital status. As an example, for a married couple with an older parent aged 48, the amount is $21,300. For a one-parent family with a parent aged 48, the amount is $12,900. This amount is supposed to be, according to the Federal formula, a protection against your assets to supplement your retirement and to allow for savings for college for younger siblings of the student.

The following allowances are subtracted under the CA formula:

  1. Emergency Reserve Allowance — An allowance against assets based on the number in family and in college (modified by a regional COLA – Cost of Living Adjustment – figure) to represent what a family should have saved in case of emergencies.
  2. Cumulative Education Savings Allowance — An allowance representing how much a family should have saved by this point for college for this student as well as any college-attending or younger siblings. This amount is based on an Annual Education Savings Allowance calculated earlier in the formula.
  3. Low Income Asset Allowance — If the Available Income calculated before is negative, the amount is subtracted from assets available (to represent that the family is living off of its assets).

The resultant value (Net Worth minus Total Allowances) is then referred to as the Discretionary Net Worth. Discretionary Net Worth is then combined with Available Income and the whole thing is run through a final conversion, leading to somewhere between 22 to 48% of Available Income (based on how high the Available Income is) and somewhere between 3 to 8% of Discretionary Net Worth (again, based on how high the Net Worth is) appearing as part of the final contribution from parents.

This figure is finally adjusted to reflect how many students are attending college in the same academic year. Under the Federal Methodology, the number is simply divided by the number in college (so, if your contribution was $10,000 and you had two in college, each student would have a $5,000 parent contribution).

Under the IM methodology, the resultant number, instead of being evenly divided, is modified by a percentage (60% for two in college, 45% for three in college, 35% for four or more in college); this would mean that for a contribution of $10,000 with two in college, the contribution for each student would be $6,000).

So, I think this is a good general overview of the asset treatment. And here I thought this would be simple. Ask away, since I am sure this will generate questions.

Again, please let me know if this is way too much detail, or not enough information.

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.