Calculating the EOC

When it comes to considering financial aid for college, one of the most important numbers a family will need to know is their EFC. This is the Expected Family Contribution, which is further defined as the amount of money a family is expected to contribute out of pocket to their student’s educational expenses. The EFC is generated by the information a family puts into FAFSA and has a direct impact on the amount of financial aid that is offered to a student. This part is simple, schools calculate their annual cost of attendance (which includes living expenses, not just tuition) then they subtract the EFC for individual students and what’s left is the financial need the college will need to package together in the form of aid and award to the student so they can pay to go to college. What is far from simple is the formula used to calculate the EFC so that’s what we’ll be looking at here.

However, I can’t possibly explain the complex formula so I’m just going to try to look at some highlights and present them in layman’s terms. First, you’re going to be using what FAFSA calls the prior prior year’s tax return (that’s not a typo). Just subtract two years for the graduation year. So, a 2020 graduate is going to use the 2018 tax return. The most critical number here is the AGI or adjusted gross income. This is the starting point for the EFC calculation—how much money do the parents make. Other financial factors that are included in the EFC are real estate holdings other than the primary residence, investments, bank and savings accounts, and educational savings such as 529 plans. Things that are not included are retirement plans like IRAs, home equity, small business values, and the cash value of life insurance policies. A tricky piece here is debt. Consumer debt like credit cards or car loans are not factored in the EFC. Nor is your mortgage. This is a really important fact because a family that has a high debt payment in whatever form is having that monthly expense ignored when they are evaluated on how much money they can contribute to a child’s education.

A student’s income and assets are also assessed as part of the EFC. So, if your child worked in the prior prior year, their information will be reflected on FAFSA as well. If fact, it is weighted more than the parents’. So, a student who is doing particularly well in their earnings is going to increase the amount a family is expected to contribute towards education faster or at a higher rate than a parent.

This is a very simplistic view of what goes into the EFC. You can go pretty far down this rabbit hole if you really want. That descent might lead you to a tax advisor who can help you plan ahead as you enter what will become your prior prior year. There may well be some things you can do financially that year or in the years that surround it to reduce your EFC, though keep in mind you’ll need to complete a new FAFSA for each year your child is in college. Therefore, any financial changes you make could just be kicking the can down the road. The good news is that for families who have a younger child who will enter college while an older child is still in college, subsequent college-enrolled children significantly impact the EFC to the advantage of parents and families.