The Estimated Family Contribution (EFC) is a crucial number in the college financial aid process. It represents an estimate of how much your family can be expected to contribute towards college costs for an academic year. While income is a significant factor, parents’ assets also play a key role in determining this figure. This article breaks down how your assets are considered when calculating your EFC.
How Parents’ Assets Contribute to Your EFC
When you fill out the Free Application for Federal Student Aid (FAFSA), you’ll be asked to report certain assets. These assets are then used to calculate what’s known as the “contribution from assets.” This amount is factored in alongside your family’s available income to create a comprehensive picture of your financial strength when it comes to paying for college.
Calculating Net Worth
The first step in determining the asset contribution is to calculate your parents’ net worth. This is done by adding up the value of assets reported on the FAFSA. For those who own a business or farm, the net worth of these assets is adjusted using specific guidelines to protect a portion of their value. You can find the adjustment percentages in resources like Table 6: Business/Farm Net Worth Adjustment in the 2023-2024 EFC Formula Guide, which provides detailed information on these calculations.
Determining Discretionary Net Worth
Next, your discretionary net worth is calculated. This involves subtracting both education savings and an asset protection allowance from your overall net worth. The asset protection allowance is designed to shield a certain amount of assets based on the age of the older parent and can be found in Table 7: Education Savings and Asset Protection Allowance within the 2023-2024 EFC Formula Guide. It’s important to note that discretionary net worth can sometimes be a negative number.
The Contribution from Assets
Finally, to arrive at the parents’ contribution from assets, the discretionary net worth is multiplied by a conversion rate of 12%. This percentage represents the portion of parental assets that are considered available to help cover college expenses. If this calculation results in a negative number, the contribution from assets is set to zero.
Combining Asset Contribution with Income
The asset contribution is not the only factor in your overall EFC. It is combined with the parents’ available income to determine the total parents’ contribution. This is done by adding the parents’ available income and the contribution from assets together, resulting in the parents’ adjusted available income.
The total parents’ contribution from adjusted available income is then calculated using a progressive rate scale, detailed in Table 8: Contribution from AAI in the 2023-2024 EFC Formula Guide. These rates range from 22% to 47% and increase as the adjusted available income rises. This system is based on the principle that as income increases beyond basic living expenses, a larger portion becomes available for discretionary spending, including college costs. Like the asset contribution, if the total parents’ contribution from adjusted available income is negative, it is set to zero.
Finally, to determine the parents’ contribution for each student, the total parents’ contribution from adjusted available income is divided by the number of family members attending college in the academic year, as reported on the FAFSA. Parents are not included in this count.
Understanding how assets are factored into your Estimated Family Contribution is essential for college financial planning. By familiarizing yourself with these calculations, you can better anticipate your expected college costs and explore available financial aid options.
