COLLEGE SAVINGS 101

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College Financial Aid: 7 EFC Myths Debunked
http://www.savingforcollege.com/articles/college-financial-aid-7-efc-myths-debunked

Posted: 2018-01-09

by Joe Messinger, CFP, ChFC, CLU

Financial Professional Content

The world of paying for college is an alphabet soup of abbreviations. One of the most important ones for you and your clients to know and understand is the EFC. EFC stands for "Expected Family Contribution." Knowing your client's EFC is critical in making informed buying decisions and finding a college they can afford.

Let's look closer, dispel some EFC myths and talk about how your client can use it in their college search. The federal government uses the Free Application for Federal Student Aid or FAFSA (yes, another acronym!) to determine a family's EFC. This number will determine how much aid they will qualify for.

Federal student assistance can come in the form of:

Determining your client's "need"

Your client's financial need is calculated by subtracting their EFC number from the cost of attendance at the college they choose. The difference between the two is their "need."

(In this piece, we're going to focus on the FAFSA calculation of EFC, or what's called the "Federal Methodology." Most colleges use FM; however, some of the most prestigious universities use radically different formulas called the Institutional Methodology and Consensus Methodology. (You can read more about the key differences here.)

The government uses three different worksheets when calculating EFC depending on the student's status. Are they a dependent student? An independent student without dependents other than a spouse? Or an independent student with dependents other than a spouse? For details on how to define "independent," refer to the government's EFC formula worksheet found here.

Let's focus on dependent students – those who receive more than half their support from their parents or guardians.

7 EFC myths debunked

1. My client's EFC will be a number my client can afford to pay towards their child's education.

Probably not. What the formula says your client can pay and what they can actually afford to pay aren't even close most of the time. Your client will probably gasp at the amount the government expects them to contribute to their child's college education every year. (The EFC is an annual amount.)

Families with a combined adjusted gross income of around $150,000 can expect to have an EFC that exceeds $30,000 for the year just from income. This is more than the annual cost of most state schools. So, for dual income mass affluent families it is not uncommon for EFCs to soar to $70,000, $80,000, $90,000 per year, with the largest driver being parental income. (Learn more about helping high income families cut high the cost of college.)

2. Your client's home equity will impact their FAFSA EFC.

No. Your client's home equity is not used in the EFC calculation. Some of the alternate methodologies take a home's value into account, but not the Federal Methodology. This can make a huge difference in a family's EFC from one school to the next if they use the Institutional Method!

3. If your client didn't qualify for aid last year, they won't qualify this year.

Not necessarily. Things like financial aid policies at colleges and your client's own income/asset figures can change year-to-year. It's always best to file the FAFSA every year just in case.

In addition, the EFC is one number for the entire family. If your client's have an EFC of $30,000, that number would be split if they have two students enrolled in college at the same time–roughly $15,000 each! Many families may not qualify when they have one student in school, but very well might when they have overlap. If a family has children that are one academic year apart, it is quite possible at certain institutions that the first year of college would be full price but years two, three and four would cost the family roughly half as much out of pocket – as long as you know how to shop for the right schools.

4. The EFC number equals what my clients will pay for college. Any additional cost exceeding that number will be paid for by the college.

Earlier, we said your client's "need" is the cost of attendance minus their EFC. However, not every college out there can meet your client's need 100%. In fact, most can't. Only a handful (about 60) can guarantee 100% need met for students. Most schools are only able to meet 50 to 60% of a family's demonstrated need, leaving what is affectionately called "unmet need". Understand your client's "net cost" to attend the school they are considering after all financial aid is applied and how they will pay for all four years down to the penny before committing to that school.

5. Saving less money will improve EFC.

Yes and no. Income of the parents and the student has the greatest impact on the EFC number. A parent's assets (cash, savings, investments—other than retirement) are assessed at a rate of 5.64%, and they have an asset protection allowance based on the age of the oldest parent. In comparison, a parent's income can be assessed at a rate up to 47%. Student's income is assessed at 50% and their assets at 20%. In most cases, it's not the assets which will drive up your client's EFC…it's their income.

However, if you can afford to, sometimes using savings to pay down consumer debt is a good idea. You'll look "poorer" on paper with less savings, and colleges don't care about the amount of their outstanding debt. A little better financial footing for families going forward as they approach paying for college and managing their cash flow during the college years is always a good idea.

KEY POINT – So why not just save for college in a cash value life insurance policy? Some would suggest to your clients that they not fund 529 plans and instead put all their money in a cash value life insurance policy. It is true that the cash value of life insurance is not assessable on the FAFSA. It is also true that the money will enjoy many of the same tax benefits of a 529 plan. However, there are a few more things to consider when comparing these savings tools. For dependent students, 529 plans are considered parental assets and are assessed at a maximum of 5.64%. Many states also offer a state income tax deduction to residents for dollars they invest in their home state's 529 plan. One thing that is rarely discussed by an insurance agent is the ongoing cost of insurance and other fees associated with a permanent life insurance policy that frequently far exceed a 5.64% assessment of the asset when filing the FAFSA. You may qualify for additional need-based aid by not having an assessable asset, but as we discussed financial aid is not "guaranteed" by any stretch. Act as a fiduciary and help your clients carefully compare the carrying cost of the insurance and the benefit of sheltering the asset from the financial aid formula versus investing in a low cost 529 college savings plan to reach their college goals.

6. Putting money into accounts in your client's child's name is the best way to save for college.

Nope. Bad idea. Assets in a student's name are assessed at a higher rate (20%) than those in a parent's name (5.64%). Assets in your client's student's name will drive up their EFC.

7. If your client won't qualify for need-based financial aid, knowing their EFC is useless.

Your client might be surprised. Knowing their EFC can be a great tool not only for planning for the future (how much will you be expected to pay) but also for your client's college search.

If your client's EFC is $24,000 and State School A costs $19,000 per year, they will not be eligible for a federal aid award. Your client's EFC is higher, so you'd be expected to foot the whole bill. However, say Private School B costs $52,000 per year and will meet 100% of your client's need. Suddenly your client may be receiving potential financial aid in the amount of $28,000—something to consider as they start your college search.

How do you know what your client's EFC will be?

A simple way to figure out your client's EFC is to take advantage of an online calculator like this one.

Don't wait to calculate your client's EFC. Figuring out the number in middle school is a good idea—way before your client's college search begins. Does your client need to be saving more in a 529 than they expected? Should they be saving less in 529? Do they need to get some assistance to create a plan to minimize their student's future student loan debt? Early is better than later in this case!

Financial Professional Content

The world of paying for college is an alphabet soup of abbreviations. One of the most important ones for you and your clients to know and understand is the EFC. EFC stands for "Expected Family Contribution." Knowing your client's EFC is critical in making informed buying decisions and finding a college they can afford.

Let's look closer, dispel some EFC myths and talk about how your client can use it in their college search. The federal government uses the Free Application for Federal Student Aid or FAFSA (yes, another acronym!) to determine a family's EFC. This number will determine how much aid they will qualify for.

Federal student assistance can come in the form of:

Determining your client's "need"

Your client's financial need is calculated by subtracting their EFC number from the cost of attendance at the college they choose. The difference between the two is their "need."

(In this piece, we're going to focus on the FAFSA calculation of EFC, or what's called the "Federal Methodology." Most colleges use FM; however, some of the most prestigious universities use radically different formulas called the Institutional Methodology and Consensus Methodology. (You can read more about the key differences here.)

The government uses three different worksheets when calculating EFC depending on the student's status. Are they a dependent student? An independent student without dependents other than a spouse? Or an independent student with dependents other than a spouse? For details on how to define "independent," refer to the government's EFC formula worksheet found here.

Let's focus on dependent students – those who receive more than half their support from their parents or guardians.

7 EFC myths debunked

1. My client's EFC will be a number my client can afford to pay towards their child's education.

Probably not. What the formula says your client can pay and what they can actually afford to pay aren't even close most of the time. Your client will probably gasp at the amount the government expects them to contribute to their child's college education every year. (The EFC is an annual amount.)

Families with a combined adjusted gross income of around $150,000 can expect to have an EFC that exceeds $30,000 for the year just from income. This is more than the annual cost of most state schools. So, for dual income mass affluent families it is not uncommon for EFCs to soar to $70,000, $80,000, $90,000 per year, with the largest driver being parental income. (Learn more about helping high income families cut high the cost of college.)

2. Your client's home equity will impact their FAFSA EFC.

No. Your client's home equity is not used in the EFC calculation. Some of the alternate methodologies take a home's value into account, but not the Federal Methodology. This can make a huge difference in a family's EFC from one school to the next if they use the Institutional Method!

3. If your client didn't qualify for aid last year, they won't qualify this year.

Not necessarily. Things like financial aid policies at colleges and your client's own income/asset figures can change year-to-year. It's always best to file the FAFSA every year just in case.

In addition, the EFC is one number for the entire family. If your client's have an EFC of $30,000, that number would be split if they have two students enrolled in college at the same time–roughly $15,000 each! Many families may not qualify when they have one student in school, but very well might when they have overlap. If a family has children that are one academic year apart, it is quite possible at certain institutions that the first year of college would be full price but years two, three and four would cost the family roughly half as much out of pocket – as long as you know how to shop for the right schools.

4. The EFC number equals what my clients will pay for college. Any additional cost exceeding that number will be paid for by the college.

Earlier, we said your client's "need" is the cost of attendance minus their EFC. However, not every college out there can meet your client's need 100%. In fact, most can't. Only a handful (about 60) can guarantee 100% need met for students. Most schools are only able to meet 50 to 60% of a family's demonstrated need, leaving what is affectionately called "unmet need". Understand your client's "net cost" to attend the school they are considering after all financial aid is applied and how they will pay for all four years down to the penny before committing to that school.

5. Saving less money will improve EFC.

Yes and no. Income of the parents and the student has the greatest impact on the EFC number. A parent's assets (cash, savings, investments—other than retirement) are assessed at a rate of 5.64%, and they have an asset protection allowance based on the age of the oldest parent. In comparison, a parent's income can be assessed at a rate up to 47%. Student's income is assessed at 50% and their assets at 20%. In most cases, it's not the assets which will drive up your client's EFC…it's their income.

However, if you can afford to, sometimes using savings to pay down consumer debt is a good idea. You'll look "poorer" on paper with less savings, and colleges don't care about the amount of their outstanding debt. A little better financial footing for families going forward as they approach paying for college and managing their cash flow during the college years is always a good idea.

KEY POINT – So why not just save for college in a cash value life insurance policy? Some would suggest to your clients that they not fund 529 plans and instead put all their money in a cash value life insurance policy. It is true that the cash value of life insurance is not assessable on the FAFSA. It is also true that the money will enjoy many of the same tax benefits of a 529 plan. However, there are a few more things to consider when comparing these savings tools. For dependent students, 529 plans are considered parental assets and are assessed at a maximum of 5.64%. Many states also offer a state income tax deduction to residents for dollars they invest in their home state's 529 plan. One thing that is rarely discussed by an insurance agent is the ongoing cost of insurance and other fees associated with a permanent life insurance policy that frequently far exceed a 5.64% assessment of the asset when filing the FAFSA. You may qualify for additional need-based aid by not having an assessable asset, but as we discussed financial aid is not "guaranteed" by any stretch. Act as a fiduciary and help your clients carefully compare the carrying cost of the insurance and the benefit of sheltering the asset from the financial aid formula versus investing in a low cost 529 college savings plan to reach their college goals.

6. Putting money into accounts in your client's child's name is the best way to save for college.

Nope. Bad idea. Assets in a student's name are assessed at a higher rate (20%) than those in a parent's name (5.64%). Assets in your client's student's name will drive up their EFC.

7. If your client won't qualify for need-based financial aid, knowing their EFC is useless.

Your client might be surprised. Knowing their EFC can be a great tool not only for planning for the future (how much will you be expected to pay) but also for your client's college search.

If your client's EFC is $24,000 and State School A costs $19,000 per year, they will not be eligible for a federal aid award. Your client's EFC is higher, so you'd be expected to foot the whole bill. However, say Private School B costs $52,000 per year and will meet 100% of your client's need. Suddenly your client may be receiving potential financial aid in the amount of $28,000—something to consider as they start your college search.

How do you know what your client's EFC will be?

A simple way to figure out your client's EFC is to take advantage of an online calculator like this one.

Don't wait to calculate your client's EFC. Figuring out the number in middle school is a good idea—way before your client's college search begins. Does your client need to be saving more in a 529 than they expected? Should they be saving less in 529? Do they need to get some assistance to create a plan to minimize their student's future student loan debt? Early is better than later in this case!

 

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