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Did you know: The Expected Family Contribution

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I’m starting a new feature here at the Financial Aid Finder that I’ll be calling — for lack of a better name — Did you know?. Every other week or so, I will look at one important, but little known (or often forgotten) aspect of financial aid. The goal here is to help you be better informed so that you can get the most of your financial aid award.

This week, I’m focusing on EFC, or the Expected Family Contribution. The Boston Herald‘s Money Matters column recently featured a great piece on how to “squeeze the most” out of your financial aid award. The article focuses on some important facts about the calculation of your EFC.

For families earning above $50,000/year*, here are some tidbits you will want to know. For example, were you aware that the federal financial aid award calculation expects your family to be able to contribute up to 50 percent of your parents’ adjusted gross income? Pretty shocking when you see it in black and white like that, isn’t it?

Even lower income earners (I’m not sure what the cut-off is, but I’ll be researching that and getting back to you) are expected to fork over 25%. Can you currently live on just 3 out of every 4 dollars you earn? That’s what it would mean to cash flow college with a 25% EFC.

Additionally, EFC is based off 3-6% of your parents’ assets. These assets may include equity in their home and the value of investment portfolios (such as savings plans they may have for you and your siblings.) Retirement funds, however, are shielded.

Of course, if the student/child has any assets, it is better to keep them in the parents’ name. Federal calculations expect student assets to be contributed at a rate of 35%. That’s why 529 Plans and ESAs are such a great way to save for college. Students are the beneficiary of the account, but parents are the custodian, which means the value of the account gets calculated at that 3-6% rate of contribution rather than the 35% rate.

* Keep in mind that if your parents earn less than $50,000 gross adjusted income per year, then EFC no longer takes assets into account. In that case, your contribution is based on the Simplified Needs Test. (By the way, if your parents earn less than $20,000/year, you automatically qualify for Zero EFC.)

Are you worried about how much your family will be expected to contribute to your college tuition bill? Stay tuned next week for ways to lower your EFC and maximize your financial aid award.

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