“Are they crazy?” is the most exclaimed comment parents say when they see their Expected Family Contribution after getting their financial aid package from their child’s chosen college. The amount can be outrageous.
The Expected Family Contribution (EFC) is calculated by the college based on a bunch of information you provide in FAFSA form and CSS profile. First, there are two things we have to get straight:
- Assets – house equity, rental property investments, 529 plans, art, savings, stocks/bonds
- Income - total amount coming into your household pre-tax every year including the money you contribute to your 401k (yes, continue to contribute 15% in total, you have to)
Do not confuse them! Yes, colleges only expect you to contribute 5-5.64% of your ASSETS, but the rubber meets the road at your INCOME. They are different.
Let's say you have $300,000 in equity in your house, and you have $100k saved in a 529 plan, for example. Your child’s favorite institution will consider you to have $22,560 (using the Federal Methodology of 5.64%, the Consensus and Institutional Methodologies use 5%) in available assets.
They are polite enough to give you an exemption for “Emergency Savings” of $17-30k. In my example, this family would be expected to contribute $22,560-$17,000 = $5,560 EVERY year to their child’s education. Not bad, you can handle that, right?
Sure, until the INCOME side of the equation kicks in. Your child’s favored institution expects you to spend… wait for it… 47% of your Adjusted Gross Income minus a few allowances (how very thoughtful of them). Let’s do an example:
Household Pre-tax Earnings $210k/year
Annual 401k contributions = $20k
Allowance for Fed, State & Local taxes = 30% (the % is given by the college, this is my estimate)
Your income is then $147k
Income Protection Allowance = $20,000/year (again, these are given by the college, I’m estimating here)
Income for FAFSA purposes is $147k – 20k (Income Protection Allowance) = $127k
Then $127k is multiplied by .47 (47%) to get $59,690 PER YEAR
If your child’s college budget for the year is equal to or LESS than $59,690 in the case of my sample household, you get NO AID.
Things to note: colleges do not give a crap about your retirement. Your contribution to your company's 401k (or similar) is added back to your income. They do NOT, however, count your retirement savings in your ASSETS. Again, how polite of them. Do not confuse those two things.
In my example, the family whose income is $210k with assets of $300k in home equity and $100k in a 529 plan, is expected to produce about $62k per year (59,690 + $5,560, from assets = $62,250).
Of course, you do not have an extra $62k laying around each year. If you earn $210k as a family of 4 in an urban area, you are already probably feeling strapped. There’s no extra. You have to take loans. THIS is where the massive debt accrues. Either your child takes the loans or you do, or a combination.
Colleges do not care about mortgage payments, medical bills, tutors, therapy, car payments, camp or anything else. They will give you an allowance for another child in college and some other allowances, maybe, depending on the school. It's fundamentally out of tune with reality, but there it is.
There’s nothing to do about this calculation, regrettably. I wish I had more than empathy to give, but as always saving will help especially since savings are assets and are only counted at about 5%. If you cannot pay for college out of current income (extra you have each month after paying for expenses) you need to save. And, start now.
Spending less than you earn each month will also help. If you can squeeze out private school, then you can probably squeeze a little more out and pay for college if spending less than you earn is already part of your lifestyle. If you are not paying for privates school as many of us are not, spending less than you earn allows you to pay for college with current dollars PLUS whatever you've saved up until now in your 529 plan.
Maybe someday, colleges will see how out of whack with reality this calculation is. We can only hope.