"The Experience"



Three Families, Three Financial Situations, Three Colleges: Part One

Author: petersons, Category: College Scholarships & Financial Aid, Scholarship Contest

The Families
Every family’s financial situation is different, but there are some “rules” that apply universally when one’s Expected Family Contribution (EFC) is being calculated. Which family is most like yours?

Case One: A Lower-Income Family from California
Our first family includes a single mother with two children : a high school senior and a ninth grader. The total family income is $42,000, with checking and savings accounts totaling $10,000. The family home was bought ten years ago for $50,000, but is now worth quite a bit more. The only retirement plan is Social Security.

EFC = $1,000

What you can learn:

* For most lower-income families (roughly defined as earning less than $40,000) the EFC will either be zero or a small amount. In this example, the EFC is roughly the amount the mother spends on her daughter during senior year. The expectation isn’t that she spends extra money, but that she transfer expenses to the college bill.
* There is no contribution required from a parent’s savings until they reach about $50,000.
* Even though this modest home has appreciated, its value is not considered in figuring the EFC.

Case Two: A Middle-Income Family from Pennsylvania
Our second family includes two working parents and two children, one a high school senior and one a sophomore at a private secondary school that costs $5,000. The father has been with the same company for 25 years and has a good retirement plan. Combined income is $72,000. Investments in mutual funds total $77,000 and they own their home, worth $250,000 after subtracting the mortgage. Over the past year, the family has paid $3,000 in un-reimbursed medical expenses. The student has $3,000 in a savings account.

EFC = $8,500

What you can learn:

* Though the family home is worth a good amount, its value is not considered in calculating the EFC.
* To a large extent, savings are protected. Of this family’s $77,000 in investments, only about $1,500 of the EFC amount comes from income.
* The value of father’s retirement plan is not counted.
* Although the FAFSA does not collect information about un-reimbursed medical expenses or private school tuition, a college aid counselor may allow for these expenses and reduce the EFC under the “professional judgment” provision of the federal need formula.
* The $3,000 in student savings is “taxed” at a rate of 35 percent, accounting for $1,050 of the EFC. When saving for college, it’s a good idea to start a 529 plan. The need formula expects a lot less from a 529 plan than it does from money in a regular savings account.

Case Three: An Upper-Income Family from Florida
There are three children, an older sister who is a sophomore in college, a high school senior, and a seventh grader. The mother and father have put aside $50,000 in a 529 plan for the college-bound senior. Total income, including taxable and non-taxable sources, is $160,000. A quarter of this income comes from the mother’s antique business, with an estimated net worth of $40,000. Stock investments total $180,000. There is $300,000 of equity in the home, in addition to a lakeside cottage worth $60,000. The father has worked ten years for a company that matches his $10,000 annual retirement contribution. This fund is worth $250,000.

EFC = $20,000

What you can learn:

Because this family has considerable assets, let’s look at the effect of each on the EFC:

* Neither the father’s retirement plan nor the $300,000 in home equity is counted.
* The total value of the stocks and cottage are considered and added $9,700 to the EFC.
* The $40,000 net worth of the mother’s business added $800 to the EFC.
* The $50,000 in the 529 plan is an asset of the parents, adding $2,500 to the EFC

The total of the assets comes to $880,000. Of this, only $13,000 was added to the EFC from income. Many families think they’ll be penalized for saving, but the need formula is actually quite kind to savers.

As you will see below, this high-income, high-asset family will qualify for aid at an expensive college, mainly because they will have two in college at the same time. If there was only one child enrolled, the EFC would double to about $40,000 and the family would be no-need at all three.

Next:
See how each family’s situation affects their need

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