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Assets included or not included in EFC calculation.

GrantchstrGrantchstr Registered User Posts: 8 New Member
I believe that IRAs are not included as "EFC" assets - but what other assets are also excluded? Annuities? Trusts?
I have read that there is something called "asset protection" of $50,000 (this number must have been set decades ago as it wouldnt keep the wolf from the door very long in retirement) But for a married couple is the excluded amount $50,000 or $100,000? For the sake of argument lets say a couple has bank savings for retirement of $200,000 (not IRA money). I believe that the EFC "capture" is 12% - so is the EFC $12,000 or $18,000 in such a case?

Also isnt the FAFSA calculation ridiculously flawed? Just one example - it seems that a student who lets say earns $15,000 in the summer and after taxes etc saves $10,000. The EFC calculation is a double whammy as the kid gets penalized both for the earnings AND the savings from those earnings........Does the EFC capture 35% of the $15,000 AND 35% of the savings from those earnings! Does that mean the family EFC includes 35% of $15,000 plus $10,000 or $8750 of those $10,000 savings? Does EFC imput Gross or AGI income?
Post edited by Grantchstr on

Replies to: Assets included or not included in EFC calculation.

  • barkowitzbarkowitz College Rep Posts: 255 Junior Member
    IRAs are not included on the FAFSA. Neither are "specially directed" retirement funds (401-K's, 403-B's) although the amount you contributed to them in the base tax year is included for the purposes of determing the family's income.

    The asset protection allowance (APA) is supposed to be a reflection of a minimum amount of assets which should be protected before any asset contribution is expected (remember, though, that the FM does not include the home, so if you own your home, the amount you are protecting is much higher). The APA is based on the age of the older parent and is higher for two-parent households than for one.

    That said, the amount of the asset contribution from parents is small anyway (usually 5 - 7% of assets in the FM formula and less in the IM formula).

    As for the student question, this is an area where you should appeal to the college to stop the double-counting. At MIT, we ask a question on the Profile designed to elicit this (how much of your asset was earned form your summer job) and then we eliminate the double-counting in our own formulas.

    The EFC starts with gross figures, but subtracts out taxes paid. From my blog entry on student contribution from earnings:
    When examining student income, we begin at the same place we began on the parent side - with the Adjusted Gross Income from the last tax year (in your case 2004). We add to this any nontaxable income (such as tax-exempt interest, IRA contributions for the current year, tax-deferred contributions, etc). We also subtract out from the income any taxable financial aid which is included in the AGI (this might include Federal Work Study earnings from the previous year or scholarships that were taxable in the previous year).

    As with the parent income calculation, there are several items which are removed from the student income as allowances against the income:

    1. US Income Taxes paid -- Again, this comes directly from the tax return.
    2. State and other taxes -- Again, a percentage of the total income (as determined above). This percentage is determined from two sets of tables, one for the Federal Methodology and one for the Institutional Methodology. As with the parent tables, the IM values are more generous than the FM ones.
    3. FICA Taxes -- Based on wages earned, a 7.65% allowance representing Social Security taxes.
    4. Income Protection Allowance (for FM only) -- An allowance used in the FM formula against the income representing student costs of living (for FM the number is $2,440).

    Student available income is determined by subtracting the total of the allowances from the total income. In both the IM and the FM formula, this value is then multiplied by 50% to indicate that there are other expenses that students have (but note that this percentage is much higher than the parent conversion rate).

    Some institutions (MIT included) have minimum student contribution levels that they set which reflect the expectation that students will earn money during the summer before the school year begins. At MIT, the minimum student contribution levels are $1500 for Freshmen, $2200 for Sophomores, $2500 for Juniors, and $2800 for Seniors. If your contribution seems to be higher than this (for IM purposes) any amount that we expect over these minimums is removed from your self-help (loans and work) not your grant, therefore not penalizing you for earning too much. This also means that you can work for more than the minimum number of hours in the summer, knowing that what you earn can replace the expectation of work or borrowing during the school year. Different colleges have different minimum levels and different policies about excess earnings, so you really need to talk to each of them to find out their policies.

    Now on to student assets. Here it is actually fairly simple.

    We take into account the same assets for students as we did for parents. Namely:

    1. Cash, savings and checking accounts.
    2. Non-retirement based investments (including trusts).
    3. Real estate owned by the student (don't laugh).
    4. Home owned by the student (don't laugh harder -- and by the way, home is only considered in IM, not FM).
    5. Business or farm equity (and remember this is also adjusted like the parent one was, somewhere between 40 to 60% of the equity depending upon the amount of the equity).

    Once the total asset value is determined, the FM formula says to take 35% of the value and include that in the Student Contribution. The standard IM formula says to take 25%. As you can see, this is a MUCH different treatment than parent assets (which have a much lower assessment rate).

    At MIT, as well as at other 568 schools, we use a different approach. We combine student and parent assets as family assets and subject them all to the parent analysis. This hopefully alleviates the concern that students saving in their own name are penalized for this. Hopefully, savings should be treated uniformly. We try to address this in our approach.

    At MIT, we do consider one type of student asset as a student asset alone, and that is trusts in the student's name which have been established by someone other than a parent. In these cases, students would see an asset contribution expected from them, but these situations are rare.

    Hope this helps.
  • wisteriawisteria Registered User Posts: 625 Member
    That said, the amount of the asset contribution from parents is small anyway (usually 5 - 7% of assets in the FM formula and less in the IM formula).

    "Small," huh?

    For self-employed parents not covered by corporate pension plans, their assets are an important part of their retirement plans.

    Let's consider a self-employed family that has accumulated $300,000 in savings which they hope to use for retirement. Assume the family has 2 kids born 4 years apart.

    That family will be paying 5 to 7% of that $300,000 every year for 8 years...let's say it's 5%. That's 15,000 per year for 8 years or $120,000 of that original $300,000 in savings.

    A big chunk of change.

    Yes, of course, annual income is assessed at a much higher rate than accumulated assets, but annual income is a RECURRING annual flow, whereas accumulated assets are the results of many years of savings.

    Families where both parents are covered by generous defined-benefit pension plans (e.g., some corporate jobs, many government employees) have a large IMPLICIT asset that goes entirely unassessed by FM and IM. The Profile has questions about the details of all kinds of family assets EXCEPT the value of those defined-benefit pension plans.

    Understandably, it's difficult to assess the value of the defined-benefit pension plans without a huge amount of information (basically, one needs to know how much longer the employee will be working at his job, what his/her salary is likely to be in those final future years, how many years of service s/he has accumulated with that employer, the extent to which the pension contract will index the pension for inflation, etc.) It's clearly impractical to determine all of that information for a defined-benefit pension plan.

    I'd like to hear from Mr. Barkowicz about how he and his colleagues attempt to deal fairly with assessing the relative need of two families with equal incomes but with assets that are difficult to compare. In one case, the parents have defined-benefit pension plans and so they have less need to save for retirement, while in the other case the parents are self-employed and have had to accumulate a significant savings account for retirement. The *apparent* assets of the latter family may *appear* much higher than those of the former family, but only because it's impractical to compute the assets of the former family.
  • barkowitzbarkowitz College Rep Posts: 255 Junior Member
    Thanks for the invitation to respond. I'll take you up on it.

    First of all, I do believe that the asset portion is small (especially in comparison to what is expected from income). I am not in the position of defending the Federal Methodology (FM) (since Congress doesn't ask me my opinion on it), and the Institutional Methodology (IM) has a lower base anyway, so I judge the IM to be even more reasonable.

    Either model assumes that you actually are spending down the asset as you go, so while the figures you quote assume a straight 5% from $300,000 for each of the 8 years (using your model), the more standard approach would be to take the percentage from the resultant lower asset, so over 8 years I come up with a remainder of $209,501 or an expenditure of $90,499. By the way, this also assumes that the asset remains static over the 8 years (not a likely scenario). Your rate of growth, depending on the type of asset, may be higher or lower than the assessment rate, but still provides an offset to what would be expected in the contribution (even with a relatively small growth rate of 1.5% as an example, in the first year $15,000 might be expected from the FM formula, but the asset will grow by $4,500).

    Leaving all of this aside, I did perhaps try to simplify this a bit too much. While you are correct, wisteria, that assets in retirement plans are ignored in both the FM and IM formulas, there are other protections which also come into account when we do our analysis. I might point you to the post on my blog on the parent contribution from assets for a more detailed look at the other asset protections that are used.

    Being self-employed does not prevent you from establishing a specially designated pension plan of your own (either a SEP IRA, Keogh, or other plans). In all cases, programs in specially designation retirement plans are ignored by both formulas.

    Additionally, you should (and can) appeal if you feel that your situation warrants a closer examination. One avenue to explore would be your preparation (or lack of) for retirement, although not all colleges will be amenable to hearing this as an appeal topic. At MIT, we would hear this case and examine the issues (like those you raise in your final paragraph above). We would look at the family's relative strength overall, and try (as we always do) to look fairly at the family.

    Hope this provides some clarity.
  • somemomsomemom Registered User Posts: 9,990 Senior Member

    you are right, there are a multitude of "unfair" items in the financial aid models...any self-employed person, paying both sides of FICA, self-funding retirement (limited by the rules of SEP/IRA), paying one's own health insurance and expenses, having no paid holidays/ sick days can contend that it is "unfair."

    I felt this way a few years ago, now the longer I read these boards, the more I realise that there is no way it can be fair, there is always some one who can game the system, always some one who beenfits more from the same rule, or that family who blows all their money whilst you saved and were frugal and then they get more money than you!

    I think one of the most striking "unfairnesses" is that only the very rich and very poor can afford the expensive schools- full ticket or full-ride. It is simply too pricey to be a responsible choice for so many middle class people. That does not feel good, but I don't know how to fix it.

    The best I can think of for self-employeed people is to review with your accountant any ways to keep your income as low as possible in the university year, not by cheating, but by planning reinvestment in the business, etc. Max out SEP/IRA (though those contributions are added back into income), max out cash value life insurance, pay off all debts, including your home for FM schools.

    You can contend the assets are for your retirement, but my brother has several real estate rentals for just that reason and has not had any luck with public schools caring that he has no other retirement! So, yeah, that really does seem unfair, as their are real limits on IRA/SEP contributions. I do think that private schoosl such as MIT have more flexibility to consider your situation, but the guy who has a definted bene pension is so far ahead of you, they simply could/would not adjust for that! Hmm, at least you have the flexibility of being self-employed, right ;)
  • emeraldkity4emeraldkity4 Registered User Posts: 35,861 Senior Member
    barkowitz has a clear explanation
    As far as I remember- assets are not considered that much- real estate that you own may be considered- but the income that you get from that real estate is probably going to come into play much more than if it was just a summer place.
    IRAs are not considered, but income that is transferred to IRA is considered to be available for tuition.
    I think people that can afford to have real estate income are going to come out ahead in the long run ( and that is why they do it I imagine)
    They are probably going to be the only ones that have retirement ;)
    Our retirement fund lost tens of thousands of dollars after being built up carefully for years, and is only now slowing building back up again.
    Real estate seems to be the only thing that is appreciately steadily.

    Finaid may not take into account that your rental properties are going to cover your retirement, but neither does it take into account that we have had huge losses in our retirement fund.
  • sblake7sblake7 Registered User Posts: 1,691 Senior Member
    Student income and assets are treated pretty severely in the financial aid formulas. The thinking being, I guess, that a 'typical' 18 year old doesn't have any financial obligations more important than his/her education. No mortgage, no kids (one hopes), no utility bills, probably no medical insurance premiums to worry about. So much of his assets, and much of his income is correctly earmarked for college, and added to the EFC.

    There's no asset protection allowance for the student-- so they'll want to take 34% of any of the student's liquid assets, each and every year (Federal Methodology. IM is 25% per year). Under FAFSA the student can make about 2,400 per year after taxes before they start assessing the income, though.

    So, under Federal Methodology, if a student made $2,400, and spent it on whatever (books, trip, gasoline, car) before the FAFSA was filled out, the student wouldn't contribute anything to the EFC.
  • fftdfftd Registered User Posts: 40 Junior Member
    Does MIT give an asset allowance like Princeton or Yale? Princeton does not treat home equity as an asset and give $140,000 allowance for a family renting an apartment while Yale gives $150,000 for asset protection including home equity. If MIT does not give any home equity allowance, it might be at least 8,400 more expensive per year compared with these two schools and is also more expensive than other top 20 schools using FAFSA. For 8 years (two kids), the difference of $67,200 might cause a 3-year delay in retirement for the parents of a middle class family. With national average house price around $200,000 and most middle class families put their saving in their primary residence, it seems to me a reasonable home equity allowance should be considered.
  • barkowitzbarkowitz College Rep Posts: 255 Junior Member
    The question is not exactly as you describe it.

    Princeton (and Harvard) do not consider home equity in their review.

    MIT (and Yale) do consider home equity, but in a very limited way (I would again refer you to my blog which has a great deal of information on how we consider parental assets, but I will reprint a section here):
    There are some assets that are included in the analysis of both the CA (Consensus Approach) and the FM formulas. These include:

    1. Cash and savings accounts.
    2. Stocks, bonds, mutual funds, and other regular (i.e. non-retirement) investment accounts (including life insurance cash value).
    3. Real estate other than your primary residence (including investment real estate, 2nd homes, etc).
    4. Business or farm equity (this amount is not at a 100% assessment rate, you report the total amount on the form and we make an adjustment based on a table, usually somewhere between 40% and 50% depending on the amount of equity). Special note: In order to determine what makes up your business or farm equity, we do require a business or farm supplement for each business you own (this includes Schedule C businesses, Schedule F farms, Partnerships, S-Corporations, and regular Corporations).

    Some assets are ignored from both formulas. These include specially designated retirement accounts like 401K accounts, IRAs, KEOGH plans, etc (although remember the amount of the current year's contribution was added back as non-taxable income before).

    One particular asset is included only in the CA formula, and not in the FM formula. This is the home, or the primary residence. At MIT, we do use a number of modifications to your reported information to arrive at a reasonable value, but the home is a factor in our analysis. Many other institutions may use similar or very dissimilar processes, so you may want to confirm with the institution what policy they have in place.

    Why is the home not included in FM? In 1993-94, the Federal Government removed the home from the financial aid formula. This was done for several reasons, I believe, none of which make particular sense from the point of view of assessing a family's ability to pay for college. The action of removing this asset from the formula was to, in effect, pretend there is no difference in a family's financial strength whether they rent an apartment or own their home. Private colleges determined that this analysis wouldn't work for them, so they created their own process to analyze financial aid (therefore the birth of the Institutional Methodology). There are very many other differences between IM and FM, but the issue of home equity serves as the starting point for their divergent paths. A history book on this subject is just itching to be written...

    So enough history, what does MIT actually do?

    We start by looking at what year you purchased your residence and how much the purchase price was in the year in which you purchased it (I say you when in fact, more than probably, it is your parents' house). Based on a table which eliminates regional variation, we determine how much the property should be worth today. This table uses a national coefficient so that parents are neither penalized or advantaged by living in an area where values over time have deviated from the national norm. As an example, if you purchased your home in 1988 for $100,000, we would use a coefficient of 1.76, so the value would be $176,000. (And if you are interested in finding the rest of the chart, it is not publicly available. The underlying information comes from here though.)

    Once we have the value as determined by the multiplier, we compare that to your stated value (on the Profile application) and in most cases will use the multiplier value (we may use your stated value on a case-by-case basis, usually if it is lower than the multiplier value).

    The next item we examine is whether you could access the value in your home. To determine this we cap the total value based on your total income. This cap is 240%. So, a family who earns $100,000 a year would have their home value capped at $240,000. In other words, we cap your home value at 2.40 times your income. This is to protect families who, due to real estate market growth, live in a home that they could not afford to purchase today. We cap the value of the home at this amount to account for the fact that a family could not afford to qualify for a mortgage to access equity higher than this level.

    We take the lower of these two numbers into account as your total home value, and then subtract debt from that to determine the home equity.

    Another asset we consider under CA is the student's siblings' assets since we try to get a whole picture of a family's net worth (we will also later provide an allowance against these assets for the siblings' savings for college). In addition, under CA we consider all student assets (with the exception of trusts) to be family assets as well so that students will not be penalized for saving for college (due to the higher rate used in the student-only analysis).

    Once all of your assets are in place, we subtract allowances from them to determine your net worth. The allowances are different depending on the formula.

    The following allowances are subtracted under the FM formula:

    1. Education Savings and Asset Protection Allowance -- An allowance against assets based on the age of the older parent and marital status. As an example, for a married couple with an older parent aged 48, the amount is $40,500. For a one-parent family with a parent aged 48, the amount is $15,900. This amount is supposed to be, according to the Federal formula, a protection against your assets to supplement your retirement and to allow for savings for college for younger siblings of the student.

    The following allowances are subtracted under the CA formula:

    1. Emergency Reserve Allowance -- An allowance against assets based on the number in family and in college (again, modified by a regional COLA figure) to represent what a family should have saved in case of emergencies.
    2. Cumulative Education Savings Allowance -- An allowance representing how much a family should have saved by this point for college for this student as well as any college-attending or younger siblings. This amount is based on the Annual Education Savings Allowance calculated earlier in the formula.
    3. Low Income Asset Allowance -- If the Available Income calculated before is negative, the amount is subtracted from assets available (to represent that the family is living off of its assets).

    The resultant value (Net Worth minus Total Allowances) is then referred to as the Discretionary Net Worth. Discretionary Net Worth is then combined with Available Income and the whole thing is run through a final conversion, leading to somewhere between 22 to 48% of Available Income (based on how high the Available Income is) and somewhere between 3 to 8% of Discretionary Net Worth (again, based on how high the Net Worth is) appearing as part of the final contribution from parents.

    So, fftd, you see it is not quite as simple as you have indicated in your post.

    Sorry for the long post, but it needed a long explanation.
  • fftdfftd Registered User Posts: 40 Junior Member
    Thank you for your time and the long post, but I still can not find the answer I want. I know Princeton and Harvard do not consider home equity in their review. Yale gives an allowance $150,000 of a family's financial assets (began in 1998) as shown in
    But I can't get an approximate number from your CA formula since I don't have the mathematic equations of the formula. Thanks!
  • barkowitzbarkowitz College Rep Posts: 255 Junior Member
    fftd, the $150,000 is old news actually (look at the date -- 98-99). Since 2002-03, Yale (along with MIT) has been part of the 568 group (as has MIT) and uses the methodology described above.

    The reason you cannot get an easy answer here is because there isn't one. Each family will have a different set of allowances based on the factors I described above. Additionally, home equity treatment (at least at the 568 schools) will protect some part of the equity based on either the family income or the year of purchase / purchase price.

    In short, the refernce you are looking at is out of date. You can always call Yale and ask, but I am not aware of any automatic offset any longer.

    BTW, the web site for the 568 group is http://www.568group.org.
  • barkowitzbarkowitz College Rep Posts: 255 Junior Member
    As a point of reference compare these two notes, one for the 2001-02 year and one for the 02-03 year:

    2001-02 -- http://www.yale.edu/opa/newsr/01-09-05-02.all.html
    2002-03 -- http://www.yale.edu/opa/newsr/02-02-13-04.all.html

    You'll notice the language about the $150,000 was dropped as they moved to the new financial aid methodology which was more generous overall.
  • taxguytaxguy Registered User Posts: 6,624 Senior Member
    One asset that is NOT counted as an asset for financial aid calculation is any cash value insurance. I believe that annuities with insurance companies are also exempt.
  • fullcollapse13088fullcollapse13088 Registered User Posts: 101 Junior Member
    Can someone please explain trusts to me? How are they counted? I know its probably been mentioned but Id like to know?
  • ohnoesohnoes . Posts: 1,130 Senior Member
    At MIT, as well as at other 568 schools, we use a different approach. We combine student and parent assets as family assets and subject them all to the parent analysis. This hopefully alleviates the concern that students saving in their own name are penalized for this. Hopefully, savings should be treated uniformly. We try to address this in our approach.

    Are most other top universities part of these "568 schools"? If so then that's great news to me, as most of my college money is in my name and not my parents'
  • momofthreemomofthree Registered User Posts: 1,486 Senior Member
    568 Presidents' Group Member Institutions:

    Amherst College
    Boston College
    Brown University
    Claremont-McKenna College
    Columbia University
    Cornell University
    Dartmouth College
    Davidson College
    Duke University
    Emory University
    Georgetown University
    Grinnell College
    Haverford College
    Massachusetts Institute of Technology
    Middlebury College
    Northwestern University
    Pomona College
    Rice University
    Swarthmore College
    University of Chicago
    University of Notre Dame
    University of Pennsylvania
    Vanderbilt University
    Wake Forest University
    Wellesley College
    Wesleyan University
    Williams College
    Yale University
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