Fundamentals of needs analysis
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Fundamentals of Needs Analysis. How is EFC Determined?. Three regular full data formulas Dependent student Independent student Independent student with dependents other than a spouse. How is EFC Determined?. Simplified Automatic zero. Formulas – Dependent Students. Simplified Formula

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How is EFC Determined?

  • Three regular full data formulas

    • Dependent student

    • Independent student

    • Independent student with dependents other than a spouse


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How is EFC Determined?

  • Simplified

  • Automatic zero


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Formulas – Dependent Students

  • Simplified Formula

    • Assets not considered

      • Parents’ AGI or earnings from work < $50,000 and

      • Parents are not required to file IRS form 1040


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  • Automatic Zero

    • EFC is automatically zero if

      • Parents’ AGI or income earned from work is $20,000 or less and

      • Parents are not required to file IRS form 1040


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Independent Students

  • Independent Students w/o Dependents other than a spouse

    • Applies to single & married independent students

    • May NOT qualify for automatic zero EFC

    • May qualify for simplified formula

      • Student (and spouse) AGI or earnings from work < $50,000 and

      • Student (and spouse) not required to file IRS form 1040


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Independent Students

  • Independent Students with Dependents other than a Spouse

    • Analysis looks much like that of parents of dependent students

    • EFC automatically zero if

      • Student’s (and spouse’s) AGI or income earned from work is $20,000 or less and

      • Student (and spouse) not required to file IRS form 1040


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Independent Students

  • May qualify for simplified formula

    • Student (and spouse) AGI or earnings from work < $50,000 and

    • Student (and spouse) not required to file IRS form 1040


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Simplified & Automatic Zero

  • Means-Tested Federal Benefit Programs

    • Students also qualify for simplified formula or automatic zero if, in addition to meeting relevant income thresholds, they or their parents received benefits from a means-tested federal benefit program

      • SSI

      • TANF

      • WIC

      • Food Stamps

      • Free or Reduced Price Lunches


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Factors that affect EFC

  • Number in Household

    • Number in College

  • Taxed and Untaxed income

    • Taxes paid

  • Investments

  • Age of the older parent

  • Number of wage earners


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Principles of Need Analysis

  • Family has primary responsibility to pay for educational costs

  • Student and parents are expected to contribute to the extent they are able

  • Family should be accepted in its present financial condition

  • Families should be evaluated in an equitable and consistent manner


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Need Analysis Concepts

  • Need-based funds are available to assist with educational costs that exceed the family’s ability to pay

  • FM assesses strength at the time of application

  • Family resources are devoted first to basic subsistence


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Need Analysis Concepts

  • Beyond basic needs, families can exercise discretion

  • FM allowances protect family resources

    • Basic needs

    • Non-education related discretionary costs


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Need Analysis Concepts

  • FM measures discretionary resources

    • Establishes a portion available for education


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Treatment of Income in FM

  • Total Income:

    Base year income from all taxable and untaxable sources

    -Exclusions (FAFSA Worksheet C)

    =Total Income


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Treatment of Income in FM

  • Available Income

    • Portion of income remaining for discretionary spending:

      Total income

      -Total Allowances

      =Available Income (AI)


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Total Allowances

  • Allowances for taxes

    • U. S. Income tax paid

    • Estimate of state and other taxes

      • State of residence

      • Amount of total income

    • FICA


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Total Allowances

  • Income Protection Allowance-IPA

    • Estimates amount needed for basic needs

    • Based on Bureau of Labor Statistics lower budget expenditures adjusted for CPI

    • Increases with each household member

    • Decreases with each member in college


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Total Allowances

  • Employment expense allowance

    • Represents additional costs when both parents work

    • Applies to working single parent families


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Treatment of Assets in FM

  • Assets defined

    • Cash, savings, checking

    • Investments and trusts

    • Real estate equity

    • Business/farm equity (non-family only)

      • Protects first 60% of equity up to $105K

      • Decreases protection percentage after $105K


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Treatment of Assets in FM

Cash, savings, checking

+Net worth of real estate and investments

+Adjusted net worth of business/farm

=Total Net Worth


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Treatment of Parents’ Assets in FM

Total Net Worth

-Education Savings and Asset Protection Allowance

=Discretionary Net Worth


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Treatment of Parents’ Assets in FM

  • Education Savings and Asset Protection Allowance

    • Protects assets for retirement and future education costs

    • Applies > age 25

      • Increases with age

      • Adjusted for marital status

    • No protection for dependent students


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Treatment of Parents’ Assets in FM

Discretionary Net Worth

X 12% (asset conversion rate)

=Contribution from Assets


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Adjusted Available Income

Parents’ Available Income (+ / -)

+Parents’ Contribution from Assets (+/ 0)

=Total Adjusted Available Income (+ / -)


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Determining Parents’ Contribution

  • As income increases, amount needed for basic household expenses decreases

    • Discretionary income increases

    • Income available for education

      Adjusted Available Income (AAI)

      X AAI contribution rate

      =Total Parents’ Contribution from AAI


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Determining Parents’ Contribution

  • Total contribution from AAI is divided evenly among all household members in college

    Total PC from AAI = 9-month PC

    Number in College


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Case Study #1 - The Baldwin Family

  • A married couple with 3 children who live in NY

  • 2 children will attend college F/T in 07-08

  • Older parent is age 48

  • Only father works. He completed a 1040A with an annual salary of $35,000 with no other income or adjustments.

  • Paid $6,000 in income tax

  • $20,000 in savings & $5,000 in investments

  • $2,000 in untaxed income & $1,500 in Hope/Lifetime Learning Credit


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Determining Student’s Contribution

Total of student taxed + untaxed income

- state and federal taxes

  • $3000 IPA

    -allowance for parents’ negative AAI

    = Available income (AI)

    X 50% assessment of AI

    = Student contribution from AI


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Determining Student’s Contribution

Cash, savings, checking

+Net worth of real estate and investments

+Adjusted net worth of business/farm

=Total Net Worth

X 20%

=Student contribution from assets


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Determining EFC

Parents’ Contribution

+Student’s Contribution from AI

+Student’s Contribution from assets

= 9 month EFC


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Case Study #1 - The Baldwin Family

  • Has an AGI of $5,000

  • The student does not work

  • Has $2,000 in savings

  • Completes a 1040A


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What about Unusual Circumstances?

  • If you have a student with unusual circumstances you can use professional judgment to adjust:

    • Cost of Attendance

      • Adjust elements that are related to the student’s cost of attending the school

    • Data elements that are part of the formula

      • You may not adjust the bottom line


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Case Study #2 - The Smith Family

  • A married couple with 2 children who live in CA

  • 1 child will attend college F/T in 07-08

  • Older parent is age 50

  • Completed a 1040.with an AGI of $180,000.

  • Father’s income = $90,000, Mother’s income = $70,000

  • Paid $40,000 in income tax

  • $5,000 in savings & $10,000 in investments

  • $7,000 in untaxed income.


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Case Study #2 - The Smith Family

  • Has an AGI of $6,000

  • Taxes paid = $300

  • Earned 5700 from work

  • Has $500 in savings

  • Completed a 1040A


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