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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
How is EFC Determined?
  • Three regular full data formulas
    • Dependent student
    • Independent student
    • Independent student with dependents other than a spouse
how is efc determined3
How is EFC Determined?
  • Simplified
  • Automatic zero
formulas dependent students
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
slide5
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
independent students
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
independent students7
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
independent students8
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
simplified automatic zero
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
factors that affect efc
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
principles of need analysis
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
need analysis concepts
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
need analysis concepts13
Need Analysis Concepts
  • Beyond basic needs, families can exercise discretion
  • FM allowances protect family resources
    • Basic needs
    • Non-education related discretionary costs
need analysis concepts14
Need Analysis Concepts
  • FM measures discretionary resources
    • Establishes a portion available for education
treatment of income in fm
Treatment of Income in FM
  • Total Income:

Base year income from all taxable and untaxable sources

-Exclusions (FAFSA Worksheet C)

=Total Income

treatment of income in fm16
Treatment of Income in FM
  • Available Income
    • Portion of income remaining for discretionary spending:

Total income

-Total Allowances

=Available Income (AI)

total allowances
Total Allowances
  • Allowances for taxes
    • U. S. Income tax paid
    • Estimate of state and other taxes
      • State of residence
      • Amount of total income
    • FICA
total allowances18
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
total allowances19
Total Allowances
  • Employment expense allowance
    • Represents additional costs when both parents work
    • Applies to working single parent families
treatment of assets in fm
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
treatment of assets in fm21
Treatment of Assets in FM

Cash, savings, checking

+Net worth of real estate and investments

+Adjusted net worth of business/farm

=Total Net Worth

treatment of parents assets in fm
Treatment of Parents’ Assets in FM

Total Net Worth

-Education Savings and Asset Protection Allowance

=Discretionary Net Worth

treatment of parents assets in fm23
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
treatment of parents assets in fm24
Treatment of Parents’ Assets in FM

Discretionary Net Worth

X 12% (asset conversion rate)

=Contribution from Assets

adjusted available income
Adjusted Available Income

Parents’ Available Income (+ / -)

+Parents’ Contribution from Assets (+/ 0)

=Total Adjusted Available Income (+ / -)

determining parents contribution
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

determining parents contribution27
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

case study 1 the baldwin family
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
determining student s contribution
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

determining student s contribution30
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

determining efc
Determining EFC

Parents’ Contribution

+Student’s Contribution from AI

+Student’s Contribution from assets

= 9 month EFC

case study 1 the baldwin family32
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
what about unusual circumstances
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
case study 2 the smith family
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.
case study 2 the smith family35
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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