Fundamentals of Needs Analysis

1. Fundamentals of Needs Analysis

2. How is EFC Determined? • Three regular full data formulas • Dependent student • Independent student • Independent student with dependents other than a spouse

3. How is EFC Determined? • Simplified • Automatic zero

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. Need Analysis Concepts • Beyond basic needs, families can exercise discretion • FM allowances protect family resources • Basic needs • Non-education related discretionary costs

14. Need Analysis Concepts • FM measures discretionary resources • Establishes a portion available for education

15. Treatment of Income in FM • Total Income: Base year income from all taxable and untaxable sources -Exclusions (FAFSA Worksheet C) =Total Income

16. Treatment of Income in FM • Available Income • Portion of income remaining for discretionary spending: Total income -Total Allowances =Available Income (AI)

17. Total Allowances • Allowances for taxes • U. S. Income tax paid • Estimate of state and other taxes • State of residence • Amount of total income • FICA

18. 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

19. Total Allowances • Employment expense allowance • Represents additional costs when both parents work • Applies to working single parent families

20. 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

21. Treatment of Assets in FM Cash, savings, checking +Net worth of real estate and investments +Adjusted net worth of business/farm =Total Net Worth

22. Treatment of Parents’ Assets in FM Total Net Worth -Education Savings and Asset Protection Allowance =Discretionary Net Worth

23. 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

24. Treatment of Parents’ Assets in FM Discretionary Net Worth X 12% (asset conversion rate) =Contribution from Assets

25. Adjusted Available Income Parents’ Available Income (+ / -) +Parents’ Contribution from Assets (+/ 0) =Total Adjusted Available Income (+ / -)

26. 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

27. 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

28. 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

29. 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

30. 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

31. Determining EFC Parents’ Contribution +Student’s Contribution from AI +Student’s Contribution from assets = 9 month EFC

32. 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

33. 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

34. 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.

35. 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