Federal Methodology

1. Module 6 Federal Methodology

2. Federal Methodology • Method for assessing ability to pay consists of two steps: • Measuring a family’s financial strength • Assessing a portion of family’s financial resources as being available to contribute toward educational costs

3. Federal Methodology • Formula used to calculate expected family contribution (EFC) • Classifies students according to one of three models: • Dependent student • Independent student without dependents other than a spouse • Independent student with dependents other than a spouse

4. Dependent Student EFC Components • Parents’ contribution (PC) consisting of: • Contribution from parents’ available income • Contribution from parents’ assets • Student contribution (SC) consisting of: • Contribution from student’s available income • Contribution from student’s assets

5. Independent Student EFC Components • Contribution from student’s (and spouse’s) available income • Contribution from student’s (and spouse’s) assets

6. Federal Methodology Characteristics • Base-year income is used • 2005 is base year for 2006-07 • Allowances protect portions of income and assets • Distributes available family resources among all family members (other than dependent student’s parents) attending postsecondary schools • EFC calculated fornine-month enrollment period

7. Dependent Model: Parents’ Contribution from Available Income Taxable income (tax filer AGI or non-filer earnings) + Untaxed income and benefits – Excludable income (i.e., education credits, child support paid, taxable earnings from FWS or other need-based work programs, certain taxable student aid) = Total income

8. Dependent Model: Parents’ Contribution from Available Income U.S. income tax paid + State and other taxes + Social Security tax (FICA) + Income protection allowance + Employment expense allowance = Total allowances

9. Dependent Model: Parents’ Contribution from Available Income Total income – Total allowances = Available income (may be negative)

10. Dependent Model: Parents’ Contribution from Assets Cash, savings, and checking accounts + Current investments, including real estate, net worth + Adjusted business and/or investment farm net worth = Total net worth – Education savings and asset protection allowance = Discretionary net worth x 12% Asset conversion rate = Contribution from assets (if negative, set to 0)

11. Dependent Model: Total Parents’ Contribution Available income + Contribution from assets = Adjusted available income (AAI) x Assessment rate = Total parents’ contribution ÷ Number in college (excluding parents) = Parents’ contribution (if negative, set to 0)

12. Dependent Model: Contribution from Student’s Available Income Taxable income (tax filer AGI or non-filer earnings) + Untaxed income and benefits – Excludable income (from FAFSA Worksheet C) = Total income

13. Dependent Model: Contribution from Student’s Available Income U.S. income tax paid + State and other taxes + Social Security tax (FICA) + Income protection allowance ($2,550) + Parents’ AAI (only if negative; added as positive amount) = Total allowances

14. Dependent Model: Contribution from Student’s Available Income Total income – Total allowances = Available income (AI) x 50% Assessment rate = Student contribution from AI (if negative, set to 0)

15. Dependent Model: Contribution from Student’s Assets Cash, savings, and checking accounts + Current investments, including real estate, net worth + Business and/or investment farm net worth = Total net worth x 35% Assessment rate = Student’s contribution from assets

16. Dependent Model: EFC Student’s contribution from AI + Student’s contribution from assets = Student contribution Parents’ contribution + Student’s contribution = EFC

17. Dependent Model: Simplified EFC Formula, Income Criterion • Parents’ 2005 AGI is $49,999 or less if tax filers; or • Parents’ 2005 total earnings from work is $49,999 or less if non-filers

18. Dependent Model: Simplified EFC Formula, Tax Filing Criterion • Tax filing criterion no longer applicable to student as of 7/1/06 • Tax filing criterion applies to parents only • New alternative to tax filing criterion if parents or student received benefits under a means-tested federal benefit program

19. Dependent Model: Automatic Zero EFC, Income Criterion • Parents’ 2005 AGI, if tax filers, or total earned incomes, for non-filers, is $20,000 or less • Parents meet same tax filing criteria as for simplified formula

20. Dependent Model: Automatic Zero EFC, Tax Filing Criterion • Tax filing criterion applies only to parent • Dependent student is not required to meet the tax filing criterion • New alternative to tax filing criterion if parents or student received benefits under a means-tested federal benefit program

21. Rounding Rules • Carry all calculations to three decimals • Round resulting amount to nearest whole number .001 to .499 rounded down .500 to .999 rounded up

22. EFC Recalculation for Other than Nine Months • EFCs adjusted for enrollment periods other than nine months cannot be used to determine Federal Pell Grant eligibility • Alternate EFCs on Student Aid Report (SAR) and Institutional Student Information Record (ISIR)

23. Summer EFC Calculation:First Approach • If summer is not considered part of upcoming award year, subtract nine-month EFC from alternate EFC corresponding to total number of months enrolled during the award year

24. Summer EFC Calculation:First Approach • If summer is considered part of upcoming award year: • Package summer using appropriate alternate EFC • Calculate EFC for regular academic year by subtracting alternate EFC used for the summer from alternate EFC corresponding to total number of months enrolled during the award year

25. Summer EFC Calculation:Second Approach • Use monthly share of EFC • May be used whether summer is first or last term of award year if school knows student’s summer enrollment plans prior to packaging