Adventures in Needs Analysis: The Basis of Professional Judgment Jim Eddy Office of Financial Aid University of Michigan – Ann Arbor

In this session we will: Do FM needs analysis together, then talk about it Review/revisit the EFC Formula Guide Discuss PJ in the context of knowing the calculation If we have time: Look at regulatory changes to FM EFC data elements over time, & discuss IM (Institutional Methodology)

Dependent Student Case Study: Let’s dive in!

The Case: Narrative Scarlett White is a cheerleader enrolled as a senior at Huron High School in Ann Arbor. Her brother Jesse will be a college Junior at Wayne State University, where he studies chemistry. Brother Alphonso is entering 7th grade, and sister Holly will again be in elementary school. Scarlett is the aid applicant for this case study.

The Case: Narrative, con’t. The parental AGI for 2014 was $83,821. Dad (Walter White, pharmaceutical executive and former high school chemistry teacher), age 52, earned $199,214 in wage income, and mom (Skyler, age 46, financial executive and car wash owner) earned $163,277. A massive net loss from Line 17 of their Form 1040 (Vamonos Pest LLC; Los Pollos Hermanos Partners; A1A Car Wash S-Corp) largely accounts for their reduced AGI. They filed a Form 1040 and itemized their deductions, with a federal tax paid of $6,021. Walt and Skyler claimed all 4 children as 2014 tax exemptions. They are careful money managers despite their IRS paper losses, and have budgeted exactly $2015 for Scarlett’s educational expenses.

The Case: Narrative, con’t. Walt and Skyler claimed a 2014 IRA deduction in the amount of $2000. They also claimed a Hope Educational credit for Arthur in the amount of $1500. Due to an earlier divorce agreement, Walt paid out $6000 in 2014 child support to one of his ex-wives. As parents they have $1,941 in savings, $78,257 in combined 529 savings plans for all 4 kids, and $10,885 in a money market fund. Scarlett did not file a 2014 tax return, and listed earned wage income of $1821. She had $5 in her savings account on the day she filed her FAFSA.

Arriving at Total Parent Income 1.Parent’s 2014 AGI: a. Father’s work income b. Plus Mother’s work income Equals total Parent work inc Parent’s taxable income Untaxed income: Taxable and Untaxed Less offsets to income 7. Equals Total Parent Income 78321

Getting Parent Available Income (AI) U.S. tax paid State/other tax (TableA1) Father’s FICA (Table A2) Mother’s FICA (Table A2) Income Protection Allow (T. A3) Employment Expense Allowance Total Allowances: Total Income (from line 7) Minus Total Allowances 15. Equals Available Income (AI) 11092

Parent Asset Contribution (exploding the mythology) 16.Cash & Savings Net Worth of Investments Net Worth Business/Inv. Farm 0 19.Adjust. Net. W. Business/Farm (A4) Net Worth (sum 16, 17, 19) Edu. Savings/asset protect. (A5) Discretionary Net Worth (20-21) Asset Conversion rate (multiply by.12) 24. Contribution from assets 6910

Finally…Parent Contribution Parent’s Available Income (line 15) Plus Asset Contribution (line 24) Equals Adjusted Available Income Total contrib. from AAI (Table A6) # in college (exclude parents) Equals Parent Contribution 2015

Student Contribution: Total income 29.Student AGI 0 30.Student’s work income Taxable income Untaxed income: 0 33.Total, taxed/untaxed Less offsets to income 0 35.Equals Total Income 1821

Student Contribution: Allowances 36.Student tax paid 0 37.State/other tax (Table A7) Student FICA (Table A2) Income Protection Allow Allow. for Parent Neg. AAI 0 41.Total allowances 6504 Total Income (line 35) 1821 Less Total Allow. (line 41) Equals Available Inc. (AI) 43. Assessed at Equals Student Cont. from AI 0

Student Contribution: Assets and Overall EFC 45.Student cash, etc Student investments 0 47.Student bus./farm 0 48.New Worth (sum 45-47) 5 49.Assessed at 20 percent 1 50.Contribution from assets: 1 Parent Contribution (line 28) 2015 Plus Student AI Contrib. (line 44) 0 Plus Student Cont. from assets 1 51.Equals Overall EFC 2016

How many different EFC formulas/worksheets are there, anyway?

Seven 1. Dependent Student, Regular 2. Dependent Student, Simplified 3. Independent, without Dependents other than a Spouse, Regular 4. Independent, without Dependents other than a Spouse, Simplified 5. Independent, with Dependents other than a Spouse, Regular 6. Independent, with Dependents other than a Spouse, Simplified 7. Auto Zero

Professional Judgment (PJ): Dealing with the “What If’s” If you know how the FM EFC formula works, you can efficiently respond to “what if” questions and utilize appropriate Professional Judgment

Some PJ Examples Medical/Dental costs: 11% is already in the IPA “I saved a lot, so I won’t get financial aid” “I lost my job, so I will get more aid…right?” “We now have 2 in college, so our aid will double, right?” “We took money out of our IRA…please help us, this is not our real income from work!” “We are saving for our grandchild…should we put the money into an UGMA?” My parent just died…will I get more aid?”

Regulatory changes to FM EFC College Cost Reduction and Access Act of 2007: “CCRAA” “HERA” Higher Education Reconciliation Act of 2005

Protecting Student Income HERA increased the income protection allowance for dependent students from $2,200 to $3,000 CCRAA increased this further: AY $3,750 AY $4,500 AY $5,250 AY $6,000 AY $6,260 Now: $6310

Change in definition of “Total Income” Effective July 1, 2009, CCRAA changed the definition of “total income” by excluding: Welfare benefits Earned Income Credit Special fuels credit Excluded foreign income Untaxed Social Security benefits Additional Child Tax credit

“Independent Student” Definition Former language: “…an orphan or ward of the court or was a ward of the court until the individual reached the age of 18…” Current language: “…is an orphan, in foster care, or a ward of the court, at any time when the individual is 13 years of age or older…”

“Independent Student” con’t. CCRAA added additional categories: “…is an emancipated minor or is in legal guardianship as determined by a court of competent jurisdiction…” “…has been verified during the school year in which the application is submitted as either an unaccompanied youth who is a homeless child…or as unaccompanied, at risk of homelessness, and self-supporting…

Asset Definition HERA added “qualified education benefit” to the definition of assets. CCRAA addressed the ownership of these accounts: Student asset if an Independent student If a dependent student, the asset is considered the parent’s whether the owner is the student or parent

Simplified Needs Test CCRAA made two changes to the eligibility standards for the simplified needs test. The first change added a new category of eligibility – dislocated workers (& displaced homemakers). The dislocated worker was defined in the Workforce Investment Act of Sometimes a big impact – assets ignored

Auto Zero EFC CCRAA changed the qualifying standard: Income limit moved from $20,000 to $30,000 Directed ED to adjust this limit annually based on increases in the CPI But, this has subsequently been tinkered with, and for , the limit is now down to $24,000

Where you can find all the FM info you might ever want FormulaGuide1516.pdf This is annually updated, the worksheets and tables you used today are right out of the guide Lots of definitions (i.e. Dependency, Simple Needs, Auto Zero, needs-tested benefits) are in there All the different hand calculation worksheets are there for different FM formulas

Institutional Methodology “IM”: Who uses it? Many privates, some publics, often using the CSS Profile There is a cost involved for filers, with some waiver exceptions Non Custodial Parent (NCP) data can also be requested Home equity is considered; significant number of formulaic differences relative to FM

IM: Why use it? When “compelling budgetary concerns” make overall higher EFC’s desirable When your institution believes all students are best served by a more realistic assessment of family financial strength When another filter is helpful to sort out families who by any reasonable definition are likely not grant eligible As an avenue to simply get Non Custodial Parent (NCP) data Your answer here:

Other “IM” options include Institutional aid applications (sometimes for both needs analysis and scholarships) Cherry picking some CSS Profile outputs Running parallel processing, sing CSS Profile calculation within PC spreadsheet or other software Calculating need for international students Other?

Q&A

GO FORTH AND PROSPER!