1. National Association of Student Financial Aid Administrators Presents … © NASFAA 2011 Federal Methodology MASFAA Conference 2011 Pamela W. Fowler, Executive Director University of Michigan Module 6

2. Slide 6-2 © NASFAA 2011 Federal Methodology Method for assessing ability to pay consists of two steps: Measuring the family’s financial strength Assessing a portion of family’s financial resources as a contribution toward educational costs

3. Slide 6-3 © NASFAA 2011 Federal Methodology Methodology used to calculate expected family contribution (EFC) Classifies students according to one of three models: –Model A: Dependent student –Model B: Independent student without dependents other than a spouse –Model C: Independent student with dependents other than a spouse

4. Slide 6-4 © NASFAA 2011 FM Formulas Regular – student completes the entire FAFSA answering all financial questions. Simplified – student completes the FAFSA but does not report assets if total AGI of parent income is under $50,000 (student income not considered). If there is no tax return for parents income is total from W-2 or any wages earned from work AND both student and parent must be eligible to file a 1040A or 1040 EZ. Independent student and spouse must meet the same criteria as the parent of a dependent student. For purposes of simplified formula; a foreign tax return is considered a 1040. A Puerto Rican tax return is considered a 1040A or EZ

5. Slide 6-5 © NASFAA 2011 Automatic Zero EFC If certain criteria are met no calculation is performed, and the EFC automatically is set to zero Automatic zero EFC is limited to: –Model A: Dependent student –Model C: Independent student with dependents other than a spouse

6. Slide 6-6 © NASFAA 2011 Regular Formula Full data element formula EFC calculated for 9-month enrollment period Base-year income is used - 2010 is base year for 2011–12 Round resulting amount to nearest whole number:.001-.499 round down;.500 to.999 round up

7. Slide 6-7 © NASFAA 2011 Hand Calculation Time FAFSA Data –State of Residence: Illinois –Age of older parent = 55 –Household size 4; # in college 2 –Students income = 0; cash = $1300; sav=$2000 –Parents AGI = $119,614; taxes pd. = $12,036 –Wages – Mom = $70,032; Dad = $45,236 –Cash = $20,000; Investments = $88,000 –Education credits = $1500

8. Slide 6-8 © NASFAA 2011 Section A – Total Parental Income Mom’s wages plus Dad’s wages = Total parents income earned from work Taxable income = AGI or total income earned from work Untaxed income = line 93 from FAFSA includes: –Child Support Received –IRA deductions and payments to SEP, SIMPLE & Keogh plans –Tax exempt interest income –Untaxed portions of IRA distributions –Untaxed portions of pensions –Housing, food and other living allowances paid to members of the military, clergy and others –Veterans non-education benefits –Other untaxed income – worker’s compensation or disability –Money received or paid on your behalf Basically everything taxed or untaxed is income.

9. Slide 6-9 © NASFAA 2011 Section B – Allowances Against Income US Income tax paid State and other taxes (Table A1) Social Security (Table A2) for both Mom & Dad Income protection allowance (Table A3) Employment Expense Allowance –2 working parents – 35% of the lesser of the earned incomes or $3500 whichever is less –1 parent family – 35% of earned income or $3500 –2 parent family but only 1 parent works= $0 Available income (AI) = total income minus total allowances

10. Slide 6-10 © NASFAA 2011 Contribution from Assets Cash, Savings and Checking plus Net worth from investments plus Net worth of business and/or investments + Adjusted net worth of business/farm* Minus Education savings and asset protection allowance = Discretionary net worth times Asset conversion rate of 12% = Contribution from assets

11. Slide 6-11 © NASFAA 2011 Excluded Assets Possessions such as car, stereo, furniture, etc. The family’s home, even if it is part of a business The family’s farm (including equipment, livestock, etc.) isn’t included as an investment if: –It is the principal place of residence, AND –The applicant (or parents) materially participated in the farming operation Family-owned small businesses that have 100 or fewer employees.

12. Slide 6-12 © NASFAA 2011 Parent’s Contribution AI plus contribution from assets = AAI Total PC from AAI = Amount from Table A6 divided by # in college

13. Slide 6-13 © NASFAA 2011 Student Available Income Taxable income (AGI or wages) plus untaxed income plus other income = total income – minus- Allowances against student’s income = US income taxes paid; +state taxes from Table A7; +social security tax allowance from Table A2; +income protection allowance of $4500 and an offset for a negative parental AAI = Total Allowances If negative use 0

14. Slide 6-14 © NASFAA 2011 Student’s Contribution from Assets Cash, + savings, + net worth of investments, + net worth of business/farm = net worth Net worth assessed at 20% = contribution from assets

15. Slide 6-15 © NASFAA 2011 Total EFC Parent’s contribution + Student’s contribution from AI + Student’s contribution from assets + = EFC (standard 9 month contribution)

16. Slide 6-16 © NASFAA 2011 Table A2 – Social Security Tax Calculate separately the Social Security tax of father, mother, and student. Income Earned from Work* Social Security Tax $0 - $106,800 7.65% of income $106,801 or greater $8,170.20 + 1.45% of amount > $106,800 *Father’s/stepfather’s 2010 income earned from work is FAFSA/SAR #86. Mother’s/stepmother’s 2010 income earned from work is FAFSA/SAR #87. Student’s 2010 income earned from work is FAFSA/SAR #38. Social Security tax will never be less than zero.

17. Slide 6-17 © NASFAA 2011 Table A3: Income Protection Allowance Number in parents’ household, including student (FAFSA/SAR #72) Number of college students in household (FAFSA/SAR #73) 1 2 3 4 5 2.......... $16,230 $13,450 3.......... 20,210 17,450 $14,670 4.......... 24,970 22,190 19,430 $16,650 5.......... 29,460 26,680 23,920 21,140 $18,380 6.......... 34,460 31,680 28,920 26,140 23,380 5 Note: For each additional family member, add $3,890. For each additional college student (except parents), subtract $2,760.

18. Slide 6-18 © NASFAA 2011 Table A4: Business/Farm Net Worth Adjustment [for EFC Formula A (parents only)] If the net worth of a Then the adjusted business or farm is— net worth is— Less than $1 $0 $1 to $115,000 40% of net worth of business/farm $115,001 to $345,000 $ 46,000 + 50% of net worth over $115,000 $345,001 to $580,000 $161,000 + 60% of net worth over $345,000 $580,001 or more $302,000 + 100% of net worth over $580,000

19. Slide 6-19 © NASFAA 2011 Table A6: Parents’ Contribution from AAI If parents’ AAI is— The parents’ contribution from AAI is— Less than -$3,409 -$750 -$3,409 to $14,500 22% of AAI $14,501 to $18,200 $3,190 + 25% of AAI over $14,500 $18,201 to $21,900 $4,115 + 29% of AAI over $18,200 $21,901 to $25,600 $5,188 + 34% of AAI over $21,900 $25,601 to $29,300 $6,446 + 40% of AAI over $25,600 $29,301 or more $7,926 + 47% of AAI over $29,300

20. Slide 6-20 © NASFAA 2011