2. Fundamentals of Needs Analysis

3. 2 How is EFC Determined? Three regular full data formulas –Dependent student –Independent student –Independent student with dependents other than a spouse

4. 3 How is EFC Determined? –Simplified –Automatic zero

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 13 Need Analysis Concepts Beyond basic needs, families can exercise discretion FM allowances protect family resources –Basic needs –Non-education related discretionary costs

15. 14 Need Analysis Concepts FM measures discretionary resources –Establishes a portion available for education

16. 15 Treatment of Income in FM Total Income: Base year income from all taxable and untaxable sources -Exclusions (FAFSA Worksheet C) =Total Income

17. 16 Treatment of Income in FM Available Income –Portion of income remaining for discretionary spending: Total income -Total Allowances =Available Income (AI)

18. 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

19. 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

20. 19 Total Allowances Employment expense allowance –Represents additional costs when both parents work –Applies to working single parent families

21. 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

22. 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

23. 22 Treatment of Parents’ Assets in FM Total Net Worth -Education Savings and Asset Protection Allowance =Discretionary Net Worth

24. 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

25. 24 Treatment of Parents’ Assets in FM Discretionary Net Worth X 12% (asset conversion rate) =Contribution from Assets

26. 25 Adjusted Available Income Parents’ Available Income (+ / -) +Parents’ Contribution from Assets (+/ 0) =Total Adjusted Available Income (+ / -)

27. 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

28. 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

29. 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

30. 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

31. 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

32. 31 Determining EFC Parents’ Contribution +Student’s Contribution from AI +Student’s Contribution from assets = 9 month EFC

33. 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

34. 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

35. 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.

36. 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