Why Is My EFC So High With Low Income?

The Expected Family Contribution (EFC) represents the amount a family is expected to contribute toward the cost of a student’s education for one academic year. It measures financial strength, not necessarily the actual amount a family will pay. The EFC impacts a student’s eligibility for various federal aid types, including grants and subsidized loans. Many families find their EFC high despite low income, prompting a need to understand the calculation and contributing factors.

Understanding EFC Calculation Components

The EFC calculation considers various financial and household data points to determine a family’s ability to contribute to college costs. This includes parental and student income and assets, alongside household specifics. The federal government uses information from the Free Application for Federal Student Aid (FAFSA) to arrive at this figure.

Parental Income

Parental income forms a part of the EFC calculation, encompassing both taxable and untaxed sources. Taxable income includes wages, salaries, self-employment earnings, interest, and dividends. Untaxed income sources such as child support received, untaxed portions of pensions, IRA distributions, and workers’ compensation are factored in. Contributions to tax-deferred retirement plans, like 401(k)s or IRAs, are also added back into the income calculation.

Student Income

A student’s own income, both taxable and untaxed, is assessed, generally at a higher rate than parental income after a certain allowance. This higher assessment rate reflects the assumption that students have fewer fixed expenses and can contribute a larger percentage of their discretionary income toward their education.

Parental Assets

Non-retirement assets held by parents are included in the EFC calculation. These assets typically include funds in savings and checking accounts, investments such as stocks, bonds, and mutual funds, and equity in real estate other than the primary residence. Certain assets are excluded, such as the equity in the family’s primary home, retirement accounts, and the cash value of life insurance policies. Parental assets, after certain allowances, are assessed at a rate of up to 5.64%.

Student Assets

Student assets are assessed at a significantly higher percentage compared to parental assets. Student assets, including savings and investments, are assessed at a flat rate of 20%, with no asset protection allowance. This higher assessment rate assumes that a larger portion of a student’s assets is available for educational expenses.

Household Information

Factors related to household size and the number of family members attending college at least half-time (excluding parents) also influence the EFC. These elements affect the income protection allowances and divisors used in the formula. A larger household size and more family members enrolled in college can lead to a lower EFC per student, reflecting a greater spread of financial resources.

Parental Age

The age of the older parent previously played a role in determining the “asset protection allowance,” which shielded a portion of parental assets. Historically, older parents received a higher allowance. However, this allowance has been significantly reduced, reaching $0 for the 2023-24 FAFSA.

Common Reasons for a Higher EFC

Even when a family perceives their income as low, several aspects of the EFC formula’s treatment of income and assets can lead to a higher calculated contribution. The EFC captures a broader picture of financial capacity than just taxable income. This can result in a disconnect between a family’s perceived ability to pay and the calculated EFC.

Untaxed Income Sources

The EFC calculation includes various untaxed income sources not reflected on a tax return, potentially inflating the EFC despite low taxable income. Examples include child support received, untaxed portions of pensions and IRA distributions, workers’ compensation, and contributions to tax-deferred retirement plans. Pre-tax retirement contributions, while reducing current taxable income, are added back into the EFC calculation. This means these additional income streams or savings behaviors are considered part of a family’s financial strength.

Student Assets and Income Contribution

Student assets and income are assessed at a higher rate than parental contributions, which can disproportionately increase the EFC. Student assets are assessed at a higher rate, meaning $200 is considered available for college costs for every $1,000 in a student’s savings. This is higher than the parental asset assessment rate. A student’s income above a small income protection allowance is assessed at a higher rate. These higher assessment rates for student-owned funds can lead to a surprisingly high EFC.

Prior-Prior Year Income

The EFC calculation uses income data from two years prior to the academic year for which aid is sought. For instance, for the 2024-2025 aid year, 2022 income is used. This “prior-prior year” income approach can create a challenge if a family’s financial situation has deteriorated since that time. A job loss, reduced work hours, or other financial setbacks occurring after the prior-prior year will not be immediately reflected. This can result in an EFC that does not accurately represent the family’s current ability to pay.

Impact of Multiple Children in College

While having multiple children enrolled in college at least half-time can reduce the EFC per student, it does not always lead to a lower EFC if other factors are present. The EFC is divided by the number of students in college, theoretically lowering the contribution for each. However, if the family has assets or untaxed income, this benefit may be offset. The formula still considers the overall financial picture, and these other factors can keep the EFC higher than anticipated.

Financial Aid Form Differences

The Free Application for Federal Student Aid (FAFSA) is the primary form for federal aid. Some institutions, particularly private colleges, use the College Scholarship Service (CSS) Profile. The CSS Profile may consider additional assets not included in the FAFSA, which can lead to a higher institutional EFC. For example, some schools using the CSS Profile might consider home equity or the value of a small business, generally excluded from the FAFSA calculation. This can create a scenario where a family receives a lower EFC on their FAFSA but a higher one from a specific institution using the CSS Profile.

Special Circumstances and Professional Judgment

The EFC formula provides a snapshot of a family’s financial situation. Unforeseen events or changes can impact a family’s ability to pay for college, leading to the need for re-evaluation. Financial aid administrators can address these situations through “professional judgment.”

Definition of Special Circumstances

Special circumstances refer to significant financial changes or unusual expenses not adequately captured by the standard EFC formula. These situations materially affect a family’s ability to contribute to college costs after the FAFSA data was submitted. Common examples include a loss of employment or a reduction in income since the prior-prior year. Other special circumstances can involve high unreimbursed medical or dental expenses, the death of a parent, or the divorce or separation of parents. One-time income events, such as severance pay, may also be considered.

The Professional Judgment Process

Families experiencing special circumstances can request a “professional judgment review” from a college’s financial aid office. This process involves submitting an appeal and providing documentation to the financial aid administrator (FAA). The FAA has discretion to adjust specific data elements on the FAFSA that influence federal student aid eligibility. The goal is to provide a more accurate assessment of the family’s current ability to pay.

Required Documentation

To support a special circumstances appeal, families must provide comprehensive documentation. This includes official letters of termination or layoff notices, recent pay stubs demonstrating reduced income, or proof of severance pay. For medical expenses, copies of medical bills and proof of payment are necessary. In cases of divorce or separation, legal documentation such as divorce decrees or separation agreements are required. Relevant tax returns reflecting changes in income or expenses should also be provided.

Outcome and Limitations

A successful professional judgment appeal can result in an adjusted EFC, potentially leading to increased financial aid eligibility. However, approval is not guaranteed. Each college’s financial aid office makes its own determination on a case-by-case basis, and their decision is final. The process addresses legitimate financial hardships but does not guarantee a specific outcome or additional aid.