<p>My son is starting to look at colleges and it was recommended to review the EFC. I have a few dollars in a money market account and was wondering if I should use this money to pay off my house? Will this help with lowering my EFC?</p>
<p>You need to understand how the EFC is calculated; it doesn’t include home equity, and parent assets are counted at the rate of 5.6%. Here’s the formula:</p>
<p><a href=“http://ifap.ed.gov/efcformulaguide/attachments/101310EFCFormulaGuide1112.pdf[/url]”>http://ifap.ed.gov/efcformulaguide/attachments/101310EFCFormulaGuide1112.pdf</a></p>
<p>Basically if you have $1000 in a money market account, it will add $56 to your EFC. If you take that $1000 and use it to pay down a mortgage, it will subtract $56 from your EFC. Your home equity plays no part in the EFC calculation. </p>
<p>You also have an age-based asset protection allowance (table A5 in the linked document) of around $50,000. So if your assets are below that allowance, then none are included in the EFC calculation.</p>
<p>It’s always a good idea to know what your EFC is well ahead of time. This will allow you to go through the 5 stages of grief early in the process :)</p>
<p>It depends. Some schools use FAFSA, some use CSS. With FAFSA, using funds in money market accounts to pay down debt or to fund a retirement account will lower EFC. I’m not as familiar with CSS, but it CSS factors in the equity in your house, so moving $ from a MM acct to paying down the mortgage won’t help as much in lowering EFC.</p>
<p>For FAFSA, income is by far the most important factor. In most cases, parent assets have very little effect on EFC unless they are really huge. But EFC is quite sensitive to student income and assets.</p>
<p>CSS PROFILE is an additional report required by some schools. It is far more detailed, and delves into assets including non-liquid assets such as home equity. Schools can pick and choose what they want to use from PROFILE; some schools take home equity into account while others do not.</p>
<p>Reducing your income by contributing to a 401k or IRA won’t help your EFC, although it will help your taxes and your retirement. Contributions are added back to Adjusted Gross Income, so they are counted as income by FAFSA. However, money already in a retirement account is off-limits. As far as I know, it’s just about the only thing that is.</p>
<p>Also, understand that in many (most?) cases most need based packages will include lots of loans to fill the gap between your EFC and the cost of attendance. You may prefer to have the cash on hand to spend on tuition rather than taking out loans.</p>
<p>I would suggest you use one of the online EFC calculators and run the numbers both ways. You may find that using this money market account to pay off your mortgage won’t really make a difference at all.</p>
<p>Remember…the FAFSA EFC is primarily used to determine eligibility for federally funded need based aid. This is for LOW INCOME students. It includes the Pell Grant, SEOG (if your school awards it), work study, and Perkins and Stafford loans. Unless your FAFSA EFC is below $5200 (I’m not sure the exact amount…but it’s in that range)…you would not be eligible for a Pell grant at all. And unless your EFC is $0, you would get a “prorated” amount of the Pell based on your actual EFC.</p>
<p>Some folks assume that liquidating various savings accounts will make some kind of difference. If the account is larger than the amount of asset protection, it will make “some” difference. But really…for FAFSA purposes, the assets are only tapped at 5.6% or so. </p>
<p>NOW…with the CSS Profile schools, you need to know that your home equity might very well add about the same amount in family contribution as the money you have in the bank. Profile schools each have their own formula…and they use home equity in your primary residence in different ways (some schools don’t use it at all…others use a certain %age of it).</p>
<p>So…check out your numbers using an online calculator. You may find this doesn’t really matter…at all.</p>
<p>Thumper is right. There are some things that everyone should do in terms of increasing financial aid numbers. Absolutely, your kid should start paying his own expenses so that he does not have a big fat account sitting there when FAFSA and PROFILE are completed because his assets are hit a lot harder than yours and some PROFILE schools will force that initial amount to be continued in usage for all 4 years. So that one is a definite. A shame the way it is that way, but it is. Also FAFSA hits the kids’ accounts with 20% vs the 5.6% that parents aree assessed. </p>
<p>The problem with much asset planning for this is that it so depends on which schools your kid is considering. The PROFILE schools are the ones that tend to meet more need. And they can use any rules they want. </p>
<p>The other thing is that you don’t live for college alone, and some moves that may save a few bucks for college may not be the wisest financial decisions to make in other aspects of your life. So you take your savings and pay off your house. If the housing market crashes, HELOCs are shut down, and you need money, you just lost a lot of flexibility. Happened to me a few years ago. The advice to go on ahead and spend your money on stuff you are thinking of getting makes sense, except for the fact that then you don’t have that money anymore. It might be smarter for you to keep putting off those repairs and purchases and keep that buffer for flexibility reasons.</p>
<p>Where things make the most difference is if you are just on the line for eligibility for something. Like if you are close to being PELL eligible, and paying some of your mortgage with your savings would cross you over the line. As Thumper says, most of the time it won’t make much difference at all to do that, but if you are close, it could.</p>
<p>Buy “Paying for College Without Going Broke” Kalman Chany, Princeton Review.
Get both 2010 & 2011 Edition, as the 2011 Edition drops the IM (Institutional Methodology) EFC calculation. Take your 2010 Tax Returns & do the worksheets in back of the book.</p>
<p>That is a great book to use, Slumom.</p>
<p>I like the Finaid.org website - very good advice - easy to follow.</p>
<p>[FinAid</a> | Financial Aid Applications | Maximizing Your Aid Eligibility](<a href=“Your Guide for College Financial Aid - Finaid”>http://www.finaid.org/fafsa/maximize.phtml)</p>
<p>This section of it addresses your primary question of how to lower your EFC.</p>
<p>The trouble with the EFC calculator on Finaid website is that it is for 2008-2009, so it is outdated. </p>
<p>With Kal Chany’s books there is always a webpage you can visit to see anything changed in financial aid which ocurred after the publication of the current edition.</p>
<p>Basically if you have $1000 in a money market account, it will add $56 to your EFC. If you take that $1000 and use it to pay down a mortgage, it will subtract $56 from your EFC. Your home equity plays no part in the EFC calculation.</p>
<p>Not really.</p>
<p>For single parents and married parents there is a certain amount that is protected (may depend on age as well). The protected amount is in the tens of thousands…so if you have say $20k in a money market and that is all you have, then none of it would count for FAFSA. However, I don’t know how CSS would handle it. </p>
<p>And, for CSS…home equity is often considered.</p>
<p>Before you do any financial gymnastics, be aware that EFC is largely income driven. For many people, nothing they do is going to result in getting more aid. And, since most schools do NOT meet need and most schools do NOT have much free money to give away, you will likely need your money to help pay for your child’s education.</p>
<p>To get a VERY ROUGH idea of what your EFC might be…figure about 22% of your income (not net income). It could be more than that if you have a LOT of savings. It could be less than that if you have a large family or other kids in college.</p>
<p>If there is no way that you can pay around 22% of your income, then…</p>
<p>1) be upfront with your child. tell him exactly how much you can spend each year. If it’s $10k per year…tell him that. If it’s more or less, tell him that. </p>
<p>2) Tell your child that any school that costs more than what you can spend will have to get covered thru aid, scholarships, or SMALL federal student loans.</p>
<p>3) if you won’t take out a Plus loan or co-sign loans, let him know that.</p>
<p>4) tell your son that he needs to have at least 2 financial safety schools on his list. These are schools that you know he’ll get accepted to, and you know FOR SURE that all costs will be covered thru assured scholarships, family funds, and/or small student loans. And, your son must like these schools.</p>
<p>OP, also understand that your EFC is probably the minimum out-of-pocket that you’ll be expected to pay. Colleges are under no obligation to give you the aid to cover cost of attendance over the EFC. And usually at least some of the “aid” is loans.</p>
<p>And I just discovered that if D maintains her 4.0 and gets >29 on act she can enter honors college at Kent state with a substantial scholarship. Is Kent her first choice, definitely not, but the honors college makes it attractive and it at least has a minor in linguistics which she may want but couldn’t get at private schools. I am really coming around to state schools! Lol. Kent is only around 19k per year! It is definitely our safety school…luckily D actually likes it and Yes, she has visited it.</p>
<p>And thanks to the housing market crash we have very little equity in our home. We pour all our extra income into my husbands ira and my 401k. How do these affect efc?</p>
<p>The fast and certain way to reduce your EFC, don’t work !
If you can reduce your family income- do so!</p>
<p>It’s that simple. If you have discretionary income – as a self employed person or can reduce your hours with your current employer without any substantial pain to your household cash flow, there is an incentive to reduce your income.</p>
<p>If it’s the difference between earning money and maxing out 401(k)s or cutting back income and not saving for your retirement while your kid is in school, give up any and all income you can afford to do as the marginal EFC calculation is brutal for the middle class (families earning 100-150k).</p>
<p>I believe there is a 50% penalty on income after your family hits 110,000 in total income (that’s middle class). So rather than earn another 30k and loose half of it to your EFC - just don’t work - it’s not worth it.
Twisted isn’t it-- but that’s the model that hits the middle class.
Families who are too “poor” to pay $50k for college but too “rich” to get financial aid are better off reducing income back to 100-110 and attend a “meets full need” institution. That is the saga facing middle class families.</p>
<p>In short-- don’t work and earn more financial aid.
Obama’s platforms ran on changing the FAFSA model - that has yet to happen.</p>
<p>Princeton has it right-- 10% of family income should be the maximum any family should have to pay for college. My kids don’t go to Princeton. Darn.</p>
<p>How do you truly know your equity? As mspearl said, equity keeps dropping as the market where we are yet again took another drop. It’s troublesome.</p>
<p>mom2collegekids you quoted my paragraph about the effect of savings on EFC but ignored the paragraph after that regarding the asset protection allowance. The $50K (plus or minus) allowance was covered there. You mention it may be age-based. In fact, if you look at table A5 in the link I posted, you’ll see the asset protection allowance is entirely age-based; there are no other factors involved.</p>
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<p>Savings in retirement accounts are not reported on FAFSA. Pre-tax contributions to retirement accounts such as 401k and IRAs made during the base year for FAFSA are added back in to the total income amount. Contributions made prior to the base year for FAFSA have no effect on EFC. Some Profile colleges request information on the total amount saved in retirement accounts, but it’s not clear how this information is used.</p>
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<p>This has been discussed extensively on the Financial Aid forum. There are many ways: Zillow, market comps, a friendly real estate agent, recent assessed value, reasonable guess… There’s a fairly recent thread regarding how certain colleges use home equity: some cap it at 110% of income, some cap at 200% of income, some ignore it, etc.</p>
<p>Princeton has it right-- 10% of family income should be the maximum any family should have to pay for college.</p>
<p>I don’t think it’s “any family”…I think it may be for families that earn about $160k or less. There are families at Princeton who are paying full freight and they aren’t earning $550k per year. </p>
<p>*And I just discovered that if D maintains her 4.0 and gets >29 on act she can enter honors college at Kent state with a substantial scholarship. Is Kent her first choice, definitely not, but the honors college makes it attractive and it at least has a minor in linguistics which she may want but couldn’t get at private schools. I am really coming around to state schools! Lol. Kent is only around 19k per year! It is definitely our safety school…luckily D actually likes it and Yes, she has visited it.</p>
<p>*</p>
<p>Is that an ASSURED scholarship for those stats? The website isn’t quite clear…it looks like it might be competitive. [url=<a href=“http://www.kent.edu/admissions/cost/scholarship.cfm]Scholarships[/url”>http://www.kent.edu/admissions/cost/scholarship.cfm]Scholarships[/url</a>]</p>
<p>Yes, it’s good to have financial safeties in reserve. There are several schools that give ASSURED good scholarships for ACT 30+ with strong GPAs. I think when money is a concern, every child should have at least 2-3 financial safeties. This way a child still has a choice if the pricey schools don’t work out.</p>
<p>I know, isn’t it sad that middle class families are expected to pay so much? I feel like my daughter has worked so hard to get perfect grades but she might not be able to attend her top choice school because I don’t have 30 k laying around! My husband is deferring his bonuses until January so our 2011 income will be substantially less and I am working as little as possible. We will have to keep deferring the bonuses and I know next year will mean loans but we have no other options. My D wants to go to grad school and I refuse to let her graduate with 60k in debt. Unless she gets significant scholarships a state school with honors program is very likely. We just submitted an application for a scholarship of either 3k Or 20k. The 20k is a very long shot but the 3k looks likely due to her chosen for a summer program. Let’s just say we will be applying for a lot of scholarships!</p>
<p>Mom2collegekids. I spoke with an admissions counselor at Kent state yesterday and was told kids entering the honors college with these stats will receive something. Whether or not it is a huge amount depends on the applicants. I realize it isn’t guaranteed but it is much more likely than at a more prestigious college. And it remains our financial safety because at least the first year we shouldn’t have to take out more than 5k in loans- if any.</p>