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2 Determining Financial Need


This article is from the Financial Aid, Scholarships, and Fellowships FAQ, by Mark Kantrowitz with numerous contributions by others.

2 Determining Financial Need

Your school's financial aid administrator calculate your financial
need using information supplied by you. If you are classified as a
dependent student, as are most undergraduate students, your parents
will also be required to supply some information.

Much of this information is contained on the Free Application for
Federal Student Aid (FAFSA). The FAFSA must be submitted for you to be
considered for virtually all need-based aid, including most federal
and state sources of financial aid. Some schools may require the
Financial Aid PROFILE (formerly known as the FAF or "Financial Aid
Form"), or a supplemental application form for additional information.

Most schools suggest you submit the FAFSA as soon as possible after
January 1 of your senior year in high school (the year you'll be
starting college) and no later than May 1. The FAFSA should normally
be submitted by March 1 for you to be eligible for most state aid.
(Do not submit the FAFSA before January 1, or it will be automatically

The FAFSA requires financial information for the previous tax year.
For example, for the 2000-2001 academic year, you must provide 1999
financial information. Even though you may not be able to complete
your federal income tax return until March or April, you should not
wait to file your FAFSA until your tax returns are filed with the IRS.
Instead, use estimated income information and submit the FAFSA as soon
as possible after January 1. This practice is completely acceptable
and recommended, especially if you anticipate your family
circumstances changing during the subsequent year.

The following documents from both student and parents, as appropriate,
will assist you in filling out the FAFSA:

+ US Income Tax Returns (IRS Form 1040, 1040A, or 1040EZ) for the
fiscal year that just ended and W-2 and 1099 forms.

+ Records of untaxed income, such as Social Security benefits,
AFDC or ADC, child support, welfare, pensions, military
subsistence allowances, and veterans benefits.

+ Current bank statements and mortgage information.

+ Medical and dental expenses for the past year which weren't
covered by health insurance.

+ Business and/or farm records.

+ Records of investments such as stocks, bonds, and mutual funds,
as well as bank Certificates of Deposit (CDs) and recent
statements from any money market accounts.

+ Social Security numbers.

Four to six weeks after you file the FAFSA, you will receive a Student
Aid Report (SAR). The SAR summarizes the information you provided on
the FAFSA and indicates the Expected Family Contribution (EFC).

The determination of financial need depends on two numbers:

+ The Cost of Attendance (COA) for your school. This may also be
known as the school's "budget".

+ The Expected Family Contribution (EFC). This is the amount of
money your family is expected to contribute to your education.

Your financial need is the difference between the COA and EFC:

Financial Need = COA - EFC

The amount of financial aid for which the student is eligible will be
based on this number. Your school will try to meet this demonstrated
need through a financial aid "package", which combines aid from
federal and state sources with loans, institutional grants, and
student employment.

Unfortunately, your school may not be able to provide you with
financial aid to meet your entire demonstrated financial need. Many
colleges and universities must create a "Unmet Need" or "Need Gap"
between the cost of attendance and the amount you can afford to pay
because of limited funds. Schools have limited funds available for
financial aid, and they must determine how to best allocate the funds
to their neediest students. Very few schools can afford to meet the
demonstrated need of all their students, so most assume that all
students and/or parents must pay a certain minimum amount, regardless
of their need. Others give financial aid only to the neediest
students. You're expected to obtain the funds for the unmet need or
gap through summer or term-time employment earnings and educational
loans, including the Federal Parent Loan for Undergraduate Students

Moreover, your financial aid package may be reduced by any "outside
resources" you receive. A resource is something that is available
because the student is in school, and is normally counted after need
is determined. For example, if your parents have contributed money to
a prepaid tuition plan, the money received from that plan toward the
student's education will be subtracted from the determination of
financial need. Other resources include VA educational benefits and
outside scholarships. Thus the determination of the school's financial
aid package is actually based on

Remaining Financial Need = Financial Need - Resources

So even though resources do not affect the size of the Pell Grant the
student will receive, they do affect the amount of Stafford or
campus-based aid available. They are often counted 100% toward meeting
need, and the university will reduce the size of the financial aid
package to compensate. Resources represent a direct reduction of cost
(e.g., a prepaid tuition plan cuts the amount of tuition the student
will pay) and therefore less need.

[A few schools will "reward" students for bringing in outside
scholarships by using a portion of the outside funds to reduce the
self help level, or by using them to reduce the loan portion of the
financial aid package and not the institutional grants.]

The school's "budget" or COA will include tuition, fees, room and
board, books and supplies, travel, and personal and incidental
expenses. In many cases there is a standard fixed budget amount for
some of these categories. For example, the budget amount for travel
may vary depending on the student's home state. Likewise room and
board expenses may be reduced and travel expenses increased for
commuter students.

Budget allowances are used only for determining the estimated expenses
that a student will experience during the enrollment period. Actual
costs will vary depending on the your particular lifestyle. If special
circumstances should warrant a higher budget amount, consult your
financial aid administrator, who is permitted to increase your budget,
if appropriate, with documentation. For example, students with child
care expenses or expenses related to a disability may be able to get
their budget increased to compensate. If your books and supplies cost
more than the amount in your budget, save your receipts and show them
to a financial aid administrator.

The federal formula approved by Congress to calculate the EFC is
called the Federal Methodology (FM). The federal methodology is used
to determine eligibility for federal funds. If a college or university
relies on a different formula for awarding its own funds, that formula
is called the Institutional Methodology (IM). Different colleges and
universities may use different institutional methodologies.

The EFC is the sum of the student contribution and the parent

EFC = Student Contribution + Parent Contribution

An independent student is not expected to have a parent contribution.
To be classified as independent for Federal aid purposes, a student
must either be 24 years of age or meet one of the following exceptions
1. be married
2. have a dependent
3. be a graduate or professional student
4. be a ward of the court or an orphan
5. be a veteran

Some schools (mostly private) expect both natural parents to
contribute to their children's educational expenses, regardless of a
divorce or any court orders to the contrary. In cases of divorce where
the custodial parent remarries, the financial information for both the
custodial parent and the step-parent must be included on the FAFSA as
well as any child support and/or alimony received from the
non-custodial parent.

If a student is classified as independent because of marriage, the
spouse's financial information must be included on the form.

The student contribution assesses 35% of the student's assets and 50%
of the student's earnings after subtracting a small threshold from the
student's earnings.

The parent contribution depends on the number of parents with earned
income, their income and assets, the age of the older parent, the
family size, and the number of family members enrolled in
postsecondary education. Income is not just the adjusted gross income
from the tax return, but also includes nontaxable income such as
social security benefits and child support. The Higher Education
Amendments of 1992 eliminated home equity from the EFC, but many
private colleges and universities still use a parent's home equity as
a way of rationing their school's own grant and scholarship
funds. Money set aside for retirement in a pension plan such as a
401K, IRA, Keogh, or 403b is usually not counted as an asset. However,
the funds contributed to a tax-deferred retirement program during the
previous year must be included on the FAFSA as "other untaxed income".
In addition, an asset protection allowance shelters a portion of the
assets from the calculation of the parent contribution. The asset
protection allowance increases with the age of the parents to allow
for emergencies and retirement needs. The asset protection allowance
for most parents of college age children will be approximately
$40,000. The parent contribution assesses a maximum of 5.64% of parent
assets and 20% to 50% of parent income, after subtracting various

The full need analysis formula is rather complex. If you want an
estimate of your EFC, use the free financial aid estimation calculator
on the FinAid site. It will let you play "what-if" games.


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