Thursday, September 6, 2012

Does how the EFC is calculated penalize savers

This is probably not a revelation to many people but with K1 approaching the age where we need to start thinking about college, this has been bugging me.

EFC is the expected family contribution calculated by colleges as well as the feds when applying for financial aid for college.

Family A: Household income of past 5 years of $100,000. Hand to mouth consumers who spend on luxury goods and expensive vacations. Savings = 0. Net worth = 0.

Family B: Household income of past 5 years of $100,000. Saves for college. Savings = $100,000. Net worth = $50,000.

All else being equal.

Will Family A’s EFC be the same as Family B’s EFC? True, Family A’s kid might graduate with more debt but it is also likely that they will also qualify for grants so that the net price paid will be lower than Family B.

Websites such as this one make the calculations even more stark.

For Bowdoin college, I used household income of $170,000 with AGI of 120,000 and zeros for almost everything else except primary residence and savings. For Family A I assumed net worth in residence was $500,000 and had savings of $100,000 $10,000. For Family B I assumed net worth in residence of $100,000 and savings of 0. Family A's EFC was about $16,000 per year while Family B's was $6,000.

Update: Found an Atlantic article with the same theme.
Update: I also assumed entering college in Fall with an additional child not yet (but going to be) in college.

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