Improve the Financing Process
Improve Federal Grant and Loan Programs
EFC recommends that Congress increase grant aid for at-risk, low-income, and first-generation students so as to minimize their need to borrow, especially in the first years of college. EFC strongly supports Congress’ restoration of year-round Pell Grants.
Increase Income Protection and Savings Allowances
The expected family contribution (EFC) is the amount of money that a family is expected to contribute toward the price of a student’s education from its income and assets. The EFC consists of two parts: the parent contribution and the student contribution. Generally, “family contribution” refers to both of these combined. For independent students, there is no parent contribution.
To determine the amount of income available for educational purposes, both parents and students are given “offsets” against income. Offsets include taxes, employment expenses, and an income protection allowance. For parents and independent students with dependents, the income protection allowance can range from approximately $17,000 to $53,000, based on family size and number of family members enrolled in college. After subtracting the offsets from total income, the remaining income is called available income. For parents and independent students with dependents, the available assets are added to the available income to arrive at the adjusted available income. A portion of this amount is multiplied by 22 to 47 percent (plus a additional pre-determined assessment) to arrive at the total expected family contribution.
In order to prevent the unintended consequence of this calculation dissuading students from working and saving additional money for college, EFC recommends that the income protection allowance and savings allowance for students be increased.
Modify the Treatment of 529 College Savings Assets In Federal Financial Aid Methodology
529 college savings plans — tax-advantaged savings plan designed to encourage saving for future college costs — stand out as popular and effective planning and saving tools that both encourage and enable American families across income levels to prepare for the costs of higher education.
New research released by Strategic Insight, an independent financial research and data analysis organization, shows that a large majority of 529 users – 75 percent — have household incomes of $150,000 or less. Most participants represent solidly middle-income families — and lower-income households also recognize the benefits and need for targeted college saving, with a full 17 percent of 529 families having household income of $50,000 or less.
The overwhelming consensus among 529 state program managers and financial advisors is that the current treatment of 529 savings in the federal financial aid methodology is the single largest obstacle to American families utilizing 529 plans to save for college expenses.
There is a widely publicized perception documented in national surveys that saving in 529 plans negatively impacts and jeopardizes a family’s eligibility for financial aid. This perception is consistently reinforced by personal finance media and a large number of financial advisors who wish to steer their clients to other investments. However, this is a false perception — the reality is that only 5.6 percent of the value of a 529 plan is included in the Expected Family Contribution. Furthermore, because of this widely held this false perception, families have been hesitant to save in 529 plans, resulting in an increase in student loan debt.
EFC recommends removing 529 accounts completely from federal financial aid methodology to encourage parents, grandparents, and other family members to utilize the tax-free advantages of 529 plans, thereby increasing savings, and decreasing borrowing.