What are you worth? How the government calculates financial aid packages

loan application with piggy bank

A sweet financial aid package can mean the difference between heading to the college of your dreams or taking a cheaper route to your degree. How the government determines your Expected Family Contribution — the amount they expect your family to fork over for one year of college — is largely a mystery to most families. This crash course in the federal aid methodology will teach you how your financial aid package is determined and what you can do to maximize your aid eligibility before filing the Free Application for Federal Student Aid (FAFSA).

How it works

To figure out your financial need, the government calculates your expected family contribution and subtracts it from the total costs your family will pay for any children who will be attending college in the coming school year. Because your federal aid package is contingent on the price of your institution, it's possible to land need-based aid even if your family has a substantial income, says James Anderson, director of financial aid for Montclair State University in New Jersey.

"If you have a $150,000 family income and you've got three kids, let's say, you may have an EFC of $30,000 or $40,000, but some of the schools you're looking at may cost $60,000," he explains. "It's all relative."

Colleges furnish figures on their estimated cost of attendance, but calculating an expected family contribution (EFC) is far trickier. You can find the formula in all of its complicated glory on the Federal Student Aid website, but the equation is primarily based on your family's collective income and financial assets, minus a modest allowance for living costs and some savings. The exact allowances for the 2014-15 school year are available on pages 18 and 19 of the guide. The government's FAFSA4Caster tool can also give you an estimate on your expected family contribution.

How assets are weighed

One factor that complicates the federal needs formula is that not all assets are considered equal.

"Kids' assets count against you more heavily than parent assets," says Scott Weingold, co-founder and managing partner of College Planning Network, a college admissions and financial aid servicing center headquartered in Cleveland.

In the current federal needs formula, parents can save up to their asset protection allowance, which ranges from $0 for young parents all the way up to $52,600 for families where at least one parent is 65 or older. For every hundred dollars saved beyond that protection allowance, the government subtracts up to $5.64 from the family's financial aid package. Students have no asset protection allowance, and for every hundred dollars saved in an account held in the their name, the government subtracts $20.00 from the family's financial aid package.

That means that if a family has $30,000 saved for college, they can bank an additional $4,300 in financial aid simply by moving money from a child's saving account to one held by their parents before applying for aid. The one exception is 529 plans. Funds in a 529 account, regardless whether it's held in a parent's or child's name, is assessed at the parent's rate.

One way to get around that nasty loophole is to spend money held in the child's name for necessary supplies before applying for financial aid.

"If you need a computer for college, if the child needs a car, if they need some educational-related expenses, then it might make sense to use some of their funds to help pay for it prior to filling out the FAFSA form," Weingold adds. "... You don't want to go crazy because if you need that money for college, you don't want to spend it all and then it's not there."

What you should know

It's important for families to understand what's considered in the federal needs formula, but it's also crucial to know what's not, says Ryan Clark, author of "College Aid for Middle Class America: Solutions to Paying Wholesale vs. Retail."

The needs formula "doesn't take into consideration consumer debt," Clark says. "... When you see that income and a lot of that is being paid out towards healthcare and towards credit card bills, there's not a lot left over even though it looks like you're making a lot of money."

Students who have high expenses that may not be considered in the federal needs formula, such as unusually large medical costs, should alert their college's financial aid office.

Certain assets also aren't considered in the federal aid formula including money stored in retirement accounts, life insurance plans and equity invested in the family's primary home. Equity in vacation and rental properties is still fair game.

"Don't list assets that don't need to be reported," Weingold advises parents. "[The FAFSA] ask for the value of your investments, so people will put down their IRAs and 401K — even life insurance cash values or annuities. Those do not need to be reported as investments on the FAFSA form. That raises someone's family contribution."


James Anderson, Director of Financial Aid at Montclair State University, Interviewed by the author on April 30, 2014

Ryan Clark, author of "College Aid for Middle Class America," Interviewed by the author on May 1, 2014

"The EFC Formula, 2014-15," Federal Student Aid, U.S. Department of Education,

"Federal Student Aid Handbook," Federal Student Aid, U.S. Department of Education,

Scott Weingold, Co-founder and Managing Partner of the College Planning Network, Interviewed by the author on May 1, 2014