It is not uncommon for parents to express frustration about being penalized for saving for their child’s education and receiving a smaller aid package. Some young parents have even been advised by their friends not to save at all, as they will receive less financial aid from colleges. However, based on my experience, families with savings are better off. 

When applying for financial aid, a formula is used to determine the Expected Family Contribution (EFC), which is the minimum annual amount a college thinks a family can afford to pay for college. It is important to note that the EFC value is for only one year, not four years, and most parents find it challenging to come up with the required amount. There are lots of new terms to become familiar with. Here is our glossary. 

The Expected Family Contribution (EFC) calculation only includes non-retirement assets, such as checking and savings accounts, investment accounts, and stock grants. Both parents and the student’s non-retirement assets are considered in the calculation, with an expectation that 5.64% of those assets will be contributed each year towards the child’s education. For instance, if a family has $100,000 in non-retirement assets, the EFC calculation will include $5,640. While families may believe that not saving outside of retirement accounts will increase their financial aid, the EFC formula heavily relies on the parents’ adjusted gross income (AGI) as the most significant contributor to their “ability to pay.” 

The EFC formula assumes that up to 47% of the total income will be contributed towards funding the child’s college education, after subtracting taxes and other allowances.

For a family with an Adjusted Gross Income (AGI) of $120,000, the contribution to their Expected Family Contribution (EFC) from their income would be around $20,000 – $25,000. Taking the Jones family as an example, with an AGI of $120,000, their contribution to the EFC from parental income would be between $20,000 – $25,000 per year. If the family had not saved for college, they would have no means to cover this portion of their EFC. 

While non-retirement assets increase the EFC, families still need funds to pay their share of the cost of college. Based on my experience working with families, those who have some savings are better off than those who do not. Families without savings are forced to resort to less desirable approaches to cover their EFC, such as changing their standard of living, taking costly loans, or leveraging other assets. It is important to note that colleges will calculate the EFC and expect families to cover a certain amount of the cost of college, regardless of whether they have savings or not. To learn more about college savings and estimating the EFC, please check out the Net Price Calculator on each specific college’s website, discuss your personal assets/savings with your financial consultant, or call us. We are happy to help where we can.  

Net Price: The real cost for a year of college is determined by taking the stated cost of attendance and subtracting free money such as merit and need-based scholarships and grants. The net price is specific to each student because it’s based on their personal circumstances and the college’s financial aid policies. (Loans do not change the net price.)