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Unexpected Family Contribution

A journalist recently asked a group of no-commission financial advisors if they could shed light on some families’ reactions to the financial aid process. Some have the impression that saving for college is counterproductive because it’s disadvantageous for figuring financial aid, and the journalist wanted to know where that erroneous perception came from. I was glad he was able to use one of my comments to wrap up his article.1 Here are the other comments I shared with him.

One significant problem is the terminology. The FAFSA methodology identifies the Expected Family Contribution (EFC), which is often met with incredulous annoyance. “How on earth do they think we can afford that?” I try to explain that the EFC is a number to promote a level playing field in awarding certain kinds of financial aid.

The EFC doesn’t really take account of what you will find convenient. It’s just one measure of what you might be expected to kick in for the next year of college costs. [Clients] are never happy with this explanation. They accept it, but they are often mad at the college financial aid system and feel abused. I try to get them to understand it isn’t a one-for-one offset.

When they realize savings balances go into the computation of EFC, they [may] make the leap, “So if we saved less, we’d get more financial aid?”

It’s like someone saying, “It’s no use getting a raise, because the government’s going to take it all in income tax.” Well, no. The IRS usually won’t take more than about 28% of it, and your state will probably take no more than 6%. If you have a city tax, that’s probably not more than about another 4%. So if you don’t want the $620 out of every $1,000 of your raise, you can give it to me.

I can use the money. After all, I have a daughter in college.

-Ken Robinson, JD, CFP®

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1"In most every instance, saving can only help in that regard. Kenneth F. Robinson, a financial planner in Cleveland, looks at the Fafsa and E.F.C. formulas and doesn’t think it’s a close call. 'If you saved $1,000 less, you’d generally have $56 more in financial need,' he said. 'So would you rather have the extra $944? I know I would.' "