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EFC and Financial Aid

One way to reduce the cost of college is through financial aid.

More than $248 billion in financial aid was distributed to students for the 2017–2018 school year. Where does this money come from and how can you make sure you’re getting all you deserve? Learn the answers to those questions and you’ll be able to take control of the process.

Where the money comes from

The $248 billion in financial aid came from four broad categories.

  • The first is the federal government, where approximately 63% of the aid came in the form of loans, grants, work-study wages and educational tax breaks.
  • The second category is state government. About 5% in aid came as tax credits for in-state residents or for those pursing specific majors, such as teaching and health care, or to certain minorities.
  • A third major category is the colleges themselves, at 25%. Typically, this money comes from endowment funds and is awarded on a first-come, first-served basis, with the lion’s share going to the top 25% of the incoming freshman class.
  • The remaining 7% came from the last category: private sources. These sources include corporations or clubs, like the Coca-Cola Company or the Lions Club. Many of them require some sort of specialized experience, club association or essay competition to receive scholarships.

Now, a student could spend days writing scholarship essays to chase after this 7%. Or they could focus on the other 93%, which is all awarded through the financial aid office at your school of choice based on a combination of merit and financial need. Of course, if you can seek funding from all of these sources, that’s great! But if you need to prioritize, you’ll probably get more return on your time investment by going after the 93%.

How completing the FAFSA fits into the process

No matter what type of school you’re interested in, the financial aid process begins with completing the Free Application for Federal Student Aid (also known as the FAFSA).

Students need to fill out this form, usually with parental guidance, prior to their freshman year of college, and then again every year until they graduate. It should be completed as early as possible starting Oct. 1 of their senior year of high school.

Once you fill out the FAFSA, your information is sent to the Department of Education (DOE). The DOE will crunch that data and use it to generate a Student Aid Report (SAR) that they send back to you. A copy of your SAR will also be sent to the schools you indicated when you filled out your FAFSA. The SAR will tell you—and the schools you are interested in—some very important information. 

In addition to summarizing the financial information you entered into the FAFSA, it will provide a number called your Expected Family Contribution (EFC). The EFC is the amount of money that the DOE expects a family to contribute to your education in a given year. College financial aid staff uses the EFC to determine how much need-based financial aid you could receive if you were to attend their school.

How the EFC is calculated

Basically, the EFC formula is divided into two parts: one for the parents and one for the student. Income and assets are assessed separately for each. You will be asked questions about your income, amount paid in taxes, and non-retirement savings and investments. Similar questions will be asked about your parents. In addition, they will be asked about the number of people in their household, the number of students in college, payments to tax-deferred retirement savings, untaxed income, and more. 

The results of the student and parent data are then added together to get the EFC for the student and the family.

If you're curious about what your EFC might be for a given year, use our EFC Calculator to get an estimate. If you’d like to understand more about your EFC, it’s a good idea to work with a tax professional or financial representative. They will help you sort these things out and to consider every option when it comes to funding your education.

Types of financial aid

There are only two types of financial aid: merit-based and need-based. Merit-based aid is awarded to those with unique talents, skills or abilities—such as musical or athletic. It is also awarded based on impressive GPAs or ACT/SAT scores. It has nothing to do with how much money you or your parents have.

Need-based aid is based on how much money the school and the federal government believe you can afford to spend on college. It’s based on a formula with two components: cost of attendance (COA), expected family contribution (EFC).

As mentioned earlier, EFC is the amount of money DOE says you and your family are able to contribute to your education in one year. Subtracting your EFC from a school’s cost of attendance determines your need. For example:

COA     (Cost of attendance)                $25,000
–EFC     (Expected family contribution)        $10,000
Need    (Amount of need-based aid a student is eligible to receive)    $15,000

Keep in mind that the $15,000 in our example is the maximum amount of need-based aid you’re eligible for. You’ll never receive more than that in need-based aid, but you could receive less because not all schools will meet 100% of a student’s demonstrated financial need. 

The most common forms of financial aid:

  • Loans: allow you to borrow money to pay for your post-secondary education and related expenses. When you take out a student loan, you must pay back the money you borrow, as well as the interest payments you accrue on your loan.
    • Some common types of student loans are Federal Direct student loans issued directly to the students, parent loans for undergraduate students (called Parent PLUS loans), Grad PLUS (for graduate students), and private loans. To learn about the differences between federal and private loans, read this article.
  • Grants and scholarships: monetary awards used to pay for post-secondary education and related expenses. Grants and scholarships are “free money” – they don’t have to be paid back. Grants for college are typically need based, whereas scholarships may be based on either needs or merits (such as special abilities, hobbies, interests, ethnicities, religions, etc.).
  • Work-study programs:  a form of federal financial aid that allow you to earn money from part-time work while you’re pursuing a degree. The “aid” comes in the form of finding you a job on campus. You can use the money you earn to help pay for your education and related expenses. Unlike a part-time job outside of the work-study program, there’s a cap on how many hours you can work and how much you can earn. (Limits vary depending on the institution.)

In order to qualify for Federal Student Loans and the Federal Work Study Program, you must apply for federal assistance through the Free Application for Federal Student Aid (FAFSA) program.

The federal government provides more than $150 billion in loans, work-study funds, and grants each year. For most students, the primary source of scholarships and grants is the college or university to which you apply. It is worth your time to apply for Federal Student Aid via the FAFSA even if you don’t qualify for federal grants because doing so makes you eligible for Federal Student Loans and potentially work-study programs.

The bottom line

When it comes to choosing between schools, don’t make a decision based on cost of attendance. Base it on how much you’ll need to pay out of pocket, either in the form of loan repayments or cash payments to cover tuition and other costs.