1 The following is a presentation prepared for: Name of Conference City, ST Date.

1

The following is a presentation prepared for: Name of Conference

City, STDate

2

Need Analysis

Name of Presenter –Title School

© 2014 NASFAA 3

Today’s Agenda and Goals

• Describe the different Federal Methodology (FM) Models and when each should be used

• Explain each of the three expected family contribution (EFC) formulas

• Complete an EFC hand calculation

• Review Revisions to Need Analysis based on the Defense of Marriage Act (DOMA)

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Basic Components of Need Analysis

Cost of attendance (COA)

– Expected family contribution (EFC)

= Financial need

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Knowledge of the Formula Can Help All

• Take a minute to think about a student/parents who come to you to discuss their contribution as calculated from data submitted on the FAFSA

• During this discussion, you discover that one parent has been unemployed for 20 weeks since filing the FAFSA

• Equipped with the knowledge of how the formula works and your ability to exercise professional judgment – the example is one where updating the data would assist and better reflect the family’s financial circumstances

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Dean John Monro’s Formula – Need Analysis

Family’s income

x 15%

= Initial contribution

– $100 x children in public school

– $200 x children in private school

= Family’s ability to pay for college

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Components of Need Analysis

• Parents’ income – Taxable income from work, income from investments, income from business and/or farm, nontaxable sources of income, e.g., pensions, Social Security, gifts

• Income offsets – State taxes paid, federal taxes paid, FICA tax, business/farm expenses, unusual medical expenses, other taxes if applicable

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• Assets – Cash, stocks, bonds, home value, other land/property, summer savings (for the student it was assumed they would work during the summer and save either $900 or $1,200)

• Offsets against assets – Home debt, other assets – less any debt, and if a Dependent student – parents received an Asset Protection Allowance (still used today)

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• Dependent model – Reduction in contribution based on children in private or public elementary, middle or secondary schools vs. number in household in college (current model)

• Student’s earnings and assets

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Principles of Need Analysis

Need analysis is the system used to allocate limited financial aid resources. Over the years, the statements listed below have become the underlying principles for need analysis.

1. Parents and students have the primary responsibility for meeting postsecondary education costs.

2. The distribution of financial aid resources should be based on the family’s ability to pay, not willingness to pay.

3. The assessment of a family’s ability to pay should be independent of the amount of financial aid available and the cost of attending postsecondary school.

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Principles of Need Analysis (cont’d)

4. There should be horizontal equity (also referred to as equity across the board) in the distribution of limited financial aid resources. That is, families in similar circumstances with similar resources should be expected to make similar contributions.

5. Families in different circumstances should be expected to make contributions appropriate to their financial resources. This is known as vertical equity, and sometimes is referred to as leveling the playing field.

6. The need analysis formula should provide a “snapshot” of the family’s financial circumstance at the time of application.

7. The need analysis results are a benchmark. As such, the final assessment of the family’s ability to contribute to the student’s postsecondary education costs is subject to the professional judgment of the financial aid administrator.

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II. Formulas for Dependent Students

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Dependent Student Model A – Regular

Parents’ income

Adjusted gross income (AGI) or income earned from work

+ Untaxed income

– Additional financial information

= Total income

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Parents’ allowances

• U.S. income tax paid

• State and other taxes

• Social Security tax

• Income protection allowance

• Employment expense allowance

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Parents’ available income

Total income

– Total allowances

= Parents’ available income

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Parents’ assets

• Current balance of cash, savings, and checking accounts

• Net worth of investments, including real estate

• Net worth of businesses and investment farms

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Parents’ contribution from assets

Parents’ net worth

– Educational savings and asset protection allowance

= Discretionary net worth

x Asset conversion rate

= Parents’ contribution from assets

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Parents’ adjusted available income

Available income

+ Contribution from assets

= Parents’ adjusted available income

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Parents’ contribution

Contribution from

adjusted available income

Number

in college

= Parents’ contribution

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• Student’s contribution from income

– Student’s income

– Student’s allowances

• Student’s contribution from assets

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Parents’ contribution (income and assets)

+ Student’s contribution from available income

+ Student’s contribution from assets

= Expected family contribution (9 month)

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Dependent Student Model A – Simplified Needs Test

Any member of the parents’ household received benefits from certain federal means-tested benefit programs in 2012 or 2013

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Parents

• Filed or were eligible to file 2013 Form 1040A or 1040EZ;

• Filed 2012 Form 1040 but were not required to do so;

• Were not required to file any tax return; or• Filed income tax return required by tax

code for Puerto Rico, Guam, American Samoa, the U. S. Virgin Islands, the Republic of the Marshall Islands, the Federated States of Micronesia, or Palau; and

• AGI or earned income is less than $50,000

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• Parents’ total income, total allowances, and available income is calculated the same way as under the regular formula

• Contribution from parents’ adjusted available income calculated using a table

• Divide contribution from parents’ adjusted available income by number in college to calculate parent contribution

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• Student’s contribution from income calculated the same way as under the regular formula

• EFC is the sum of parents’ contribution and the student’s contribution from available income

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Dependent Student Model A – Automatic Zero EFC

Eligibility criteria

• Tax filing status, receipt of benefits from certain means-tested federal benefit programs, or dislocated worker status

• Income

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III. Independent Students with Dependents Other Than a Spouse Formulas

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Independent Student with Dependent(s) Regular Formula

Student and spouse (if married) total income

Student (and spouse) AGI or

Student (and spouse) income earned from work if no tax return filed

+ Total untaxed income & benefits

– Other additional financial information

= Student total income (could be negative)

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Student allowances against income

• U.S. income tax paid

• State and other taxes (from table)

• Student Social Security taxes

• Spouse Social Security taxes

• Income protection allowance (from table)

• Employment expense allowance

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FM FORMULA

Income Protection Allowance

30.00%

22.00%9.00%

16.00%

11.00%

12.00%Food

Housing

Transportation

Clothing & Personal Care

Medical Care

Other family consumption

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Student available income

Total income

– Allowances against income

= Student available income (AI), may be negative

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Student/spouse assets

Current cash, savings & checking balance+ Net worth of investments & real estate

• Primary residence not included• If negative use 0

+ Adjusted net worth of business/investment farm (from table)

• Family owned farm & business with < 100 full-time or equivalent employees not included

• If negative use 0

= Student net worth

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Student assets

Student net worth

– Asset protection allowance (from table)

= Discretionary net worth

x 7% asset conversion rate

= Contribution from assets (if negative, use 0)

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Expected family contribution

Available income (AI)

+ Contribution from assets

= Adjusted available income (AAI) may be negative

Total contribution from AAI (from table) if negative, use 0

Number in college

= Expected family contribution

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Independent Student with Dependent(s) Simplified Formula

Qualifications• Anyone in family received in prior two years:

SSI, SNAP, Free/reduced lunch, TANF and/or WIC

or

• Student & Spouse (if married) both filed or are eligible to file IRS 1040A/EZ or were not required to file a tax return

or

• Student or spouse is dislocated worker

and

• Total of student and spouse AGI < $50,000 or if nontax filers, total of work income < $50,000

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Independent Student with Dependent(s) Simple Formula

Same as regular formula except assets are excluded from calculation

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Independent Student with Dependent(s) Automatic Zero Formula

Qualifications same as for SNT except income< $24,001

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IV. Independent Students Without Dependents Other than a Spouse

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Independent Students Without Dependents Other than a Spouse

Formula B or Model B

The EFC for an independent student without dependents other than a spouse is calculated using FAFSA data for both the student, and if married, the spouse.

Total income

– Total allowances for nondiscretionary expenses

Discretionary income X 50%

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Model B• Regular Formula B

• Simplified Needs Test Formula B Student/spouse combined AGI or income earned from work is less

than $50,000 and either

Student/spouse were not required to file a tax return or were eligible to file a simplified form if required to file

or

Student or spouse is a dislocated worker

or

Student or spouse received a means-tested federal benefit at any time during the prior two years

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Total Income

The total income is the sum of the student/spouse taxable and untaxed income, minus other financial information reported on the FAFSA but excluded from the formula.

• Other Financial Information – listed on questions 44a - 44f on FAFSA Education credits, child support paid, need-based employment,

combat pay, etc.

• Untaxed income – listed on questions 45a - 45j on FAFSA Payments to tax-deferred pensions, IRA deductions, child support

received, veteran’s noneducation benefits, etc.

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Allowances Against Income

Total allowances are calculated by adding the following:• U.S. income tax paid• State and other tax allowance – Table B1

% of student/spouse income which varies by state• Social Security tax allowance – Table B2

SSI taxes are calculated separately for student/spouse• Income protection allowance

Based on marital and enrollment status of student/spouse• Employment expense allowance

Only accounted for if both student and spouse are working

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Contribution from Assets

Assets are considered in order to fully measure the student/spouse ability to contribute toward educational costs if not eligible for the Simplified Needs Test Formula B.Three items to be considered:1) Net worth – Table B3

• Needs to be adjusted to protect a portion of the net worth2) Discretionary net worth – Table B4

• Done to protect a portion of assets needed for purposes other than education, such as emergencies or retirement

• Increases with age of student3) Portion of the value of assets to be considered available for student’s education

• Discretionary net worth is multiplied by 20% to obtain contribution from assets• This is the portion that is considered available to assist in paying for student’s

education

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Model B – Case Study #1Antoine Nomuch

Antoine will be a fourth-year undergraduate student for the fall 2014 term. He is married, and his wife, Ida, will also enroll half time as a fourth-year undergraduate student. They have no children. Antoine’s date of birth is June 1, 1988. Antoine and Ida live in Boise, Idaho.

Antoine and Ida filed an IRS Form 1040A for the 2013 tax year. They reported an adjusted gross income (AGI) of $46,000, 2 exemptions, no interest or dividend income, a $1,200 American Opportunity tax credit, and a tax liability of $2,400.

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Model B – Case Study #1 (cont’d)

Antoine earned $27,000 in 2013, $3,000 of which was through the Federal Work-Study (FWS) program. Ida earned $19,000 in 2013, $2,500 of which was earned through FWS. Ida received SNAP benefits in 2012, prior to marrying Antoine. Antoine has not received any means-tested federal benefits in 2012 or 2013.

The couple’s only assets are $1,500 in a joint checking account and $3,000 in a joint savings account.

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V. DOMA, Parental Information, and Reauthorization

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DOMA

• On June 26, 2013, the Supreme Court struck down the section of the Defense of Marriage Act (DOMA) that provided that for purposes of federal programs, a marriage can only be between one man and one woman

• Impacts the Free Application for Federal Student Aid (FAFSA), /EFC, and income driven repayment plans

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Reporting Information about Parents

Beginning with the 2014–15 FAFSA:

• Dependent students must include income and other information about both of their legal parents (biological or adoptive) if –

– The parents are living together

– Regardless of the parents’ marital status or gender

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Collecting parental information from both legal parents will result in fair treatment of all families by eliminating longstanding inequities that were based on the legal relationship of the parents (married or not married) rather than on the parents’ relationship with their child

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• New response of “Unmarried and both parents living together” to the parents’ marital status question

• Instructions and help text on FAFSA on the Web (FOTW) explain that parents are the student’s legal (biological or adoptive) parents if those parents live together

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Prior Year Data (Current Model)

• Prior Year (PY) System: Students need to submit information from their 2014 income tax returns which are not due until April 15, 2015

• To qualify for first-come, first-served state and institutional aid, students should submit FAFSA as soon as possible

• Students received aid notifications around April 2015, about 4 months before school starts

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Prior-Prior Year Data (Proposed Model)

• Prior-Prior Year (PPY) System: Students submit information from their 2013 income tax returns, which were filed April 15, 2014

• 2013 income tax returns should be easily accessed through IRS Data Retrieval Tool

• Students could submit a completed FAFSA as early as September or October 2014, qualifying earlier for state and institutional aid as well as receiving earlier aid notification from colleges, possibly 8 months in advance of May

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VI. Institutional Methodology

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Institutional Methodology

• Used by many schools to calculate eligibility for institutional need-based (and merit within need) funds

• Developed by the College Board

• Seeks to measure a family’s overall financial strength

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Institutional Methodology

• Same general principals that apply to FM

• Same basic formula

• Difference is in calculation of the EFC

• Considered a more thorough and accurate assessment of ability to contribute

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Institutional Methodology – Major Differences from FM

• No simplified needs test or automatic zero EFC

• Negative income that affects AGI is treated as zero

• Untaxed income includes

– Paper losses taken as deductions by businesses

– Some tax credits

– Foreign Income Exclusion

– Social Security

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Allowances• Income Protection Allowance based on Consumer Expenditure

Survey three-year average

• State and local tax rates vary by income and zip code

• Annual Education Savings Allowance protects parent income needed to save for education expense of younger children

• Emergency Reserve Allowance protects assets needed for emergencies

• Cumulative Education Savings Allowance protects amount of parental assets based on annual savings goal for each child

• Low Income Asset Allowance protects assets for low income families

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• Countable assets include small business, family farm, home equity and assets in names of student’s sibling(s)

• Lower contribution from assets• Unequal division of parent contribution based on

number in college• Minimum contribution for both student and parents• Student contribution from income assesses half of

student available income but protected for students from low income families

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• Assessment of student assets at 25%

• Calculation of an expected contribution from the noncustodial parent

• Calculation of contribution from income for Independent students used monthly maintenance allowance

• Higher minimum contribution for Independent students

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• Option to customize College Board formula– Impute home value based on date and price of

purchase– Cap home equity by multiplier of income– Allow secondary school tuition– Impute assets based on interest and dividend

income– Provide medical/dental allowance higher than

standard allowance included in IPA• Option for school to create its own methodology

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Institutional Methodology – Case Study #1

• Student is a newly admitted, first-year student

• Student has submitted a FAFSA and PROFILE

• Family has modest income with high assets

• Family lives in a high cost area

• Family owns a home

• Student has significant earnings

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Institutional Methodology – Case Study #2

• Student is a newly admitted, first-year student

• Student has submitted FAFSA, PROFILE, Noncustodial PROFILE, and tax returns for both the custodial and noncustodial parents

• Student’s parents are divorced

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Institutional Methodology Summary

• Best available indicator of a family’s ability to contribute to college costs

• More comprehensive analysis

• Measures total financial strength of the family as compared to others in the applicant pool

• A tool that can be adjusted based on the resources and philosophy of the institution

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Case Studies

• Now that we have thoroughly reviewed and have actually done some manual EFC calculations, let’s:

– Test our knowledge, and

– Practice the application of what we learned

• See Participant Guide for Case Studies

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Model A – Dependent Student Melanie Knox

• Parent income

• Allowances against parent income

• Available income

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• Student income

• Allowances against student income

• Student contribution from income

• Student contribution from assets

• Expected family contribution

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Model B - Courtney Fletcher

• Student/spouse income

• Allowances against student/spouse income

• Contribution from available income

• Student/spouse contribution from assets


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Why Should I Understand Need Analysis?

• Need-based financial aid

– Federal

– Institutional

• Explaining differences between FM and IM

• Understanding the “theory” behind what we do

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Why Should I Understand Need Analysis?

• Counseling

– Student

– Parents

• But students and parents can edit FAFSA…

• But I have a computer…

• Math !?!

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Have You Heard?

• I can’t pay that, I have another child…

• I lost my job!

• I spent all my savings on…

• What if I get married?

• Do you want me to sell my house?

• But I got a Pell Grant last year…

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Counseling

• Reassuring students and parents that we are competent

• Professional judgment

– Can be used to change data elements

• Will the changes have an impact?

• Understanding dependency status

• Increase confidence!

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Federal Methodology Information Resources

• The Higher Education Act of 1965, as amended, Part F – Need Analysis

• 2014–15 FSA Handbook, Application and Verification Guide (AVG), Chapters 2 and 3

• EFC Formula Guide, 2014–15

• The ISIR Guide, 2014–15

• 2014–15 Free Application for Federal Student Aid

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Need Analysis – Pulling It Altogether

Financial aid came into existence to help deserving students gain access to a higher education who could not afford it on their own. Irrespective of what has evolved over the years, determining who the neediest students are and to provide them with precious aid dollars; especially grants and scholarships is one of the defining roles that aid professionals face in today’s higher education. As the costs of education rise, our role will become more scrutinized. Knowing need analysis is key to fiscal stability and institutional integrity.

1 The following is a presentation prepared for: Name of Conference City, ST Date.

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