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Professional Judgment
 
Counterintuitive Results

This page presents discusses a few cases where a professional judgment adjustment counterintuitively results in an increase to EFC instead of a decrease. Some of these situations involve errors, others are genuine consequences of quirks in the financial aid formula.

Adjustments to Wrong Worksheet

Total income is defined as AGI + Worksheet A + Worksheet B - Worksheet C. Sometimes financial aid administrators make an adjustment to the wrong worksheet or with the wrong sign, causing an increase in total income instead of a decrease. If an adjustment results in an unexpected change in EFC, check to make sure the adjustment was in the correct direction.

Number in College

Sometimes increasing the number in college will result in an increase in the EFC instead of a decrease.

The number in college affects EFC in two ways. First, the parent contribution is divided by the number of students in college. This reduces the EFC. Second, the income protection allowance (IPA) is reduced by about $2,330 (2004-2005 tables) for each additional college student. A reduction in IPA usually leads to an increase in EFC (except if automatic zero EFC applies or the sum of all allowances exceeds income).

So there are two aspects of the formula that depend on number in college. One decreases the EFC and the other increases the EFC. This can lead to counterintuitive results where an increase in the number in college may or may not reduce the EFC.

The following formula gives an approximation of the situations in which an additional student in college will increase the EFC. Let NIC be the number in college before the addition of another student and PC be the current parent contribution (not normalized by the NIC). Then the EFC will increase when

PC
-----
NIC
< PC + 47% * $2,330
-------------------
NIC + 1

Simplifying this yields

PC < 47% * $2,330 * NIC

In other words, you can expect the EFC to increase with an additional student in college when the original parent contribution normalized by NIC is less than $1,095.

This is, of course, a simplification, since 47% is the maximum bracket applied to adjusted available income (22% is the lowest). The constant in the formula depends on which bracket was triggered. If it were the lowest bracket, then the EFC will increase with an additional student in college when the original NIC-normalized PC is less than $513.

In any event, this quirk in the formula only seems to apply when the student is Pell-eligible (barring any significant income or assets of the student).

Though it may seem counterintuitive at first glance, it does make sense. When a child goes to college, the household expenses for that child are significantly reduced, and are instead included in the cost of education. When the parent contribution is low, the reduction in family expenses per college student can exceed the change in parent contribution.

Married Students

In some cases married students will have different EFCs even though their income and all other variables are identical.

This occurs when the students were born in different years and one of the students is 26 years old or older. This causes the students to have different asset protection allowances (APA). Unlike the formula used for dependent students, where the age of the older parent triggers the asset protection allowance, the formula for independent students uses the age of the student, regardless of whether the spouse is older.

In addition to having different ages, the couple's assets must exceed the APA of the younger student. This allows the different asset protection allowances to yield different discretionary net worth figures.

The greater the difference in ages and the greater the family assets, the greater the difference in the two student's EFCs. The maximum difference in EFCs will be about $4,000. The penalty ranges from $80 to $140 per year difference in the couple's ages.

Worksheet C Matches AGI

Financial aid administrators need to be aware that when Worksheet C equals the student's total income (AGI + Worksheet A + Worksheet B) or Worksheet C is at least 90% of the parent's total income, an edit check assumes an error has been made. The financial aid administrator must override the assumption or the EFC figure will be incorrect.

When Worksheet C exactly matches the adjusted gross income (AGI) and the student's AGI is above the student's income protection allowance, the EFC may end up being higher than it should. This is not due to any quirk of the formula, but rather an automatic edit check in the US Department of Education's implementation of the Federal need analysis methodology.

This quirk can be triggered when the student's only source of income during the past year was Federal Work Study and Americorp. It can also be triggered by professional judgment, where an increase in Worksheet C may sometimes lead to an increase in EFC if the new Worksheet C total exactly matches the AGI.

When Worksheet C equals AGI, the Student Total Income (STI) figure should be $0. But the Department's implementation sees a zero and says "hey, that looks like a mistake" and sets Worksheet C to zero, yielding a STI equal to AGI. (In cases involving non-filers, it results in a STI equal to income earned from work.)

This then results in a student contribution that is higher than it should be. (It also results in a non-zero student tax allowance.) Depending on the student's income, this can result in a substantial increase in the student's EFC. For a typical work study student, the increase is on the order of $1,250. The magnitude of the difference is significant enough that it could mean the difference between being Pell eligible and not for about 1% of students.

The actual Worksheet C Assumption Edit is as follows: "When the Worksheet C amount is equal to or exceeds 90% of the total income for parents, or 100% of the total income for students, a correctable assumption is made that an error has been reported and the amount for Worksheet C is set to zero."

Financial aid administrators can override this assumption by using assumption override code 5 for parents and code 6 for students. Students can also suppress the assumption when submitting an application or correction on the web by verifying the information when a drop down box appears after they submit the information that triggers the edit. These methods of overriding the assumption is preferred to subtracting $1 from the Worksheet C amount for students. (Note that since the threshold for parents is 90% of total income, subtracting $1 from Worksheet C will not work for parents.)

Impact of Taxable Income

When a change in family income leads to unexpected results, it is usually due to the simplified needs test and automatic zero EFC, and not the change in tax liability.

When taxable income increases, the family's tax liability often increases as well. Increases in taxable income increase the EFC, while increases in tax liability, which are an allowance against income, often decrease the EFC. Usually the increase in tax liability is less than the increase in taxable income, so there is a net increase in EFC.

The inclusion of the simplified needs test and automatic zero EFC in the Federal need analysis methodology introduces a step function into the formula. This means that slight changes in income around the thresholds for these alternate formulas can lead to a much larger change in EFC than expected.

Newborn Leads to Big EFC Changes

The addition of a dependent to a household can sometimes lead to a significant decrease in EFC. This often occurs when a married couple has their first child. It can also occur when an independent student gets a dependent other than a spouse.

The change is caused by the two different formulas for independent students. The formula for independent students without dependents is much less favorable than the formula for independent students with dependents other than a spouse. So the birth of a child can switch an independent student from one formula to the other, leading to a big decrease in the EFC.

Dependency Override Increases EFC

In some cases a dependency override can increase the student's EFC instead of decreasing it. Although the formula for independent students is generally more favorable than the formula for dependent students, there is a little wiggle room that can lead to an increase in EFC instead of a decrease.

This quirk is caused by differences in the income protection allowance. The income protection allowance for independent students is approximately $3,000 higher than the allowance for dependent students. So normally an independent student will have a lower available income. However, when a student becomes independent, cash support from parents can be included on Worksheet B. If this support is greater than the difference in income protection allowances, and most of the parent's income was previously sheltered by allowances, the student's EFC might increase as a result of a dependency override instead of decreasing.

 

 
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