How to Pay for College

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Aid Formulas

Ann Garcia

If you’ve been reading this blog for a while, this is a bit of a refresher post.

There are three aid formulas:

  1. Federal methodology (FM), based on the FAFSA

  2. Institutional Methodology (IM), based on the CSS PROFILE; and

  3. Consensus Methodology (CM), which uses both aid forms.

Each is a different way of calculating a family’s financial strength with respect to ability to pay for college. There are some similarities between the three methodologies:

  • Each considers income and assets for both student and parents

  • Each provides some allowances for parents

  • Each has a formula for how income and assets are assessed– it’s not “dollar-for-dollar”

  • All exclude assets held in retirement accounts from their calculations

But there are some big differences.

Federal methodology (FM)

FM, calculated using the FAFSA, is used for awarding federal student aid. That means that any school awarding federal dollars (not just Pell grants but federal student or parent loans that might be part of an aid package) will need you to complete a FAFSA even if they also require the PROFILE.

The FAFSA looks at parent and student assets, but it excludes a number of assets that are counted on the PROFILE:

  • Home equity

  • Nonqualified annuities

  • Cash value life insurance

  • Value of a farm or small (<100 employee) business

For divorced families, the FAFSA also only looks at the custodial parent’s income and assets. (Note, though, that any money provided by the noncustodial parent is reported, either as parent income if it’s alimony or child support, or as student income if it’s money given to pay for college, including a 529 account distribution if the account is owned by the noncustodial parent.)

The FAFSA publishes its formula here.

Institutional Methodology (IM)

IM, using the PROFILE, considers the assets listed above. In addition, IM does not have an income protection allowance for students; all student income is considered available. In fact, IM requires the student to contribute about $2,000 as a freshman. Higher student income can be assessed at upwards of 70 cents on the dollar.

IM asks for home equity (based not on Zillow but on the Federal Housing Multiplier Index using the MSA/MSAD). Schools use this number differently; some cap home equity at a multiple of household income, for example.

In the case of divorced parents, IM also asks for the noncustodial parent’s income and asset information.

In addition, the College Board has about 200 additional questions that schools might choose to include. When you register for the PROFILE and list the colleges to which you want your results sent, it will automatically generate the appropriate list of questions for those schools.

The College Board does not publish its formula; in fact, it gives schools latitude in using the information it collects. Therefore, while your FAFSA EFC will be the same at every school (though it might yield different aid packages), your IM EFC may vary considerably from school to school. The College Board provides a calculator that allows you to compare your EFC as calculated by FM and IM.

Consensus Methodology (CM)

CM is used by a small group of schools with the objective of standardizing the financial aid calculation among these schools. It uses aspects of both IM and FM, leaning more heavily on FM, but standardizes calculations among schools. Some key points:

  • Home equity is capped at 1.2x parent income

  • CM has the most favorable treatment of student assets, using the same 5% assessment rate as for parent assets.

Whichever methodology is used by the schools you are looking at, you need to remember what these applications do and do not do:

  • All three methodologies are for need-based aid only. Merit aid is a separate consideration

  • While these methodologies will provide consistent EFC calculations for all students at a given school, the school retains latitude in packaging aid, i.e. the mix of loans, grants, scholarships and work study that make up each student’s aid offer.

  • Schools are not required to meet student financial need, and even among those that do, there is no requirement that need be met exclusively through gifts (grants and scholarships).