Hoops and Hurdles of Financial Aid: Where the EFC Falls Short

This is the second of a three-part series about aspects of financial aid policies that misalign with students’ lived experiences. 

The first installment in this series highlighted how financial aid eligibility design and requirements present barriers for students who enroll in school part-time or less. Here, we continue to examine the details and impact of the current policy for deciding who is most “deserving” of aid. 

Exclusion of Debt

Left nearly untouched since being established in 1972, the federal formula used to calculate a student’s Expected Family Contribution (EFC) is incomplete and outdated. EFC is a measure of the amount a student is expected to pay for college, which determines the need for Pell Grants and other types of aid. The formula plugs in data from the Free Application for Federal Student Aid (FAFSA) about a student’s personal and family characteristics and finances.

Currently, students with families who have an adjusted gross income of $23,000 or less qualify for “autozero EFC.” Students at or below this cutoff can automatically skip income and asset questions and are expected to pay $0 towards college, which qualifies them for the maximum Pell Grant award. Missing from the formula, however, is a way to ascertain meaningful differences in levels of need among students with $0 EFC. 

The EFC formula does not adjust for debt or regional cost of living. Excluding these important factors can result in underestimated levels of financial hardship experienced by low-income students with families that have large amounts of debt, such as student loans, mortgages, auto loans, and credit cards. Not including debt can leave students with families who have fluctuating incomes more susceptible to cuts in financial aid. For example, a student’s aid can be drastically cut as a result of a modest increase in family income from a parent working additional hours to cover an emergency expense. Declines in aid over such situational changes in income are not uncommon. Counting debt in EFC calculations would allow for greater recognition of context and thus a more representative measure of a student’s level of need. 

Working Student Penalty

Operating under policy assumptions of the past adversely impacts students who work while in school. Congress initially designed the EFC formula to assess the need for the formerly “traditional” student, who may have some income from a summer job but still largely depends on parental resources for school-year expenses. 

Financially dependent students can earn up to $6,660 before having half of any excess earnings counted towards their EFC. Students who work in low-wage summer jobs in the retail or foodservice industry are not very likely to hit this income threshold. Whereas students who have to work throughout the school year are much more likely to reach this cap. Single independent students can make up to $10,360 before their earnings affect their EFC, but even this threshold is likely to be surpassed if they are working in full-time positions and need to make enough to support dependents of their own. With between 70 to 80 percent of students working while in school, the EFC formula’s implicit tax on student earnings has far-reaching impact. 

Proposals for Reform

Policymakers have offered several proposals aimed at addressing the shortcomings of the federal methodology. Without capturing a complete picture of a family’s circumstances, the EFC does not accurately measure what a student can afford to pay. Adjusting the formula so that students could have a negative EFC could allow for more nuanced analysis and targeting of aid. Past proposals have called for minus $750 EFC limit paired with an increase in the maximum Pell Grant award. A recent proposal to amend the Higher Education Act – the law governing federal support for students and institutions – includes a provision that would substitute the federal needs analysis methodology from the EFC to the Student Aid Index (SAI). The SAI measure could go as low as minus $1,500 and would be determined automatically for students with complicated finances who do not file taxes. 

Lumina Foundation’s “Rule of 10” benchmark offers a different approach for a sliding scale of ability to pay. The Rule of 10 states that students should pay no more for college than the family savings 10 percent of discretionary income for 10 years and the earnings from working 10 hours a week while in school. Students from families whose incomes are less than 200 percent of the poverty rate would only be expected to pay using the earnings from 10-hour workweeks in school. Use of this benchmark could help reduce the EFC’s underlying penalty on working students’ incomes. 

Policymakers should continue to examine the feasibility of proposed adjustments to create a more accurate and equitable instrument for determining need. 

Strategies for SA Pros

In absence of federal change to the EFC, colleges, and universities still have the power to more holistically measure student need and distribute institutional-aid and scholarships using their formulas. Efforts to improve aid policy – at the federal, state, or campus level – should ensure diverse stakeholder involvement and keep students at the center of discussion. 

Student affairs professionals can help create space on campus for regular discussions about affordability and what aid policy looks like in practice. Such discussions could include students, a variety of functional offices and leadership across campus, as well as system-level constituencies and experts in the field. Student affairs practitioners can offer valuable observations about the student experience and how financial aid policy fits in the broader campus affordability context. Moreover, insights drawn from affordability advocates and thought-leadership on campus could help inform future federal-level models for policymaker consideration.