3 Ways the Government Overestimates Your Ability to Pay for College

The government uses an antiquated family budget, and no regional cost of living adjustments.

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"Where do they think we'll get this money from?" 

Parents who fill out the Free Application for Federal Student Aid, or FAFSA, are often shocked by how much the federal government thinks they can afford to pay for college when they receive their official "Expected Family Contribution," or EFC. 

Those who have investigated exactly how the government calculates the EFC say there's a reason: The formula is so unrealistic and so old—it's loosely based on a family budget from 1967—that it isn't surprising that many 21st Century families are flabbergasted. 

The Education Department takes the family's financial information and applies a complicated formula adjusting for the family's size, expenses, ages, and other factors. The department has published worksheets explaining the details of the formula for the 2010-11 and the 2011-12 academic years. 

Although the number the government computers calculate is called the "Expected Family Contribution," that turns out not to be the amount most families have to spend on their children's college. Colleges can and do calculate their own versions of a family's EFC. But the federal EFC is important because it determines who gets federal financial aid such as Pell Grants and low-interest student loans, as well as many state, community, and private scholarships. And many colleges use it as a starting point before determining each student's financial aid package, which results in his or her own unique net price of attendance. 

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For the 2010-11 academic year, the government will give an EFC of $0 and the maximum Pell Grant of $5,550 to students from families earning less than about $30,000. For every $100 in after-tax income above that $30,000 threshhold, the government will raise the student's EFC by at least $22. For every $100 of after-tax income above about $60,000, the student's federal EFC will rise by as much as $47. 

That means a middle class family of four with an adjusted gross income of about $75,000 could get an EFC of anywhere from $4,000 to $9,000 a year, depending upon other factors such the parents' ages, savings, and expenses. 

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Many financial aid administrators defend the stingy EFC formula, saying neither schools nor governments can afford to give aid to students from families who haven't saved for college because they've chosen to spend on things like bigger-than-necessary houses, new cars, or iPhones. 

But independent financial aid analysts say three government EFC policies can penalize even frugal families: 

1. Outdated budget estimates. The Education Department bases its estimate of what families can afford today on a government budget for a "family maintaining a lower standard of living" in 1967. That budget has been adjusted for inflation every year. But it has not been adjusted for changes in family spending patterns. During the 1960s, fewer wives worked, for example, so families spent much less on child care. The antiquated budget also can't account for modern technological expenses such as cell phones, computers, or internet access. 

2. No regional adjustments. The government doesn't account for the different costs of living in different cities. The Council for Community and Economic Research, which produces widely used data for tracking cost of living, estimates that living in New York City, for example, costs more than twice as much than living in, say, Pueblo, Colo. Yet the federal government assumes Brooklyn, N.Y., families paying, say, $2,000 a month for a three-bedroom apartment can afford to spend as much on college as similar families with comparable income paying only $1,000 for a similar home in lower-cost communities. 

3. Unrealistic family spending assumptions. The government's formula doesn't make any accommodation for parents whose disposable income is reduced because of their own student loan bills, even though a growing number of parents are still paying off their own student loans as their kids enter college.