A Formula That Adds Anxiety

"Where do they think we'll get this money from?" Like millions of other parents, Carole Bellew, a divorced mom in Cambridge, Mass., got a gut-wrenching shock when she opened the E-mail from the federal government telling her how much she'd be expected to contribute to her son's college costs. Bellew, who runs a small accounting business, was spending every penny of her $4,000 a month or so in take-home pay to cover their rent, health insurance, transportation, food, and utilities. Yet Uncle Sam said she'd be expected to come up with almost $5,000 toward her son's first-year tuition. "It's insanity," she recalls thinking at the time.

Congress has made some fixes that will reduce many parents' contributions starting in 2009. But it hasn't fixed the fundamental reasons for the not-so-funny numbers. The government continues to base what today's families can afford on a family budget from 1967. And it isn't adjusting for regional differences in the cost of living.

"At best, it is a very harsh assessment of families' ability to pay," says Mark Kantrowitz, publisher of FinAid.org. At worst, he says, it is "somewhat unrealistic...and archaic."

Who gets what. The government's formula for the "expected family contribution" is important because it determines who gets federal aid such as Pell and smart grants. And each college is supposed to subtract a student's EFC from its cost of attendance to figure out how much additional financial aid the student needs.

The formula is also something that nearly all students hoping for financial aid have to confront. The single most important step for anyone hoping for aid is to fill out a Free Application for Federal Student Aid, or FAFSA (www.FAFSA.ed.gov). Education Department computers take the entered family financial information and apply a complicated formula adjusting for the family's size, expenses, ages, and other factors. But, generally, it figures that families grossing about $50,000 a year will probably qualify for enough aid to limit their contribution to a few hundred dollars a month. Families earning about twice that may have to come up with $20,000 a year for college.

Education Department officials say the formula is based 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 not for changes in family spending patterns. Thus, there's no room in the budget for HBO, cellphones, Internet access, Nintendo Wiis, or other modern luxuries. Nor has it been adjusted for more necessary expenditures, such as the dramatic increase in healthcare costs, notes Kantrowitz.

What's expected. For anyone filling out a FAFSA this coming January, the government will assume that a family of four with one student in college and two working parents will need $26,960 in annual after-tax income (or nearly $2,250 a month) to meet basic necessities. Out of every dollar earned above that, at least 22 cents should be available to pay for college expenses, the feds say. The formula also assumes parents will contribute a small percentage of any nonretirement savings above about $50,000 each year.

About 300 private schools use a different formula, created by the College Board, to determine how much of their own money to give out as scholarships. The College Board bases its budget on government studies of what families actually buy today. It estimates that the typical family of four with two working parents will need $30,960 in annual after-tax income (or about $2,600 a month) next year. After allowing for educational and medical expenses, it, too, assumes at least 22 cents of every dollar above that can go to college. And it expects families to be able to contribute a small percentage of both savings and home equity every year.

Independent counselors say many families are also penalized by the government's failure to take into account some cities' recent dramatic increases in rent and other expenses. The private schools that use the College Board's method can, if they choose, make some adjustment for regional differences in cost of living. But the biggest allowance is only an extra 17 percent for San Franciscans. The Council for Community and Economic Research, which produces some of the most widely used data for tracking cost of living, estimates that in addition to San Francisco, cities such as Boston, New York, Washington, D.C., San Diego, Los Angeles, and Honolulu all have total costs of living at least 35 percent higher than the national average.

Those in charge of the formulas assert their budgets are realistic estimates of the minimum it takes to live. Families that spend more are making choices—buying a car instead of taking public transport, living in a nicer neighborhood—rather than allocating that money to college, they say.

"These are not supposed to be lifestyle budgets," says Susan McCracken, who heads the College Board's need-estimating program. "The idea is to draw a line in the sand for everyone and say, 'Above this, you have the ability to start making choices.'"

Parents say the EFC is just part of a larger system that is forcing them to take on costs they simply can't afford. Although formulas result in very low estimates of financial need, most colleges say they don't have enough money to limit the family's costs to the EFC. Fully a quarter of students who the government says need financial aid don't get a penny in grants or scholarships. And those who do get aid receive so little that the families have to raise, on average, $5,300 more than their EFC.

Bellew, who expects to have to come up with $8,000 above her EFC this year, says these gaps are causing parents like her to borrow against their homes or postpone their retirements. "The system," she says, "is totally broken."