A Tale of Two Methodologies


Submitted by Heidi Markey, Senior Financial Aid Advisor, University of Denver & John Gudvangen, Associate Director, Financial Aid, Colorado College

Sometimes, the federal EFC is a lie.

Ok, maybe “lie” is too strong a word. But the Federal Methodology (FM) for determining a family’s finan-cial strength via the FAFSA often fails to provide a complete picture of a student’s ability to pay for his or her education. So at the very least, the federal EFC is frequently guilty of lies of omission.

To fill in the gaps left by the Federal Methodology, a growing number of higher education institutions have implemented an Institutional Methodology (IM) in order to gain a more accurate understanding of a family’s finances.

What is the Institutional Methodology?

In short, the Institutional Methodology (IM) is a formula developed by financial aid professionals and economists used to measure a family’s ability to pay for college. This measurement is instrumental in determining how the institution will use its own monies (not federal or state funds) to help subsidize a student’s cost of attendance. And most colleges that use institutional methodology ask families to fill out the College Board’s CSS Profile form.

This approach differs from the Federal Methodology on several important points, and the resulting IM- generated EFC is often quite different from the FM-calculated EFC.

Key Similarities and Differences

A basic principle of IM that a family’s capacity to pay is a function of both income and assets. The first step in calculating that capacity is to define income in a reasonable way. Here is a brief overview of the differences and similarities in how that calculation is made with these two approaches:

•IM takes a more in-depth look at overall financial strength. Both IM and FM agree that families with no assets have less ability to pay for education than families with the same income. IM, however, does not have a simplified needs test that ignores assets.

•Similar to FM, IM subtracts appropriate allowances from income, and a portion of the remain-der is available to contribute toward college costs. With the Institutional Methodology, a similar process takes place for assets.

•Unlike FM, IM usually does not allow business or other losses on the tax return.

•IM provides a more generous allowance for state and local taxes paid, and it provides an allow-ance for annual educational savings. Some IM schools also will provide allowances for unusual medical expenses and secondary tuition expenses.

•IM considers home equity as an asset. This is because, generally speaking, a homeowner is often in a stronger financial position than a non-homeowner, pays lower income taxes, has sta-ble mortgage payments, and can take advantage of lower interest rates through refinancing. Some IM institutions limit the amount of home equity considered as a resource based on a per-centage of the family’s income.

•Under IM, the following parental assets are considered: Cash, savings, checking accounts, in-vestments including stocks, bonds, mutual funds, money market investments, CDs, education IRAs, college savings plans, and other real estate. In contrast, FM looks at fewer indicators of financial strength, and the federal EFC is derived primarily from income.

•Different from FM, IM also looks at savings and investments held in the names of the student’s siblings who are under the age of 19 and not enrolled in college. IM also looks at farm equity business assets in small businesses with fewer than 100 fulltime employees..

•Unlike the FM, in cases of separation or divorce the majority of IM schools require financial information from both of the student’s biological parents. The underlying philosophy is that the primary responsibility to help finance a child’s education rests with the parents, regardless of marital status.

This requirement is due to the fact that students who are made Pell eligible through the FM often have a non-custodial parent with substantial income and assets that do not factor into FM calculations. (Financial aid professionals commonly refer to these students as “Pell eligible millionaires.”)

Why You Should Care

Even if your school does not use an Institutional Methodology, you may be working with families who are considering both IM and non-IM institutions. As financial aid professionals, it is critical that we be well-versed in all aspects of financial aid so we can help students make well-informed decisions. That includes facets of the process like Intuitional Methodology that are not used at every institution.

When speaking at high schools, chances are you are meeting with families that will need to complete both the FAFSA and the CSS Profile. It is our hope that you will remind students that both the University of Denver and Colorado College require financial aid applicants to submit the Profile, and be able to an-swer basic questions about that aid application.

Any Questions?

It is a pleasure to share information on Institutional Methodology with our fellow CAFAA colleagues. You are welcome to contact Heidi Markey at Heidi.Markey@du.edu or John Gudvangen at jgudvan-gen@ColoradoCollege.edu with questions any you may have. We look forward to hearing from you.

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