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​Financial Aid Determination and Fed Methodology

The Federal Methodology (FM) is the formula used by the federal government to determine your Expected Family Contribution (EFC) for a Federal Pell Grant, campus-based programs, and Federal Subsidized Direct Loan Programs. For non-need-based Federal Unsubsidized Direct Unsubsidized Loans, your EFC is not a factor; however, loan amounts cannot exceed the cost of attendance.

Depending on your financial circumstances (student for those that are independent and student and parent for those that are dependent), the FM uses one of three models to determine your EFC: the regular, the simplified, and the automatically-assessed formulas. Which one is applied depends on your financial situation.

I. The regular formula for federal student aid

For a majority of students and/or parents, this is the formula that will be applied. It evaluates assets and income and determines how much your family can contribute to your cost of education. That amount is then used to determine the amount and type of aid - such as grants, self-help, or loans - that you are eligible to receive.
Basically, for the regular formula, what the family owns that has monetary value (checking accounts, savings accounts, etc) is combined with what you earn. Here's how it works:

Asset assessment

The assets you report on your FAFSA are added to determine your family's financial strength. (If it's less than zero, then it's calculated as zero). If you own a farm or business, your net worth is adjusted to help protect the farm assets. The FM then waives a portion of your net worth for education savings and asset protection and what's left over is your discretionary net worth - basically this is cash and what can be converted to cash. (It's possible that your discretionary net worth could be less than zero.) This amount is multiplied by an asset-conversion rate - the portion of your assets the federal government thinks you will be able to contribute to your cost of education. If the amount comes out as less than zero, then your asset contribution is set at zero.

Income assessment

Your asset contribution is added to your available income to establish your "adjusted available income." This total is multiplied by a rate that varies depending on your adjusted available income - the more you have, the higher the percentage. Finally, the FM arrives at your EFC for that year. If more than one child in a family attends college at least halftime, the EFC is divided equally among them. So, if two children are in college and the EFC is $5,000, then $2,500 is allotted to the EFC for each child.

II. The simplified formula for federal financial aid

Sometimes, the FM ignores your family's assets altogether and uses your income only to calculate your EFC. Once again, as with the regular formula, the amount that you can contribute is used to determine what kind of student aid, such as federal work study or the FSEOG, you are eligible to receive.

You might qualify for this simple formula if you meet these criteria:
You or your parents filed or can file a 1040A or 1040EZ, or don't have to file any tax returns at all
Your parents' (if you're a dependent) adjusted gross income on their return (or on their W-2s if they aren't required to file) is $49,999 or below

What matters here is whether or not you (or your parents) are eligible to file a 1040A or 1040EZ - not if you actually filed them. A family may have filed a 1040, but if their combined income was less than $50,000 and they were eligible to file a 1040A or 1040EZ, the qualifications for the simplified formula have been met.

III. The automatically-assessed formula for federal student aid

For the last FM model, there isn't much to evaluate. If you or your family qualifies, the EFC assessed is automatically $0! If you're an undergraduate student, that makes you eligible for the maximum Federal Pell Grant. You may also be eligible for a Federal Supplemental Educational Opportunity Grant (FSEOG).
The criteria are simple:

You or your parents filed or can file a 1040A or 1040 EZ, or you and your parents are not required to file any tax returns at all; and
You or your parents' adjusted gross income on their return (or on their W-2s if they aren't required to file) is $20,000 or less.