So, it’s time to begin part one of the breakdown of the individual formulas to determine your EFC, and we begin with parent contribution from income.  Parental income is really the single largest source of your expected contribution, and serves as the foundation for our analysis of your families circumstances.  What I will try to do here is address the core way in which both the FM and CA methodologies treat parents’ income and then answer some frequently asked questions about the methodologies. 

First, though, some pressing business at hand…

Thanks to all of you who have posted your random 10 songs from your mp3 player or music library.  I’ve enjoyed reading them and I don’t feel so far out in left field musically, since I recognized (almost) all of the bands listed.

Some answers to recent questions…

From Ipsen:

- The income statement of 2004 hasn't been produced yet; instead, we have only the one of 2003.  As the numbers are not much different, so when filling the section about my family's income in 2004, can I supply the number of 2003?

If the answer to the above is “No”, please help me coping with this question: -My parents' taxes are collected by their governmental employers before they actually get the salary.  Hence, they don't know the amount of taxes in 2004 until the official income statements of the year are produced.  So can I fill the **post-tax numbers** in the (father/mother)*'s income blanks, of course with some indications?

My answer:

Do the best job you can of estimating the 2004 numbers.  We would prefer you not to just simply fill in 2003 information, as it is likely that there has been a change of some kind to the income in 2004.  As regards taxes, you should always report gross earnings and then let us know the amount of the tax.  If you are completing the application before the actual file date, estimate taxes, but follow on with actual tax returns when they are available.

From Arvind:

I am an international student from India.  I had a query about the financial aid form. 
My grand mother also depends on my parents income, hence including her, my parents, my sisters and me q.14 of the f.aid form for international students has answer as 5. 
Do I include her and my parents name in section 15 of the same form.  if yes, do i leave the educational information par blank.

Answer:

If your grandmother lives in the household with you, you should include her in the number in your family and in the family matrix (in this case leave any educational information blank unless she is currently enrolled in college!!).  If your parents provide money to support her but she doesn’t live with you, note that in the comments section, provide information on how much support they provided in the past year (a monetary estimate) and do not include her in the number in family or in the family matrix.

Albert:

hey daniel, when is the FAFSA and CSS/Profile due for MIT?  Some schools are expecting it for February 1, but to be turned into the agencies.  Thanks.

Answer:

We would like to have received all of your information by March 1 at the latest, so this means that you need to send it in earlier to ensure that it arrives to us by the 1st.  If you will be filing the FAFSA electronically, allow 2 to 3 weeks, so get it done by February 7th or 8th at the latest.  If by paper, allow a month, so it needs to be mailed by February 1st.  The Profile (since it is only online) should be done no later than February 15th so that we can receive the information by March 1st (and so that you receive your information about IDOC before that [<- more information coming on IDOC, I promise]).  If you plan on submitting 2004 tax returns, you will use IDOC.  If you will not have 2004 returns available in time by March 1, then send your 2003 returns directly to our office instead.

You didn’t ask this question, but I will answer it anyway.  For international applicants, please make sure all information is received by March 1 as well! 

So, on to my main post!

The contribution from parent income is broken into three different pieces:

1.  Determining the parents’ total income,
2.  Figuring out allowances against the income, and
3.  Subtracting the allowances from the total income to determine the available income.

I’ll tackle these one step at a time.

For the starting income figure, we take the parents’ adjusted gross income figure as reported on the bottom on the first page of the tax return (for simplicity, I will assume that we are talking about a family with two parents; at the end of this process I will do another post explaining the differences for divorced / separated families).

To that we add non-taxable income (which can include a wide variety of income sources – some are child support received, tax-deferred contributions to retirement programs, tax-exempt interest, etc).  [For a more complete list, you may want to look at Worksheets A and B from the FAFSA application for the appropriate sources].

Next we remove from parent income any items listed on Worksheet C of the FAFSA (child support paid, education tax credits, etc).

We add the AGI plus the non-taxable income and subtract the income exclusions to come up with the total income.

Now on to allowances against income.  There are five main areas:

1.  US Income Tax Paid – we use the actual income tax paid by your parents as reported on the FAFSA and Profile, and as documented by the copy of your tax return. 
2.  State Taxes Paid – for this calculation, we use a table (two different ones in fact, one for FM and one for CA) to determine how much of your Total Income should be protected to cover state and local taxes. 
3.  FICA or Social Security Taxes – again, for this line we allow a deduction based on a formula against wages earned from any employment to cover taxes paid to the Social Security system. 
4.  Employment allowance – for families where both parents are working (or, in a single parent household, where the parent is working) a deduction to allow for the cost of having no one at home (based on a formula and capped at a very low value). 
5.  Income Protection Allowance (IPA) – this is meant to be an offset to protect families with particularly low income to protect the entirety of their income before any contribution is expected (even in part) from them.

There are also three additional allowances that are used only under the CA methodology:

1.  Medical / Dental Expense Allowance – any amount spent on medical and dental expenses greater than 3.5% of total income is allowed as a deduction under the CA methodology. 
2.  Annual Educational Savings Allowance – an allowance for savings for other children in the family who are pre-college age (1.52% of total income per pre-college age child).  By allowing for this amount, the formula is encouraging families to save some money for college out of current income for younger siblings. 
3.  Private Elementary and Secondary School Tuition allowance – an allowance to reflect ongoing costs for private school tuition for younger siblings; no allowance is allowed for the current student applying to college, but a maximum of $7900 per child.

Some other considerations as regards the CA treatment of income:

For negative income, we do examine whether the loss was truly a cash loss or a paper loss.  If the loss is not a true loss (in other words, a loss on the tax return, but not a cash outlay for the family), the loss is added back to the income.

Depreciation (whether on a business return or a rental return) is also considered to be a paper loss and therefore is added back to income.

For families living in a metro area with a high cost of living, we use an optional regionally based cost of living allowance in the CA formula to allow for an increased IPA.

As a reminder then, the difference between total income and total allowances is set aside as Available Income (we will come back to this number later).

So, lots of information, and I’m sure this will generate many questions, so ask away!

Daniel Barkowitz is the Director of Student Financial Aid and Student Employment at MIT. 
An archive of his blog may be found at: http://blogs.mit.edu/CS/blogs/barkowitz/. 
Or his official site: http://www.mitadmissions.org/Daniel.shtml.

Author:
Daniel Barkowitz
Director of Student Financial Aid and Student Employment at MIT

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