Carleton uses the Institutional Methodology (IM) to determine income. This approach:
- Starts with the adjusted gross income (AGI) from the federal income tax form. Both guardians’ and the student’s incomes are taken into account.
- Then, AGI is adjusted to discount certain losses permitted in the federal tax system, but ones that don’t affect a family’s ability to pay for college.
- Untaxed income (e.g., social security, child support, tax deferred savings or retirement plans, food and housing allowances, depreciation and amortization, repayment of loans from shareholders, untaxed portions of pensions or annuities, workers’ compensation benefits and other sources) is also considered in determining a family’s total income.
Note that business deductions on federal tax returns are added back to income in the need analysis system. Losses from business, rental ventures, capital losses and losses carried forward from prior years are not allowed for need analysis purposes. Consequently, income used for Carleton’s need analysis can be significantly different than what the tax system uses to determine federal tax liability.
What Allowances are Subtracted from Income?
IM subtracts the following six allowances from income before determining how much of the parents’ income should be earmarked for college expenses.
- Mandatory taxes
- Federal income taxes paid
- Allowance for state and local income, sales, and property taxes
- FICA tax
- Medical and dental expense allowance to account for exceptionally high medical and dental expenses reported by the family.
- Employment expense allowance to account for expenses related to working outside the home if both parents are employed or if the parent is single.
- Annual Education Savings Allowance (AESA) recognizes that a family must save for the educational expenses of younger children at the same time they are sending older children to college. The allowance is designed so that families that save the specified fraction of their income each year—currently about 1.5 percent—will have accumulated about one-third of their expected parent contribution for a private four-year college by the time their child enrolls. IM assumes that the family will finance the remaining expected contribution from current income, assets, and/or borrowing.
- Income Protection Allowance (IPA) represents the median expenses of families living at the lower living standard defined by the U.S. Department of Commerce. The IPA does not define the amount of money required by most families to cover their living expenses – in fact, it is much lower than that. Instead, it represents the income level below which a family has no discretion about how it spends its income. Parents with incomes at or below the IPA are not asked to make any contribution at all to their children’s educational costs. Those with higher incomes have more choices about how they spend their income and are expected to use some fraction of their discretionary income to pay for their children’s education.
- Elementary/Secondary Tuition Allowance to account for expenses paid by the family for private elementary or secondary school tuition. Not all institutions apply this allowance since they consider these expenses discretionary.
What Portion of Income are Families Expected to Contribute?
After subtracting taxes and other appropriate allowances from total income, a portion of the remaining available income is tapped for college expenses. Similar to the federal income tax rate structure, the IM assessment rate structure applies a lower rate—23 percent—to the first dollars of available income and progressively higher rates to additional dollars of discretionary income. Even families subject to the highest rate—47 percent—are asked to pay that rate only on their last dollars of available income.
The student’s income is assessed at the same marginal rates as their parents. The IM assumes that all students work during the summer and term breaks and save a majority of their earnings for college expenses. Carleton expects a minimum of $2,000 from freshmen and $2,100 from upper-class students each year.