September 20, 2022
Estimated Read Time: 6 minutes
It’s hard to talk about college without mentioning financial aid. Yet this pairing isn’t a marriage of love, but one of necessity.
In many cases, financial aid may be the deciding factor in whether your child attends the college of his or her choice. That’s why it’s important to develop a basic understanding of financial aid before your child applies to college. Without such knowledge, you may have trouble understanding the process of aid determination, filling out the proper aid applications, and comparing the financial aid awards that your child may receive.
Despite the critical role financial aid plays in your child’s choice of college, few have the resources to negotiate this intimidating and confusing topic. To start with, there are different types of aid, different sources, and different formulas for evaluating your child’s eligibility. This blog will give you a basic understanding of financial aid, how it is determined, and the processes you need to follow.
The key takeaways for this blog are:
Financial aid is money distributed primarily by the federal government and colleges in the form of loans, grants, scholarships, or work-study jobs. A student can receive both federal and college aid. An ideal financial aid package will contain more grants and scholarships (which don’t need to be repaid) and fewer loans.
Financial aid can be further broken down into two categories: need-based aid, which is based on a student’s financial need, and merit aid, which is based on a student’s academic, athletic, musical, or artistic talent. Both the federal government and colleges provide need-based aid in the form of loans and grants. For merit aid, colleges are the main source, and they often use favorable merit aid packages to attract the best and brightest students to their campuses.
It’s worth noting that colleges can vary significantly in their generosity when it comes to financial aid. The amount of grants and scholarships a college offers is typically related to the size of a college’s endowment and its unique objectives. College marketing materials generally provide statistics on the size of a college’s average aid award (both in dollar amounts and as a percentage of the typical aid package) and the family income thresholds necessary for different aid amounts. If you’re a family researching colleges, one of the best things you can do to help your bottom line is to target colleges that offer significant grant aid.
In addition to colleges, many businesses, foundations, and associations offer smaller merit scholarships with specific eligibility criteria and deadlines. Various scholarship websites allow your child to input his or her background, abilities, and interests and receive (free of charge) a matching list of potential scholarships.
Financial need is generally determined by looking at a family’s income, assets, and household information. The federal government uses the FAFSA (Free Application for Federal Student Aid) and colleges generally use the CSS Profile form or their own institutional form. The FAFSA uses a formula known as the federal methodology; the CSS Profile uses a formula known as the institutional methodology. The general process of aid assessment is called needs analysis.
Under the FAFSA, your current income and assets (excluding home equity, retirement assets, cash value life insurance, and annuities) and your child’s current income and assets are run through a formula. You are allowed certain deductions and allowances against your income, and you’re able to exclude certain assets from consideration. The result is a figure known as the Expected Family Contribution or EFC. This is the amount of money that you’ll be expected to contribute to college costs before you are eligible for aid.
Your current income is the most important factor, but other criteria play a role, such as your total assets, the number of children you’ll have in college at the same time, and how close you are to retirement age. Additionally, you will be required to provide tax information to verify your income.
Having a ballpark estimate of financial aid ahead of time can be very helpful for planning purposes. There are two ways you can do this.
1. FAFSA4caster – The federal government offers an online tool called the “FAFSA4caster” that you can use to estimate your EFC.
2. Net Price Calculator – Every college offers a tool on its website called a “Net Price Calculator” that you can use to get an estimate of how much financial aid your child might be eligible for. Completing a Net Price Calculator for several colleges is an excellent way to get an idea of what your out-of-pocket costs might be at different schools
Keep in mind that the EFC does not guarantee how much aid you will need. It is a figure that will help you determine the affordability of different colleges. It can also help you identify funding gaps that you will need to bridge before deciding on a college.
Once your child has been accepted to a college or university, he/she will receive financial aid award letters that detail the specific amount and type of financial aid that each college is offering. When comparing aid awards, read each award letter carefully and make sure you understand exactly what the college is offering. The goal is to compare your out-of-pocket cost at each college.
To do this, look at the total cost of attendance for each college and subtract any grant or scholarship aid the college is offering. If the grant or scholarship is merit-based, find out if it’s guaranteed for each year your child is in college. If the grant or scholarship is need-based, find out whether you can expect a similar amount each year if your income and assets stay roughly the same. Always be sure to check on what requirements must be met to qualify annually and whether it increases to keep up with annual increases in tuition, fees, and room and board.
The difference between the total cost and any grant or scholarship aid is your out-of-pocket cost or “net price.” Compare this figure across all colleges to determine how much, if anything, you or your child will need to borrow. Then multiply this figure by four to get an idea of what your total borrowing costs might be.
If you’d like to lobby a particular school for more aid, tread carefully. A polite email or letter to the financial aid administrator followed up by a telephone call is appropriate. Documenting a change in circumstance that affects your ability to pay will help your chances of asking for more aid.
Now that you know what financial aid is and how it is determined, it’s easy to assume that it will do most of the heavy lifting when it comes time to pay the college bills. But the reality is you shouldn’t rely too heavily on financial aid. Although aid can certainly help cover your child’s college costs, student loans often make up the largest percentage of the typical aid package, not grants and scholarships. If you rely mainly on loans to finance college, you and your child could end up with a considerable debt burden that can have negative financial implications for years after graduation. In a future blog, we will tackle the different savings options you have to avoid considerable college debt.