Navigating the world of college funding can sometimes make you feel like you’re getting hit with a slew of acronyms, calculations and hard-to-interpret fine print. But as a LearnVest planner, I encourage my clients to learn as much as they can about the process so that they can make the best choices for their family.
Here’s the first question I typically get asked by parents getting ready to send a student off to college: Is my son or daughter even eligible to receive financial aid? And my answer is usually a resounding “yes,” as eligibility for most federal student aid programs is based on financial need.
What Is Financial Need?
The Higher Education Act of 1965, the law that governs student aid, states that it is the parents’ responsibility to educate their children beyond the 12th grade. However, more importantly, the law also states that if a family can demonstrate need, then the government will assist in paying for such an education.
But the term need is not to be confused with “needy,” which most people incorrectly assume they must be in order to qualify for federal, state and college financial aid. Rather, need is determined by a basic formula that helps determine how much aid you’ll receive at a given college:
Cost of Attendance – Estimated Family Contribution = Need
Now let’s break down each part of this formula.
Cost of Attendance (COA). The financial aid administrator at each college determines an average cost of attendance that includes tuition and fees, as well as an allowance for living costs such as room and board, books, supplies and transportation. The law also provides limited allowances for computer expenses, dependent care and expenses for handicapped students.
Bear in mind, the COA can vary for each student at the same school, depending on their various expenses for the year. For example, some programs of study may have lab fees or higher charges for books and supplies than others. Students living off-campus, meanwhile, may have higher costs for room and board and additional transportation expenses than students living on campus.
Estimated Family Contribution (EFC). The next part of the formula is the estimated family contribution, or the amount parents will be expected to contribute toward a student’s educational expenses during the academic year. This is determined from the personal and financial information entered on your Free Application for Federal Student Aid (FAFSA). Because your EFC is recalculated every year, you must submit a new FAFSA each year as well.
For dependent students (whether a student is considered independent or dependent is determined by a set of questions asked on the FAFSA), family contribution is the sum of four separate weighted calculations based on the parents’ income, the parents’ assets, the student’s income and the student’s assets.
Note that the student’s assets are weighted at a higher value than those of the parents, so it’s worth keeping any college savings accounts in the parents’ names.
Need. After subtracting your EFC from the college’s COA, what’s left is your need. While the family contribution will be the same at every college a student applies to, the need at each will vary according to the college’s overall cost. With this final number, colleges can award need-based federal student aid in the form of Pell Grants, Federal Supplemental Educational Opportunity Grants, direct subsidized loans, Perkins Loans and Federal Work-Study.
There are a growing number of colleges that, because of a lack of sufficient aid resources, may fill only a set percentage of each student’s demonstrated need. That makes it all the more important to get educated about how the financial aid process works so you know how you might be able to improve your situation.
Applying for Aid
Since a family’s financial situation can change from year to year, you must apply for financial aid annually. The FAFSA and the College Board’s CSS/Financial Aid PROFILE become available every October 1st for the following aid year — and should be completed as close to that date as possible, since financial aid is awarded on a first come, first serve basis.
But planning for how you’ll pay for the college years isn’t something that should wait until your student is a senior. Ideally, you’ll begin your planning freshman year, giving your student enough time to prep for the SAT or ACT, and giving you both enough time to research how much aid the colleges you’re interested in typically give and how you might be able to lower your EFC.