FINANCIAL AID FOR COLLEGE

ABCs of Financial Aid

These days, it's hard to talk about college without mentioning financial aid. Yet this pairing isn't a marriage of love, but one of necessity. After all, financial aid may be the deciding factor in whether your child attends the college of his or her choice or even attends college at all. 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 receives.

But let's face it. Financial aid information is probably not on anyone's top ten list of bedtime reading material. It can be an intimidating and confusing topic. There are different types, different sources, and different formulas for evaluating your child's eligibility. Here are some of the basics to help you get started.

What is financial aid?
Financial aid is money given to students to help pay for college. Financial aid can be one of four types: loans, grants, scholarships, or work-study jobs.

Grants and scholarships are more favorable than loans because they don't have to be repaid--they're free money. In a work-study program, your child works for a certain number of hours per week (either on or off campus) to earn money for college expenses. Obviously, an ideal financial aid package will contain more grants and scholarships than loans.

Need-based financial aid vs. merit aid
Financial aid can be further broken down into two categories--need-based aid, which is based on your child's financial need; and merit aid, which is based on merit only. The majority of financial aid is need-based aid. However, in recent years, merit aid has been making a comeback as colleges (particularly private colleges) use favorable merit aid packages to lure the best and brightest students to their campuses, regardless of their financial need.

Who provides merit aid?
The best place to look for merit aid is at the colleges that your child is applying to. Does the college offer any grants or scholarships for academic, athletic, musical, or other abilities? If so, what is the application procedure? Keep in mind that the availability of college-sponsored merit aid is likely to fluctuate from year to year as colleges decide how much of their endowments they want to use, as well as the specific programs they want to target.

Besides colleges, a wide variety of private and public companies, associations, and foundations offer merit scholarships and grants. Many have specific eligibility criteria. In the past, sifting through the possibilities could be a daunting task. Now, with the Internet, there are web sites where your child can input his or her background, abilities, and interests and receive (free of charge) a matching list of potential scholarships. However, though this avenue is certainly worth exploring, such research (and subsequent work to complete any applications) shouldn't come at the expense of researching and applying for the more common need-based financial aid.

Financial aid is money given to students to help pay for college. Financial aid can be one of four types: loans, grants, scholarships, or work-study...an ideal financial aid package will contain more grants and scholarships than loans.

Who provides need-based financial aid?
The main provider of need-based financial aid is the federal government, followed by colleges. States come in at a distant third. The amount of federal aid available in any given year depends on the amount that the federal budget appropriates, and this aid is spread over several different financial aid programs. For colleges, need-based aid comes from a college's endowment, and policies may differ from year to year, resulting in an uneven availability of funds. States, like the federal government, must appropriate the money in their budgets.

The federal government's aid application is known as the FAFSA, which stands for Free Application for Federal Student Aid. The federal government and colleges use the FAFSA when federal funds are being distributed (colleges are responsible for administering certain federal financial aid programs). When colleges distribute their own financial aid, they use one of two forms. The majority of colleges use the PROFILE application, created by the College Scholarship Service of Princeton, New Jersey. A minority of colleges use their own institutional applications. The states may use the FAFSA or may require their own applications. Contact your state's higher education authority to learn about the state aid programs available and the applications that you'll need to complete.

The FAFSA is filed as soon after January 1 as possible in the year your child will be attending college. You must wait until after January 1 because the FAFSA relies on your tax information from the previous year. The PROFILE (or individual college application) can usually be filed earlier than the FAFSA. The specific deadline is left up to the individual college, and you'll need to keep track of it.

How is my child's financial need determined?
The way your child's financial need is deter-mined depends on which aid application you're filling out. The FAFSA uses a formula known as the federal methodology; the PROFILE (or a college's own application) uses a formula known as the institutional methodology.

Under the FAFSA, your current income and assets and your child's current income and assets are run through a formula. You're 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. It's the amount of money that you'll be expected to contribute to college costs before any federal aid is forthcoming. Your EFC remains constant, no matter which college your child applies to.

An important point: Your EFC is not the same as your child's financial need. To calculate your child's financial need, subtract your EFC from the cost of attendance at your child's college. Because colleges aren't all the same price, your child's financial need will fluctuate with the cost of a particular college.

For example, you fill out the FAFSA, and your EFC is calculated to be $5,000. Assuming that the cost of attendance at College A is $18,000 per year and the cost at College B is $25,000, your child's financial need is $13,000 at College A and $20,000 at College B.

The PROFILE application (or the college's own application) basically works the same way. However, the PROFILE generally takes a more thorough look at your income and assets to determine what you can really afford to pay (for example, the PROFILE looks at your home equity and retirement assets). In this way, colleges attempt to target those students with the greatest financial need.

Your EFC is not the same as your child's financial need... your child's financial need will fluctuate with the cost of a particular college.

How does my child's financial need relate to his or her financial aid award?
When your child is accepted at a particular college, the college's financial aid administrator will attempt to create a financial aid package to meet your child's financial need (colleges aren't obligated to meet all of it). Again, you would like your child's need met with the highest percentage of grants, scholarships, and work-study jobs and the least amount of loans. When comparing the financial aid packages that your child receives, make sure to compare your actual out-of-pocket costs among colleges, not necessarily the ratio of loans to grants in one particular package.

Finding the Funds to Pay for a College Education

Finding the funds to pay for your child's college education is like filling a test tube. The length of the tube represents the cost of education at any one school (tuition, fees, books, room and board, transportation, and personal expenses), and it's your job to fill it.

The first ingredient is what you'll have to contribute from your own pocket: the expected family contribution (EFC), which is determined by the federal government's financial aid formula.

Your EFC is the same regardless of the college your child chooses. The difference between your EFC and the cost of a particular college equals your child's financial need, which is a variable.

To meet this financial need, your child might be eligible for financial aid in the form of loans, grants, scholarships, and/or work-study funds from the federal government, the college itself, and/or independent organizations. (In some cases, a family's EFC may be enough to satisfy all college costs.)

Your child may not receive all the financial aid he or she needs. If so, you'll have to top off the tube with more of your own funds, which are in addition to the EFC.

Positioning Your Income/Assets to Enhance Financial Aid Eligibility

Definition
There are a number of strategies you can implement to try to enhance the amount of federal financial aid your child receives. These strategies take advantage of the federal methodology rules about which family income and assets are included in determining your family's expected family contribution (EFC). Lowering your EFC raises your child's eligibility for federal financial aid.

Strategies to reduce income factored into the EFC

• Time the receipt of discretionary income to avoid the base year, which is the year prior to the year you fill out the federal government's aid application (the Free Application for Federal Student Aid, or FAFSA)
• Pay all federal and state income taxes due during the base year, which will reduce assessable cash and increase your tax deduction on the FAFSA
• Have your child limit his or her income for the base year to the amount of the student income protection allowance ($2,420 for the 2004/2005 academic year)

Strategies to reduce assets factored into the EFC

• Use cash (an assessable asset) to pay down consumer debt, which is not a factor in the federal methodology
• Use cash to make large planned purchases the year before your child starts college
• Use assets assessable under the federal methodology to pay down your mortgage, which increases your home equity (an excludable asset)
• Shift assessable assets above your asset protection allowance (a sum automatically excluded from consideration) to assets excluded by the federal methodology (e.g., home equity, retirement plans, cash value life insurance, annuities)
• Use your child's assets to pay for the first year of college, which reduces (for subsequent years) the student asset contribution that the federal methodology factors into the EFC Points to keep in mind
• Colleges don't use the same formula as the federal government in determining financial aid eligibility--their formula (the institutional methodology) is generally stricter
• Any increased financial aid your child receives may consist entirely of loans, not grants or scholarships
• Be careful about disrupting an otherwise sound investment program

Definition
A grant or scholarship is a type of financial aid that doesn't have to be repaid. Grants and scholarships can be awarded on the basis of financial need or on merit only. They are widely available from the federal and state governments, colleges, corporations, and private associations and foundations. You can research grants and scholarships free of charge at your local library, on the Internet, or by visiting your child's high school guidance counselor or college career office. The two main federal grants are the Pell Grant and the Supplemental Educational Opportunity Grant.

The two main federal scholarship programs are the Robert C. Byrd Scholarship Program and the Ameri-Corps Program.

Prerequisites
Typically, you must complete an application to be eligible for a grant or scholarship--the federal government's FAFSA or the relevant private application. Some grants and scholarships also require financial need.

Key strengths

• Free money--doesn't have to be repaid
• Widely available through federal and state governments, individual colleges, corporations, and private associations and foundations

Key tradeoffs

• Portion of the grant or scholarship that exceeds tuition, fees, books, and equipment will be subject to federal income tax
• Competition for some grants and scholarships may be stiff

Variations from state to state

• State grants and scholarships may vary widely by state. They are often need-based, though the number of merit awards is increasing as state schools try to become more competitive.
• To obtain state-specific grant and scholarship information, contact your state's education agency.

Grants and scholarships can be awarded on the basis of financial need or on merit only. They are widely available from the federal and state governments, colleges, corporations, and private associations and foundations.

Financial Aid: Work-Study

What is work-study?
Work-study is a type of financial aid program that allows students to work and earn money as a way to supplement higher education costs. The most established program is the federal work-study program, although some states may have work-study programs of their own.

The federal work-study program
The federal work-study program is a federally sponsored financial aid program that subsidizes jobs for both undergraduate and graduate students. It is based on a student's financial need.

The federal work-study program encourages jobs that are related to your child's course of study and/or the community (employment may not involve political or religious activity). These jobs can be either on- or off-campus, and they pay at least minimum wage (but can pay higher). Money earned in a work-study job is paid directly to the student at least once per month (undergraduate students are paid by the hour; graduate students either by the hour or on a salary basis). The student can then spend the money in any way he or she wishes.

The federal work-study program is a campus-based program. This means that the financial aid administrator at each individual college administers it. Each school receives a certain amount of money for the federal work-study program, and once the money is awarded, there is no more until the following year.

Tip: Because federal work-study is a first-come, first-served program, it is in your child's best interest to apply as early as possible. In any case, make sure your child applies before the college's application deadline.

If your child qualifies for a work-study job, the amount of the total work-study award will depend on your child's level of financial need, the time your child applies, and the total funds available at your child's college or university.

Caution: You cannot earn more money than your award stipulates. For example, if you receive a $2,000 work-study award, your employment lasts until you earn $2,000, and then it is over for that academic year.

Also, you may decide to turn down a work-study position if you are able to get a job on your own that provides better pay and hours. To apply for federal work-study, your child should contact the financial aid office of the college he or she will attend.

State work-study programs
States may have work-study programs of their own. To find out if your state offers such a program, contact your state's higher education agency.

Each school receives a certain amount of money for the federal work-study program, and once the money is awarded, there is no more until the following year... [So] it is in your child's best interest to apply as early as possible.

Comparison of Federal Higher Education Loans

*This rate applies during periods of repayment; it is lower for borrowers who are in school or in a grace or deferment period.
**The federal government pays the interest on the loan when the student is in school at least half-time, in a grace period, or in a deferment period.

Financial Aid Calendar

If you're applying for financial aid for college, here's a calendar highlighting the important tasks to be done during
the senior year of high school.