After hours of research and college visits, your child has chosen the next step in their educational career. Congratulations! If you’re like most parents, your excitement is mixed with concerns, one of which is how to pay for the next few years of higher education. Many parents pay for college with a combination of current income, savings, and financial aid. By learning the basics of financial aid, you'll be able to understand how the aid process works and compare the aid awards your child receives.
What is financial aid?
Financial aid is money distributed primarily by the federal government and colleges through student loans, grants, scholarships, and work-study jobs. Loans and work-study must be repaid (through monetary or work obligations), while grants and scholarships do not. A student can receive financial aid from both the federal government and the and college.
Financial aid can be further broken down into two types: need-based, which is based on your child's financial need, and merit-based, which is based on your child's academic, athletic, or artistic talent.
How is financial need determined?
Financial need is generally determined by looking at a family's income, assets, and household information. The government's aid application, the FAFSA, uses a formula known as the federal methodology. Here’s generally how it works:
- Parent income is counted up to 47% (income equals adjusted gross income or AGI plus untaxed income/benefits minus certain deductions)
- Student income is counted at 50% over a certain amount ($6,660 for the 2019/20 school year)
- Parent assets are counted at 5.6% (home equity, retirement assets, cash value life insurance, and annuities are excluded)
- Student assets are counted at 20%
The result is a figure known as your expected family contribution, or EFC. This is the amount of money you must contribute to college costs to be eligible for aid. Your EFC remains constant, no matter which college your child applies to.
Your EFC is not the same as your child's financial need. To calculate financial need, subtract your EFC from the cost at a given college. Because tuition, fees, and room-and-board expenses are different at each college, your child's financial need will vary depending on the cost of a particular college.
Example: You fill out the FAFSA and your EFC is calculated at $35,000. College A costs $60,000 per year and College B costs $50,000 per year. Your child's financial need at College A is $25,000 and $15,000 at College B.
Colleges use their own formula for determining financial need. Basically, the process works the same way except that the college typically takes a more in-depth look at your income and assets. For example, some colleges may consider your home equity in assessing your ability to pay college costs.
How do I apply and when?
The best way to file the FAFSA is online at fafsa.ed.gov. You and your child will each need an FSA ID, which you get online.
The FAFSA relies on income tax information from two years prior (for example, the 2020/21 FAFSA will rely on your 2018 tax return) and current asset information. The FAFSA can directly import your tax information through the IRS Retrieval Tool. You will then be asked additional questions.
The FAFSA can be filed as early as October 1st in the year prior to the year your child will be attending school. Private colleges typically require both the FAFSA and the standard PROFILE form or their own aid form, which you'll need to submit by each individual college deadline. The PROFILE form is generally submitted in late fall or winter but is often required earlier if your child is applying early decision or early action.
After your FAFSA is processed, you will receive a Student Aid Report that highlights your EFC. Colleges that you list on the FAFSA will also get a copy of the report. Then the financial aid administrator at each school that accepts your child will try to craft an aid package to meet some of your child's financial need.
Tip: It’s not uncommon for colleges to meet only a portion of a student’s financial need. If this happens to you, you'll have to make up the gap, in addition to paying your EFC.
Download this Financial Aid Calendar to keep everything on track!
Comparing aid awards
Sometime in late winter or early spring, your child will receive financial aid award letters that detail the specific amount and type of financial aid that each college is offering. To compare offers, first determine your out-of-pocket cost, or net price, for each school by subtracting any grant or scholarship aid (which doesn't need to be repaid) from the total cost of attendance. Next, look at the loan component of each award to see how much, if any, you or your child will need to borrow. Then compare the net price and loan amounts across all colleges.
If you’d like to ask a school for more aid, a polite letter to the financial aid administrator followed up by a telephone call is appropriate. Your chances for getting more aid are best if you can document a change in circumstances that affects your ability to pay, such as a recent job loss, unusually high medical bills, or some other unforeseen event.
Common federal aid programs
Here are some names you'll be hearing as you navigate the world of financial aid:
Direct Stafford Loan – The most common student loan for college and graduate students. The undergraduate student interest rate is currently fixed at 4.53% and the graduate student interest rate is 6.08% for loans disbursed July 1, 2019 through June 30, 2020.
Perkins Loan – A student loan for college and graduate students with the greatest financial need. The interest rate is currently fixed at 5%.
Direct PLUS Loan – An education loan for parents of college students and independent graduate students. A separate application is required, though filing the FAFSA first is a prerequisite. Parents can borrow the full cost of their child's education, minus any financial aid received; the only criteria is a good credit history. The interest rate is currently fixed at 7.08% for loans disbursed July 1, 2019 through June 30, 2020.
Pell Grant – A Pell Grant is available only to undergraduates with exceptional financial need.
A word about merit aid
Colleges often use merit aid packages to attract certain students to their campuses, regardless
of their financial need. The availability of college-sponsored merit fluctuates each year and is different for each school based on their endowments, as well as the specific academic and extracurricular programs they want to target. As a family researching college options, exploring college merit aid is probably the single biggest thing you can do to optimize your bottom line.
If you want to get an estimate of how much financial aid (need-based or merit) your child might qualify for at a particular college, visit the college's website and fill out its net price calculator - all colleges are required to have one on their websites. You’ll be asked for parent and student income and asset information. The net price calculator will take anywhere from 5 to 15 minutes to complete.
Besides colleges, a wide variety of groups offer merit scholarships to students meeting certain criteria. There are websites where your child can input his or her background, abilities, and interests and receive a matching list of potential scholarships (free of charge).
How much should I rely on aid?
With all this talk of financial aid, it's easy to assume that it will do most of the heavy lifting when it comes time to paying the college bills. But the reality is that although aid can certainly help cover your child's college costs, student loans -not grants and scholarships,- often make up the largest percentage of the typical aid package. It’s important to consider that parents and students who rely mainly on loans to finance college can end up with a considerable debt burden that negatively impacts their financial situation for years after graduation.
If you’re worried about how to pay for college or would like to explore strategies to lower your EFC, connect with an advisor. Whether your child is heading to college this fall or is in elementary school, a Farm Bureau Financial Advisor can help you make a plan for your children’s’ future.
From materials prepared by Broadridge Investor Communication Solutions, Inc.
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