The high school years can be a stressful time for students and their parents. Along with the usual academic and social challenges, this is the time when many families come face-to-face with the reality of the high cost of obtaining a college degree.
At today’s prices, even families who have been contributing to a dedicated college savings fund for many years may discover that their savings will cover only a portion of their child’s expected college expenses. Of course, it’s always possible that your child’s academic or athletic prowess will earn him or her a full or partial scholarship. But the competition for these dollars is fierce, so it’s wise to start exploring your financial aid options well ahead of time.
Financial aid generally comes in two forms: need-based aid and merit-based aid. Need-based aid includes subsidized government loan programs, such as Perkins Loans, subsidized Stafford Loans or state loan programs. These programs offer loans with relatively attractive interest rates and do not require repayment until after the student graduates or leaves school. Many colleges also provide direct grants, scholarships or tuition discounts to qualified low-income students.
Merit-based aid, as the term suggests, is awarded to students who excel academically or athletically, or who possess other special talents (such as the ability to play tuba in a marching band). This type of financial aid usually comes in the form of grants or tuition discounts, rather than loans. Private schools are more likely than public schools to offer higher amounts of merit aid, as their endowments enable them to compete more aggressively with other private schools for top-tier students. Therefore, families who may have assumed that private college was out of reach may want to explore financial aid opportunities from these institutions more closely.
To get started on your financial aid odyssey, you will first need to become familiar with three acronyms: EFC, FAFSA and CSS.
Understanding your Expected Family Contribution (EFC)
The first step when exploring your financial aid options is to calculate your Expected Family Contribution (EFC). Your EFC does not represent the amount of money your family will have to pay for college, nor is it the amount of federal student aid you will receive. It is simply a number used by colleges to calculate the amount of federal student aid you are eligible to receive.
Your EFC measures your family’s financial strength according to a federal formula that factors in your family’s taxed and untaxed income, assets, family size and the number of family members who will attend college during the same academic year. Your debts are not factored into the calculation.
For a more accurate assessment of what each particular college may expect you to pay, visit each college’s website and search for the “net price calculator.” The net price is the full cost of attendance minus any grants and scholarships you may receive from the college. The price you receive is based on the personal financial information you provide and the financial aid policies of each particular college. Keep in mind that the net price covers only one year of college and does not factor in potential tuition increases in the future.
Get familiar with FAFSA
To apply for federal financial aid, you will need to complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is used by the U.S. Department of Education and all public and private universities to conduct a “needs analysis” that determines your Expected Family Contribution.
When completing the FAFSA for the first time, there are a few things to keep in mind. First, understand that FAFSA results are based on your family’s tax return for the year immediately prior to the year your child enrolls in college (your “base year”). For example, if your child plans to enter college in the fall of 2017, financial aid determinations would be based on your 2016 tax return.
If you have the ability to defer income or increase tax deductions, consider taking those actions in the year prior to your first FAFSA application. Similarly, you may want to reconsider the timing of any actions that would produce a temporary increase in your taxable income during your base year or any year in which you hope to qualify for financial aid. This includes capital gains from the sale of real estate or investments held in taxable accounts.
Even if you believe your family’s income is too high to qualify for financial aid, it may still be in your best interests to complete the FAFSA. That’s because some sources of aid, such as unsubsidized Stafford and PLUS loans, are available regardless of need. However, to be considered for these loans, you must fill out the FAFSA. In addition, some schools will not consider you for merit-based aid or scholarships if you do not complete the application. Finally, remember that your financial aid package generally applies to your child’s freshman year only. You will need to update your FAFSA information for each subsequent academic year.
For private colleges, don't forget the CSS Financial Aid Profile
The published prices for attending most public colleges are typically less than those of private colleges. But some families overlook the fact that many private colleges maintain large endowments that enable them to offer attractive financial aid packages to qualified students. Much of this aid comes in the form of grants and scholarships that in some cases can put the total cost of attendance on par with, or even below, the cost of a public college.
To qualify for this aid, many private colleges require you to fill out yet another form known as the CSS Financial Aid Profile®. Developed by the College Board, the CSS Financial Aid Profile is an online application used by approximately 400 colleges and scholarship programs to award financial aid from sources outside of the federal government. After you fill out the application, the College Board sends your information to the colleges and scholarship programs you have chosen.
The CSS Financial Aid Profile requires more information than the FAFSA, including information about your home equity on your primary residence, retirement savings and life insurance plans. It also requires details on your income over the past three years. Students whose parents are separated or divorced may be required to provide additional information, such as the income and assets of a noncustodial parent. In all, the College Board suggests allotting up to two hours to complete the form, assuming you have first taken the time to gather your prior-year tax returns and other financial data.
If you plan to complete the CSS Financial Aid Profile, be aware that students applying for early decision or early action are often required to file the application by November 15 of the year before they attend (the deadline is often February 1 for regular admission students). Be aware that each college may have its own unique methodology for determining who qualifies for financial aid. Therefore, consider contacting each college’s financial aid office to get more details about how it determines its financial aid packages.
A disciplined saving strategy is the best aid package
There are numerous strategies you can explore for improving your family’s odds of landing either type of financial aid. Once you receive an offer, it may be possible to negotiate a better offer, especially if you can demonstrate a higher need.
But keep the following fact in mind: while 70 percent of American families receive some financial aid, nearly 40 percent of financial aid packages include loans that must be repaid. The College Board estimates that the average debt burden for recent college graduates averages between $24,000 and $30,000.
To help your children avoid a high college debt burden, look for ways to ramp up your contributions to a dedicated college savings account, such as a 529 college savings plan. Even if your child will be entering college next year, that still leaves a five-year window during which you can save for college. If your family managed to set aside an additional $250 each month during this period, you could amass $15,000—money you wouldn’t need to borrow to pay for college.
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