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Get a head start on college: Financial aid

From financial aid to college costs, these steps can help you prepare.

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Finesse financial aid

With the cost of a college education increasing at a rate of 3.5% for the 2013–14 school year,1 it's more important than ever to understand the financial-aid process and how to potentially improve your eligibility.

In particular, the federal government program Free Application for Federal Student Aid (FAFSA), which is used by many families to apply for aid, has some factors that you may use to your advantage a few years before your child enters college.

FAFSA calculates your expected family contribution, or EFC, as the amount of money that the parents and student together should pay toward college expenses, based on the cost of attending a particular school. The higher the EFC, the less financial aid you can expect to receive, and vice versa. But keep in mind that it is up to the school to distribute financial aid for each student as it sees fit. Just because you receive a low EFC doesn’t mean that you will have to pay only that amount toward college.

Here's an example of a hypothetical expected family contribution calculation:2

As this example shows, when there are two students in college at the same time, the entering student has a lower EFC than if there were only one student in college. You can also see that student assets/income are taken into consideration to help pay for college.

"Paying down all credit card debt and other consumer debt will reduce assets and improve chances of more federal financial aid," said Andrew Schrage, co-owner of Money Crashers, a popular personal finance Web site. "Assets in the student's name count more than those in the parents' name when determining the Expected Family Contribution, which will reduce the amount of aid available."

Consider spending down custodial accounts in the child's name, and consider adding any surplus monies to retirement accounts in the parents’ name, thus improving a family's chances for more federal financial aid, because these accounts aren't taken into account for the EFC.

Understand college costs

It's important for families to understand the true college costs that they will face. The average annual total for tuition, fees, and room and board for an in-state public four year college was $23,410 for the 2014–15 tuition year. The average total for tuition, fees, and room and board for a private four-year college was $46,272 for the 2014–15 tuition year.3

A recent Fidelity study on families' preparedness for college found that, on average, families intend to pay 65% of their children's college costs.4

In reality, few families pay the full sticker price for college. In view of this, colleges have been required to provide a “net price calculator” on their Web sites to provide a rough estimate of what the costs for prospective students are, after grants, financial aid, and certain expenses are taken into account.

"Fidelity suggests performing a dry run with the College Board EFC calculator—even five years before you complete your first FAFSA application—in order to obtain a ballpark EFC figure and get a sense of what family financial data is required to participate in the financial-aid evaluation process," says Steve Devaney, CFP®, a director of financial solutions with Strategic Advisers, Inc., at Fidelity Investments. Then, once you're closer to deciding on which schools to apply for, use the college’s net price calculator.

Get familiar with grants, scholarships, and loans.

Your financial-aid award may consist of a combination of grants and scholarships (money you don't have to pay back) and loans (which must be paid back). The largest piece of undergraduate aid (40%) comes from federal loans, consisting mainly of two loan types—Stafford loans (subsidized and unsubsidized) and PLUS loans. The average undergraduate aid per full-time equivalent student totaled $13,218 in the 2011–12 school year, including $8,082 in grant aid from all sources, and $4,840 in federal loans.5

Grants

Federal Pell grants—up to a maximum of $5,730 for 2014-15 academic year—are awarded based on financial need, as determined through the FAFSA. Colleges and universities award grants based on financial need, merit, or both. State grants vary in amount and are usually need-based awards. Private grants are based on a variety of factors, including background, associations, achievements, interests, and need.

Scholarships

Awarded by the federal government, institutions, states, and private sources, scholarships may be based on different factors such as merit, need, diversity, interests, or cultural background, to name a few.

It is a good idea to research the different types of grants and scholarships available to your child or loved one, to make sure you're utilizing any source of funds you don't have to pay back. To look for scholarships, search fastweb.com and finaid.org.

Student loans

While your student may or may not qualify for grants or scholarships, there are a variety of loans available to help foot looming tuition bills.

Probably the most attractive loans are subsidized Stafford loans. These are federal government loans available to any student who meets the FAFSA eligibility requirement and who typically has an unmet financial need after Pell grants and other financial aid are factored in. Typically, they are offered at set amounts for each school year—from $5,500 for the first year up to $7,500 in the third year and beyond—with a lifetime limit of $31,000.

Also to be considered are unsubsidized Stafford loans and private education loans, which you may apply for regardless of financial need. With unsubsidized Stafford loans, the interest on the loan begins accruing immediately. However, the student may defer payments until six months after he or she leaves school.

Parent loans

Parents may borrow for college through PLUS loans, which allow you to defer repayment until six months after the student leaves school, although the interest begins to accrue as soon as the loan is dispersed. Borrowing limits are high, so parents with good credit histories may borrow up to the full cost of the student's education, less any aid the student has received.

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1. www.collegeboard.com
2. Ibid
3. Ibid
4. About the 2013 Fidelity College Savings Indicator: As part of the study, Fidelity conducted a survey of parents with college-bound children of all ages. Parents provided data on their current and projected household asset levels, including college savings, use of an investment adviser, and general expectations and attitudes toward financing their children’s college education. Using Fidelity’s proprietary asset–liability modeling engine, the company was able to calculate future college savings levels per household against anticipated college costs. The results provide insight into the financial challenges parents face in saving for college. Data for the Indicator (number of children in household, time to matriculation, school type, current savings, and expected future contributions) were collected by Research Data Technology, an independent research firm, through an online survey of more than 2,500 parents nationwide with children aged 18 and younger who are expected to attend college. The survey respondents had household incomes of $30,000 a year or more, and were the financial decision makers in their household. College costs ere sourced from the College Board’s Trends in College Pricing 2012. Future assets per household were computed by Strategic Advisers, Inc. (a registered investment adviser and wholly owned subsidiary of FMR LLC). Within Fidelity’s asset–liability model, Monte Carlo simulations were used to estimate future assets at a 75% confidence level. The results of the Fidelity College Savings Indicator may not be representative of all parents and students meeting the same criteria as those surveyed for this study.
5. www.collegeboard.com
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