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 them 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 2 forms: need-based 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 don't 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'll want to get familiar with 3 acronyms: EFC, FAFSA, and CSS.
Understanding your expected family contribution (EFC)
Your first step when exploring 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's simply a number used by colleges to calculate the amount of federal student aid you're 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'll 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 the 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 see is based on the personal financial information you provide and the financial aid policies of each specific 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.
A financial aid application is a snapshot in time. If your income is unusually high one year, perhaps as a result of selling a business or receiving a large bonus, it could result in a higher EFC, hurting your chances for aid. It's helpful to reach out to the financial aid office if you have fluctuations in your income from year to year.
Get familiar with Free Application for Federal Student Aid (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 EFC.
FAFSA asks for income information from 2 years prior. So, for example, for a student applying for 2018–2019 academic year financial aid, the FAFSA asks for family income from 2016. If a family had much higher income in 2016 than in 2017, it would behoove the family to let the financial aid office know. Some schools can take that income change into consideration and award additional financial aid.
Because the financial aid applications use income from 2 years prior, families can implement a strategy for grandparent-owned 529 accounts. 529s owned by grandparents don't count as either a student or a parent asset. However, distributions from these accounts are considered student income, which could reduce financial aid awards.
Be mindful of 529 withdrawals
"A withdrawal from a non-parental 529, such as a grandparent 529, can really impact your financial aid if you are not careful," says Keith Bernhardt, Fidelity's vice president of Retirement and College Products. "Depending on the size, part of that withdrawal could be counted in the expected family contribution for a subsequent year."
To avoid impacting a student's eligibility for financial aid, grandparents can make distributions from 529s as early as the spring of the student's sophomore year, which is right after the last tax year that will show up on the student's last undergraduate FAFSA. This assumes the student finishes college within 4 years. You'll need to wait until the following spring to employ this strategy if your child takes 5 years to graduate.
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 2 years prior to the 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.
Don't forget the College Scholarship Service (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 College Scholarship Service (CSS) Financial Aid Profile®. Developed by the College Board, the 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 Profile requires more information than the FAFSA, including information about your home equity on your primary residence, retirement savings (though most colleges don't use that information to determine financial aid eligibility) and life insurance plans. It also asks for details on your income over the past 3 years.
"The Profile counts all 529s that list a student as a beneficiary, and they even want to know about a 529 plan of a sibling who is under 18," explains Mark Kantrowitz, publisher of Cappex.com, a site that helps families maximize financial aid. 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 2 hours to complete the form, assuming you've first gathered your prior-year tax returns and other financial info.
If you plan to complete the 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). Frequently, colleges use their own methods to determine who qualifies for financial aid so consider contacting the college's financial aid office to get details on its financial aid packages.
Differences between the FAFSA and the Profile
When counting assets for financial aid, the main difference between the FAFSA and the Profile is that the Profile takes into account home equity, ownership in small businesses, and the value of family farms. That could amount to a big difference in how much aid you get. With the FAFSA, schools expect families to contribute 5.6% of parent-owned 529s, and 20% of those owned by students. The Profile, however, expects a 25% contribution of student-owned 529s along with 5% of parent-owned 529s and other parent assets. A 529 is considered parent-owned if it is owned by a dependent student or one of their parents.
The Profile financial aid calculation assumes that parents can contribute up to 5% of their home equity for college each year, though many colleges cap home equity value at 1.2 to 3 times parent income to take into consideration fluctuations in the housing market.
For example, some colleges cap home equity at 2.5 times adjusted gross income. So if your family earns $150,000, but has $500,000 in home equity, only $375,000 of home equity is factored into the calculation. At 5%, the Profile would add $18,750 to your EFC.
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. After you receive an offer, it might be possible to negotiate a better one, especially if you can demonstrate a higher need.
But keep the following fact in mind: While 70% of families receive some financial aid, nearly 40% 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 is entering college next year, that still leaves a 5-year window when 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.
Next steps to consider
Open a flexible, tax-advantaged 529 college savings plan.
Check to see if you're on track with our college savings calculator.
What to consider when borrowing for college.