How Financial Aid Works

The Short Version

All I have left is this tshirtA record 21.1 million students enrolled in colleges across the United States in the fall of 2013 according to the U.S. Department of Education. This represents a 15 % increase over the last decade and there is an anticipated 5% increase above that in the next few years! With all these students in college and universities, is there enough money in the financial aid system to help them all? The answer is ‘yes’, ‘no’ and ‘it depends’.

This special report is meant to clarify for you what exactly “financial aid” is and how you can get your fair share. According to Department of Education statistics, parents and students pay, on average, about 60% of college costs. This means that 40% of college costs is covered with college-based grants, scholarships (gift aid), and federally funded student loans and work–study employment (self-help aid).

It is important for you to know how each college your young scholar is considering determines how it awards its’ financial aid funds. There is only one basic formula called the “federal methodology” that is used to determine your eligibility for federal funds. However, most competitive private colleges and universities use more complex formulas to determine your need. In fact, five different colleges may view your need five different ways. More about that below.

Piggy bank pic

Financial Need. All colleges will calculate your estimated family contribution (EFC) by looking at your income and assets for the tax year prior to the calendar year in which you apply for aid. That is, if you are applying for aid for the years 2017/18 you will use the data from the 2015 tax year. Competitive private colleges may look at your income for two or more tax years. State schools and some private schools will not view your home as an asset so questions regarding your primary residence are not asked on the FAFSA form. Your need, once determined by the college will be subtracted from the college’s cost of attendance (COA). The COA is required by the Department of Education to include the tuition and fees, room and board (direct billable expenses) and books, supplies, personal expenses, computer expense, and travel (indirect expenses). The DOE requires this definition of COA yet most schools do not accurately reflect the true COA to families. You have a right to appeal an award if it does not, but they will say that the school budget is set for everyone and can not change it.

Financial Aid Process. Do not wait until your student is a high school senior to begin this step. That is, do a “Dry Run” NOW. Even if your student will not be graduating for four or more years take a snapshot of what your estimated need will be “down the road”. This will give you an idea of how to prepare. Learn what your basic EFC is going to be. The College Board’s website has a calculator albeit it is not dependable, as I will illustrate later. Either we or your financial planner (if he or she is familiar with the myriad of nuances of the IM methodology) can provide this calculation for you. Particularly given the “financial aid leveraging” policies that most schools practice when awarding grant and scholarship aid.

Since the inception of the FAFSA (formally the FAF) in 1992, the first day it was available to be filed by parents of seniors was January 1st. Now it can be filed any time after October 1 of the senior year. Do not file it before then because it will be returned unprocessed. The big change in the 2016/17 application year is that the income figures reported will be from the already submitted tax returns of the prior year. That is the tax year that covers the last half of the sophomore year and the first half of the junior year. Therefore, there will be no need to estimate income because it has already been established as accurate, presumably. Assets, however, will be entered based on the asset value at the time of submission of the FAFSA and Profile. If your student is applying to a college that uses the Profile form, that should be filed on the same day as the FAFSA so as not to confuse the financial aid offices. Filing on separate days may result in asset amounts that don’t match and some FAO’s would not understand that as silly as that may sound. 🙂

NOTE: ~ It is important that the forms get into the system between October 1st and January 30 so that all accepted students will have time to compare financial aid packages.

This “rule of thumb” applies when your student is applying for the freshman year or, for the first time. In addition, even if you have learned you will NOT qualify for any “need-based aid, file the FAFSA form. If circumstances change in later years such as another sibling in college or your financial picture changes, you will have a better chance of receiving college-based aid funds (grants or scholarships) at that time.

Role of the FAFSA and PROFILE. Both of these are ‘need’ analysis forms. The FAFSA is a government form used by 100% of the colleges and universities in the country that use Federal funds to determine eligibility for these monies such as student Stafford and Perkins loans, Pell, SEOG grants and state grant eligibility. Colleges with more money (the privates) will often use the PROFILE and/or their own INSTITUTIONAL form to determine who is eligible for some of the funds in the schools’ endowment. Once processed, the FAFSA form will generate a Student Aid Report (SAR). In the upper right-hand corner of which will be your FM EFC. Remember, however, this is NOT what you will be expected to pay a college. It only represents the very minimum you will be expected to pay unless you student is a genius or Division I athlete on a merit or athletic scholarship. (This is another reason you want to do a “dry run” as early as possible.)

Colleges using the PROFILE or other forms will be much more invasive in their questions, particularly if you are a business owner or divorced. For this, a Business/Farm Supplement (now incorporated into the Profile form) and Non-Custodial Parent form will be required. Calculated into your EFC for these schools will be a set student contribution from income. This varies from college to college and year to year. Ask the college what it is. After all, these forms are analyzed the college will determine what your IM EFC will be. (Once again, do a “dry run” ahead of time with someone who understands different college policies if you can.)

Expected Family Contribution. As discussed, but bears repeating, there are two different methodologies used by colleges to determine your family’s Expected Family Contribution (EFC). Congress determines the Federal Methodology (FM). It should go through a comprehensive review every five years. Congress in 2006 lowered the student “tax” on assets of 35% to 20%. As always, parents have an asset protection allowance (APA). But the APA has been reduced significantly. Assets over that allowance would be “taxed” at 5.6%. Also, there is no allowance for families if a parent was in college at least halftime. That change is several years old. (It is still possible to appeal to a college financial aid officer to use professional judgment (PJ) to allow an adjustment.)

One change made in 2007 is a good one for some business owners. That is, if the business employs less than 100 people, the value of the business does not have to be reported on the FAFSA. It will be valued by a private college, however, on the Profile, Business Supplement or the school’s individual form. At least it lowers the FM EFC and can benefit the top students. Many private colleges and universities use the Institutional Methodology (IM). It varies from college to college but expands on the Federal formula by looking at home equity, extraordinary medical expenses, secondary school tuition, and depreciation of rental property, adds back to AGI all business and capital gain losses. For example, a student who has a parent who declares a LOSS of $916,000,000 on the 1040 will qualify for a Pell grant, but may not receive any grant aid from a private college. The IM EFC is invariably higher than the FM EFC, even if one of those online calculators indicates otherwise. (The number of exceptions is minuscule.)

Family Contribution Example: Your joint parent income is $99,243, the oldest parent is 49 and there are four family members. You do not own a business. One student in college. Your FM EFC will be about $18,880. Your IM EFC will range from $21,000 to $28,000 depending on the college and the desirability of the student. If the college’s COA is less than $18,880 the only aid offered would be an unsubsidized Stafford loan. (Unsubsidized means you are required to pay the current interest rate on the loan of 4.5%), rates have adjusted every July 1. If the college COA is $46,000 then your need is between $25,000 to $27,120. Let’s say your student is in the top 5% of the applicant pool and considered a top prospect. So your need may be $27,120. Your award packages (if the school does not offer merit scholarships) could look like this:

  • College Cost of Attendance or COA (aka “Budget”) ~ $46,000
  • Stafford loan: $3500 (self-help; interest-free) ~ a processing fee of 1 to 3% may apply. In other words not all of that amount goes toward tuition.
  • Stafford loan: $2000 (interest not subsidized)
  • Work Study eligibility: $1200 (self-help) ~ on campus job; not guaranteed.
  • College grants: $19,420 (gift aid) ~ the best kind
  • Total Aid: $27,120 ~ plus the Family Contribution of $18,880 = $46,000

This will enable the college to advertise that they meet 100% of need. Even if another student has a higher EFC with the exact same income but is lower in the applicant pool with a lesser “desirability rating”, if they fill his need based on the school’s interpretation of need…they filled his 100% too!

Steps to Financial Aid. The first and most important steps toward college admission rest with the student. The student must apply and be admitted before a financial aid package is delivered. Understanding how the process of financial aid works, however, will be shared with the parents. Colleges are looking for strong students that will contribute to the academic and social fabric of the particular institution. It’s not always the valedictorian who gets the most money. Above average grades, higher than average ACT or SAT scores, (see the Common Data Set) meaningful list of a couple of extracurricular accomplishments that demonstrate initiative and leadership, a unique talent can lead to the particularly attractive financial aid package.

The sooner your student realizes this and begins to assemble a strong secondary school record, the better. But even a late effort toward a good academic and extracurricular record is better than no effort at all. Students should begin to consider what they’re looking for in a college no later than the second half of the junior year. This is a good time to develop a list of realistic colleges and arrange for visits to them during the winter and spring vacations.

During the first couple of months of the senior year, your student should have a final list of colleges based on his academic, social and financial parameters. Determine which financial needs the colleges and when all deadlines are will require analysis forms. Some high school guidance offices will have forms you can look at for reference from the previous year. Of course, use them only for reference.

Make time during the December holidays to work on the FAFSA and PROFILE, with the intention of completing them by January 20th of the New Year. Now, as mentioned above, there is no need to wait for your employer W-2 to be sent because you will be using the year prior to your current year. Those tax returns are complete. In addition, because the colleges can access your tax returns directly from the IRS (DRT) you may not have to send them to the college. But if you do, before you make copies of the Federal 1040 write your student’s name and social security # on the top of each page and the W-2’s. Then, make as many copies you need. Do not send state tax returns to colleges – they only want Federal forms and associated documents.


scan0006If you have special circumstances that were not adequately explained in the PROFILE questionnaire send a letter directly to the school’s financial aid director. Do this one week after you file the forms and before you receive the college’s financial aid package. Most colleges prefer to know everything before they complete a student’s package. They will appreciate it. Do not feel it will hurt his admission chances unless he is a borderline admit at best. This way, you won’t have to appeal for the proverbial “scraps” afterward.

College Financial Aid Officers. The results of your needs analysis form will be forwarded to the financial aid office at the colleges. A file will be created. Some colleges used to wait until mid-March to begin packaging aid offers. However, the date you filed with the processor will be recognized and given priority based on that. “First come-first served.”
Computer programs have been created to assist in financial aid packaging. This can be maddening but is the way it is. These packages are constructed according to the school’s policy.

It is always wise to be polite to the folks in financial aid. They are in a tough and sometimes thankless position. Most of them have your interests at heart, but also have to answer to the directive of the board of trustee’s and other ruling powers. Everything they do and a judgment they make using ‘professional judgment’ has to be recorded. Be patient and friendly. Get to know them when you are making college visits. Sometimes they will remember you favorably if you were able to establish a rapport early on.

Yours for college affordability success,
Eric Goodhart
Programs for Education ~
Ask us for a Money $aving “Dry Run”.
(978) 820-1295