College costs continue to soar, and student loan debt in the U.S. now exceeds $1.5 trillion dollars. That means the average student graduating college in 2017 had nearly $30,000 in debt. So for parents and students navigating the admissions system, it’s critical to understand how financial aid really works. Unfortunately, as with everything else in this area, college financial aid is complex and confusing. So here are some facts you need to know about the system.

College Financial Aid Isn’t Always Fair

College financial aid officers start by looking at a number computed on your Free Application for Federal Student Aid (FAFSA), called the “Expected Family Contribution,” or EFC. According to the government, the EFC is a “measure of your family’s financial strength.” It’s a number calculated by a formula established under the law, to estimate how much money the government thinks your family can afford to pay for a child’s college education each year.

The number is wildly wrong for many families. For many families in the middle-class (earning anywhere from $60,000 to $200,000), the amount of money the government estimates you can afford to pay for your child’s education and the amount of money you can actually afford can be wildly different. For example, the formula estimates that a family which earns $75,000 a year, with one child in college, should be able to pay over $10,000 a year towards their child’s college education. That is simply unrealistic and unaffordable for most families.

What’s worse, if you planned ahead and saved money carefully over the years to meet this goal, your savings will increase your EFC. Even if you use college savings accounts (such as 529 plans or Keogh plans), you might increase your EFC. There are ways to minimize this: for example by moving savings from accounts in your child’s name to accounts in your name, or by moving assets into your home, or into retirement accounts like IRAs.

Here’s an important fact: the government expects you to contribute 22-47% of your net available income (also called discretionary income), calculated based on a formula, to your child’s education. The government created this formula based on patterns of life from decades ago. It doesn’t take into account the differing cost of living in different places or many other costs that families now routinely incur. So the estimates are way out of line for most people. As a result, developing a financial plan early is critical to afford college.

College Financial Aid is Confusing and Complex

At many colleges (mostly, but not entirely, private universities), you’ll have to fill out not only the FAFSA but a second financial aid form called the CSS/Profile. The CSS/Profile is a form created by the College Board, which administers the SAT and AP tests. It requires a lot more information than the FAFSA and has a different formula to calculate your EFC. In fact, there are not two, but three different formulas (called the Federal, Institutional, and Consensus Methodologies) to compute your EFC. Why are there three? Because in this, as with every other aspect of the U.S. college admissions system, complexity allows for colleges to have more choices in their decision-making process.

And if that isn’t bad enough, the EFC isn’t really a good measure of how much you’ll have to pay for your child’s education, no matter how it is calculated. At most universities, the EFC is a guide the college uses, but not determinative. Some colleges will require you to pay more than the EFC. At some, your child will earn merit scholarships and you’ll pay less than the EFC.

College Financial Aid is Negotiable

Here’s the final fact you need to know about financial aid. It is negotiable. College financial aid departments call this process “appealing” the financial aid award. Once you receive your financial aid award, you can write a letter appealing the award, and present special circumstances that would justify a better award.

Writing such a letter requires some thought. Be clear about what your financial circumstances are that require a reassessment of your financial need. This article provides a good template to use.

Different Types of College Financial Aid

Financial aid can seem like an all-encompassing term, but there are many types of aid. Knowing how these differ is important to maximize your award:

Need-Based Aid

Need-based aid refers to financial aid offered based on your financial circumstances. That’s as opposed to aid offered because of the achievements of your child. Colleges define “need” as the difference between their cost of attendance and your EFC. You can’t get more need-based aid than this.

There are different types of need-based aid:

  • Federal grants, like Pell Grants, are outright grants that you don’t need to pay back. These are offered directly by the Federal government.
  • Many states also offer need-based grants to students whose income is below a certain threshold.
  • The federal government also offers subsidized loans: loans that students don’t need to pay back until they leave college. These are loans, so remember you have to pay them back with interest eventually.
  • Finally, the college can offer an institutional grant: an award made by the college directly. Private universities have much greater discretion in deciding who gets an institutional grant. And different institutions have different policies on this, so find out before you apply.

Merit-Based Aid

Merit-based aid refers to grants offered based on a student’s GPA, test scores, or other accomplishments. Some universities offer merit-based aid, some don’t. Sites like LifeLaunchr’s College Match can help you find universities that offer merit-based scholarships, so use them to find colleges you’re keen on. Working with a coach can also help you create a list of colleges that will offer scholarships to students such as your teen, so it can be a great investment.

Outside Scholarships

Outside scholarships refer to the billions of dollars in scholarships that are offered by organizations across the country each year. Some are local organizations, some are national. Organizations offer scholarships based on interests, ethnicity, sports, connections to the U.S. military, and many other factors. Each year, nearly $3 billion in scholarships goes unclaimed. Using a service such as LifeLaunchr’s Scholarship Match can help you find scholarships that can cut the cost of college significantly.

What Should You Do?

The financial aid system can be unfair, complex, and confusing, but navigating it thoughtfully can yield surprisingly good results. Here are concrete steps you can take to minimize your cost of college:

Make an Honest Assessment Early

Money is an uncomfortable topic. Faced with the high cost of college, many families freeze. This is the least productive response. No matter where you are in the process, make an honest assessment of what you can afford for your child’s college education. Even if the answer is nothing or a minimal amount, you’re better off knowing.

Do Some Financial Planning

The financial aid system does sometimes penalize savings. So if you have savings, you may be better off investing the money in buying a home. You could then borrow against the equity in your home when you need the money to pay for college. Consult a financial planner early, and make decisions that will maximize your eligibility for financial aid. LifeLaunchr can help you develop a financial plan, so schedule a free consultation.

Get an Expert to Review your FAFSA Before You Submit It

The FAFSA can be easy to fill in. But sometimes subtle variations in answers can cause big differences in the outcome. So ask an expert, like those at LifeLaunchr, to review your submission before you make it. Getting the details right is critical.

Pick Colleges That Will Offer Merit Aid

For those who won’t qualify for a lot of need-based assistance, you can receive merit-based assistance. Use a site like LifeLaunchr to search for colleges that offer merit-based assistance.

Apply for Outside Scholarships

Start early, and spend 15-30 minutes a week finding and applying for scholarships. You can win significant amounts of money with discipline and regular effort.

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