College costs continue to soar, and student loan debt in the U.S. now exceeds $1.5 trillion. That means the average student graduating college in 2017 had nearly $30,000 in debt. During the pandemic, interest and principal payments on these loans are in forbearance, but that could change any time. So parents and students navigating the admissions system need to understand how financial aid 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 recent COVID-19 relief bill changes the EFC calculations and rebrands EFC as the “Student Aid Index,” but the changes will not go into effect until the 2023-24 academic 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 afford can be significantly different. For example, the formula estimates that a family that 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 transferring assets into your home or retirement accounts like IRAs.
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. The formula doesn’t consider the differing cost of living in different places or other expenses that families now routinely incur. So the estimates are way out of line for most people. As a result, it’s critical you develop a financial plan early in your child’s education.
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 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 letter, you can write a letter presenting special circumstances that justify more financial aid.
You can only use this process when your circumstances genuinely justify more aid, so writing such a letter requires some thought. Be clear about the situation that requires a reassessment of your financial need. This article provides an excellent template to use.
Different Types of College Financial Aid
Financial aid can seem like an all-encompassing term, but there are many types of assistance. Knowing how these differ is essential to maximize your award:
Need-based aid is offered based on your financial circumstances. “Need,” as defined by colleges, is 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 provide 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 institutional grants. And different institutions have different policies on this, so find out before you apply.
Merit-based aid is offered based on a student’s GPA, test scores, or other accomplishments. Not all universities offer merit-based aid. As a matter of policy, many very selective universities do not offer merit-based aid/ Instead, they meet 100% of “need,” which ensures that students with low incomes who they admit can afford to attend.
Sites like LifeLaunchr’s College Match can help you find universities that offer merit-based scholarships, so use them to look for colleges. Working with a coach can also help you create a list of colleges that will provide scholarships to students such as your teen.
Outside scholarships refer to the billions of dollars in scholarships 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. 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 if you are thoughtful and plan early, you can get surprisingly good results. Here are concrete steps you can take to minimize your cost of college:
Make an Honest Assessment
Money is an uncomfortable topic. Faced with the high cost of college, many families freeze, which is the least effective 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 significant 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 aid. 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.