Financial Aid 101

Financial Aid As Part of The College Process

Before developing a list of colleges to consider for application, I encourage you to have a discussion about your college budget as a family, if you haven’t aheadshotlready.

It is important to know as a family how much you are willing to pay for a year of college before becoming emotionally attached to schools. In general, I recommend that students think of every school on their list as 1st Choices, until the acceptance letters come in. Then, it’s time to put schools in a preferential order based on academic and social, as well as the financial aid package being offered.

As you probably know, there are four main sources of college money, listed below with their percentages:

  • Federal-40%
  • Colleges-35%
  • State-11%
  • Private scholarships-7%

Federal money is mostly for students with financial need (determined by the government’s EFC calculator, not necessarily what a family thinks they need or truly needs to afford college). However, even families with higher income can receive some federal aid, especially if they are looking at pricier, private schools. For families with higher income but without an unlimited college budget, it is best to look for colleges that are generous with merit aid, and where the student is in the upper 25% of the previous year’s freshman class (looking at GPA and test scores).

There are a couple of things you should do as soon as possible to make sure you put the right schools on your college list:

Figure out your EFC (Expected Family Contribution), which is what the government thinks your family should be able to pay for one year of college.


Why? It will give you a sense of what you might have to pay for one year of college.

Knowing your EFC will help you know what schools you should be looking for. With a low EFC, you might consider schools that give generous need-based aid. If you have a high EFC, let’s say $40,000 or higher, schools that are generous with merit aid should be on your list, unless cost is not an issue.

Here is a good EFC calculator to use:

And here is a great video tutorial on how to fill out the calculators:

You will be asked what formula you want to use, as there are two: the Federal Method and the Institutional Method. You should select both. All schools that participate in the Federal Aid program use the Federal Methodology (on the FAFSA) to calculate need. Around 250 schools (mostly private, and highly selective) also use the Institutional Methodology formula to calculate a family’s need, through an application called the CSS Profile.

Here is a list of schools that use the CSS Profile school:

Warning: Every Profile school can modify its financial aid formula in countless ways. So in reality, a student who applies to 10 PROFILE schools could end up with 10 EFC’s that are all different. The CSS Profile takes into account home equity, whereas the Federal Methodology (FAFSA only schools) does not.  This can often increase the EFC for families, and they are expected to pay more.

Important Facts:

  • Many parents are worried that their investments will hurt their chances for financial aid. However, most investments usually don’t hurt aid chances because the aid formulas ignore assets in qualified retirement accounts such at IRA’s, 401(k)’s, 403(b)’s, SEP-IRA’s.
  • For taxable assets, families are allowed to shelter a certain amount that won’t be included in the calculations. The older the parents are (and the closer they are to retirement), the more they can shelter. See the chart on page 19, if you are interested:
  • The federal financial aid treatment of Coverdell ESAs and 529 college savings plans is identical. Each is considered an asset of the parent if the parent is the account owner (which is a more favorable result than if the account were classified as a student asset). Also, distributions (withdrawals) from either a Coverdell ESA or a college savings plan that are used to pay the beneficiary’s qualified education expenses aren’t classified as either parent or student income, which means that some or all of the money is not counted again when it’s withdrawn.

Note: The financial aid treatment of 529 plans and Coverdell ESAs is complex and subject to change. You should consult a financial planner experienced in financial aid issues for more information.

Once you have colleges in mind you are considering:

Use the Net Price Calculators from each college on your initial list to see the Estimated Net Price you might if your student attended that particular school. This is often a more accurate picture of what your yearly cost will be, as it can take into account merit aid offered by the school.

The net price represents what a student will have to pay after scholarships and grants from the federal and state governments and the school itself are subtracted. Let’s say, for example, that a college costs $50,000 and the student will receive a $30,000 award from the school and a state grant of $5,000. The net price for this student would be $15,000. The net price equals the true price of the college because it only considers free money and disregards loans when calculating the cost of a school. To use many calculators, and particularly those of selective private schools, you will need your latest tax return and bank/investment statements. If the student has income and a bank account, you should gather that information too.

Hopefully, the Net Price Calculators will ask you a number of questions about your student’s grades, test scores, activities and class rank, so that you know they are figuring Merit Aid into the calculation. A thorough calculator could take you 10 to 15 minutes to complete.  You can also play around with data on the Net Price Calculators to see what a change in GPA or test scores might do to your cost.

Warning: The weakest calculators rely on the federal-calculator template. Using a calculator that uses the federal template could take less than a minute to complete! The questions are minimal, which leads to dubious cost estimates.

The fastest way to find a school’s Net Price Calculator is to Google “X University Net Price Calculator.” Using the Net Price Calculator for colleges on your list can help you create a better list. Remember, you want a list that is balanced in terms of admission chances, as well as one filled with colleges your student could afford to attend.