With the high cost of a college education, no one wants to pay more than they must. Yet thousands of families pay too much for college every year because they don’t understand the basics of financial aid and don’t know the right questions to ask. So let’s learn the basics and then what questions to ask.
Basics Part I
There are three types of financial aid for college: grants or scholarships, loans and work-study.
Grants and scholarships are free money that you do not need to pay back.
Most grants and scholarships come from the federal and state government or from the individual college.
Loans need to be paid back after college.
There are many loan programs available from the federal and state government. Most of these loans have fairly low interest rates. There are also private loans available although these generally have a higher interest rate.
Work-study is a job offered on the campus of the college.
Basics Part II
Need based aid vs Merit based aid
Need based aid is given by all colleges to students who have need. Anyone who can’t pay the full cost of the college has need.
A form called the Free Application for Federal Student Assistance (FAFSA) determines the amount of need for federal grants and scholarships. Many highly selective colleges also require a form known as the Profile form The FAFSA form is filled out after January 1 of the year the student will first attend college.
The FAFSA and Profile forms ask questions about the income of the parents and student using information that you gave on your tax returns. These forms also ask questions about the amount of money you have in savings or investments. The Profile form is more detailed than the FAFSA form. Once these forms are completed the government uses the FAFSA form to determine how much your family can pay for college. This is your expected family contribution or your EFC. Your EFC is the same regardless of the cost of the college. Similarly the individual colleges who use the Profile use that form to determine what your family can pay for college.
Your need is the cost of the college you are looking at minus your EFC. For example, if you are looking at a college that costs $20,000 a year and your EFC is $5,000, your need at that college is $15,000. If you are looking at a college that costs $40,000 a year your EFC is still $5,000. Your need at this college is $35,000.
Merit-based aid includes scholarships typically for students who have good grades or have some other special talent such as athletic or musical talent. Most highly selective colleges offer little or no merit-based aid.
Finally, in looking at colleges you should ignore the cost of the college. Yes, you read that right. Ignore the stated cost of the college when you are first deciding which colleges to investigate further. You will see why later in this article.
So now you know the basics. Now comes the fun part: How to save money by asking the right questions.
Questions to ask the colleges
Question 1– What percent of my need do you meet?
Remember that EFC, or expected family contribution that the FAFSA determined? Some colleges will meet 100% of your need. Need again is defined as the cost of the college minus your EFC. So what does it mean if a college says they will meet 100% of your need? It means that once the FAFSA or Profile form has determined how much you can pay for college, the college will pay 100% of the rest of the bill.
Colleges will typically meet the need you have using a combination of grants, loans and work study. Most colleges will award work study and loans first and if there is a need after that, the remaining need will be supplied by grants. The colleges will typically have a standard loan and work study amount that they award and you should ask about what these numbers are when investigating the college.
Let’s see an example of a financial aid award from a college that provides 100% of need with a student who has an EFC of $5,000.
Total cost of college $40,000
Expected family contribution $ 5,000
Financial aid award
Work study $ 2,000
Loans $ 4,000
At a college that meets 100% of your need you pay $5,000.
But what happens if the college doesn’t meet 100% of need? Many less selective colleges don’t pay the total amount of need that their students have. Let’s use the example of our imaginary college from above only this time assume that the school only provides 90% of need.
Total cost of college $40,000
Families expected contribution $ 5,000
This college only provides 90% of the $35,000 need or $31,500. Thus, your out of pocket expenses are the $5,000 EFC plus an additional $3,500 for a total cost of $8,500.
This example makes it easy to see why a school that meets 100% of need is often a better financial aid deal than a school who doesn’t meet all of the families need.
Many of the most expensive private colleges meet 100% of the students need while cheaper public colleges usually meet less than 100% of the need. This means that for many students it can be cheaper to go to an expensive private college than to attend a cheaper state school. Until you know what percent of need the college meets, don’t eliminate a college from consideration just because it is expensive.
Question 2- Do you have merit based aid?
Many colleges that don’t meet 100% of a students need do offer scholarships for some students. If your student is near the top of the application pool for a less selective college they may get some money if they qualify for merit based aid. Thus, in some cases, if the student is willing to look at a less selective college, they may get a better financial aid package. Here are some questions you should ask if the college provides merit aid.
How many merit awards are available?
What is the value of the merit awards available?
What are the qualifications to receive one of these merit awards?
This works even for families that don’t qualify for need based aid at all. If your student can qualify for a merit based award you won’t need to pay the full stated cost of the college.
Question 3- How is financial aid determined after the first year?
Some colleges have a policy of providing good financial aid for the first year and then substantially reducing the grant aid in the following years while increasing the loans. You should ask the college in which you are interested how they determine financial aid after the first year and what the average loan is after the first year. While it is typical that the amount of loans will increase each year if the increase is substantial you will want to take that into consideration.
Question 4- What is the average loan amount at graduation of those students who have loans? This question will give you the best indication of the amount of loans that this college requires compared to other colleges in which you may be interested. Although most students will have some loans when they graduate, you don’t want this amount to be any more than necessary.
Question 5- What is your policy regarding outside scholarships?
Most colleges will subtract money earned in outside scholarships from your financial aid package. Some colleges will reduce the loan burden by the amount of the scholarship, but other colleges will reduce your grant money. If the college reduces the amount of loans you have to take out that is a benefit to you. There is no benefit to you if the college reduces the grant aid.
Question 6- What is your packaging policy?
Most colleges give a financial aid package that includes grant money, loans and work study. But each college combines this money differently. Specifically you want to know:
What percentage of an aid package from your college is grant vs. self-help (loans, work study)?
The greater amount of grants versus loans and work study the better for the student.
Do you have a preferential packaging policy?
Preferential packaging occurs when a college gives a better financial aid package to a student with a stronger academic profile than to another student with the same financial need but with less academic credentials.
Question 7- What is your four year graduation rate?
What difference does a college’s four year graduation rate make? This is an important question that many people never consider. Another way to phrase this is, How many years of college am I going to have to pay for? If the college has a high four year graduation rate, you will most likely only have to pay for four years of college. However, if the college graduates most students in six years then you can plan on paying for six years of college, not four.
Now that you know something about financial aid, including the questions to ask each college you are considering, you can make an informed decision in paying for a college education and hopefully also save some money.