Financial aid: How to get what's coming to you

By Sarah Max

1. Introduction

Colleges use both formulas and feelings when awarding aid. Here's how to stack the odds in your favor.

Here's something that may surprise you: Four years at Harvard could actually cost the same as four years at a state school. That's because financial aid often makes up the difference between the sticker price and what you have to pay. If, for example, your "expected family contribution" is only $5,000, you might qualify for $25,000 in annual aid for a school that costs $30,000 each year. But if the school's annual costs are only $8,000 a year, you're likely to qualify for just $3,000 in aid.

When it comes to college financial aid, people have plenty of misconceptions. The cardinal rule for parents: assume nothing. Just because the family next door or your colleague's kid received aid doesn't mean you will -- or won't. Financial aid is based on a combination of factors, and differs from school to school, even child to child.

Despite the climbing costs of a college education, the outlook for parents seeking aid is pretty bright. A record $90 billion in financial aid was available in the 2002-2003 school year, according to the College Board, a non-profit organization that tracks college trends.

After adjusting for inflation, that's an 11.5 percent increase over the prior year. In all, more than 75 percent of private college students and 60 percent of public college students got some type of aid this past school year.

"While there have been tremendous increases in the cost of private education, there is a tremendous amount of aid available as well," says Alan Posich, an independent education consultant.

The trick is figuring out what aid you're eligible for -- then getting it.

2. Who gets aid?

Financial aid is no longer limited to just the hardest-pressed families. "There's a huge misconception that financial aid is only available if you are poor," says the College Board's Jack Joyce. Of course, you are still more likely to qualify for aid if your annual income is less than $70,000, but many schools will offer some aid to talented students whose parents earn more. Colleges and universities are increasingly offering aid to good students to improve the reputation of the school. "Colleges are recognizing that there are some very good students who don't qualify for federal aid, but can't afford to pay the full bill," says Posich.

The federal government dishes out the majority of available aid as grants and loan guarantees. The formulas used to calculate who gets aid are based largely on income. "The financial aid process is driven much more by income than assets," says Joyce. In general, aid is harder to obtain when income exceeds $100,000 and only one child is in school. If there are two or more children in school simultaneously, however, a family with an income of $150,000 may still qualify. Of course, it is impossible to give hard and fast guidelines about whether a particular student will receive aid, but you can do some preliminary calculations on websites such as www.collegeboard.com and www.finaid.com.

3. Cracking the aid formulas

Federal and state aid is awarded based on the information on a student's Free Application for Federal Student Aid. (You can complete the form online or download it from www.fafsa.org). Public colleges adhere closely to the form, and private schools also factor it into their offers. A second form, the College Scholarship Service Profile, is also used by hundreds of schools and many organizations that offer scholarships. Most people don't submit the form until the fall of the student's senior year of high school, long after the FAFSA, because you must indicate the schools to which you're applying. (Find the CSSP on the www.collegeboard.com.)

Both forms need to be completed every year that you apply for aid. Like filing your taxes or applying for a mortgage, the process isn't complicated, but it will be a good deal smoother if you are organized. Make things easier by saving your key financial information including tax forms, pay stubs, brokerage and bank account statements beginning in the student's junior year of high school.

Once a college has your FAFSA, it calculates eligibility by taking the cost of attending a particular college minus the expected family contribution (EFC). The EFC is based largely on income, but is also affected by your assets, the number of children you have attending college at the same time, and the number of years you have until retirement. (Schools try to avoid ransacking your nest egg if you are within ten or fifteen years of retirement.)

The institutional method used by most private schools is slightly more complicated than the federal formula. It makes allowances for such things as emergency savings and money put aside for younger children. Because private schools have their own money to dole out, they are often more willing to look beyond the numbers and take other situations into account, such as a sibling with a chronic illness or a particularly high cost of living. If your family has special financial circumstances that affect your ability to pay for college but are not apparent in the numbers, consider sending a letter to the college's financial aid office after submitting all the necessary forms.

4. Interpreting your award

Expect preliminary aid offers to arrive in your mailbox around the time your child receives an acceptance letter from the school. If you wind up getting aid offers from more than one school, you'll likely see differences. Aid packages vary not only in how much aid is offered, but how it is divided into grants and loans.

The best packages are made up by grants, which are categorized as need-based, merit-based, federal, state, and institutional. Grants are usually tax-free and don't have to be repaid. The largest federal grant programs, the Pell Grant and the federal Supplemental Educational Opportunity Grants, are based strictly on need and are generally non-negotiable. Pell Grants, which usually go to students from low-income families, offer a maximum of $3,300 annually. SEOP grants range from $100 to $4,000 a year. Grants that come directly from a school are often a mix of need-based and merit-based, which can be based on anything from academics to ethnicity to athletics.

The bulk of student aid -- about 60 percent-- comes in the form of subsidized and unsubsidized loans. The best of these will be subsidized loans, which typically carry low interest rates and which don't have to be repaid until several months after the student has graduated. With the federal Perkins Loan, students can borrow up to $4,000 a year for five years at a very low interest rate, usually 5 percent. The government puts a $20,000 annual cap on the loans, but it is up to a particular college to determine the size of a specific student's loan. The Stafford Loan also carries a relatively low interest rate, capped at 8.25 percent. College students may borrow up to maximums that rise the longer a student remains in school, from $2,625 in the first year to $5,500 in the senior year. Interest begins to accrue on these loans six months after a student graduates, at which time repayments begin.

Students who apply for aid are also eligible for unsubsidized Stafford loans. Interest on these loans begins to accrue immediately, although the borrower can defer the interest payment until he begins to repay the principal, typically after graduation.

In most cases, students who accept a federally subsidized loan will be required to participate in the federal Work-Study program, in which students are given on-campus jobs and expected to work between 10 and 15 hours a week.

Parents may also borrow. The Parent Loans for Undergraduate Students (PLUS) allow parents to borrow up to the total cost of four years of college, minus any financial aid received. The loan depends on your credit rating, although requirements are not as stringent as they are for a mortgage. The downside: repayment begins 60 days after you receive the loan, although you can stretch repayment over 10 years. The interest rate is tied to the short-term Treasury bill rate, with a maximum of 9 percent.

Keep in mind that you do not have to accept the entire package. You can decline a particular loan if you decide that you do not need it. However, you may not be able to decline a work-study job and still receive certain other loans.

Be sure to make your decision before the school's financial aid deadline. And don't forget to decline the offers made by other schools so that they can distribute the aid to other students.

5. Upgrade your aid

Not happy with your offer? You might try to appeal to the financial aid office for a better one. If your package contains an obvious error, or if you have reason to believe that an aspect of your finances was not taken into consideration, you may be able to successfully appeal. Also, be sure to let the financial aid office know if your circumstances changed after the application was signed, sealed and delivered.

But you may also win an appeal is if your child receives competing offers from two similar schools. (The College Board site, www.collegeboard.com, has an excellent worksheet for comparing offers.) If your child's first choice school made a relatively poor offer, however, see if anything may be done to improve it. "More and more schools are upfront about their willingness to compare competing offers," says Joyce.

Before you pick up the phone, be sure you are ready to state your case. Understand the terms of the current package and be able to articulate exactly what it will take to make the school affordable to you. Typically, the officer will ask you to send the competing offer or documentation of your new financial circumstances before making a decision.

Of course, the better your child's academic record, the better your chances for beefing up the offer. "Colleges want to match their resources with the students they most want to enroll," says Joyce. "This is no time to be shy." Even if your child is at the top of his class, you will want to emphasize affordability. Take care not to appear as though you are negotiating for the sake of negotiating.

6. Smart saving strategies

It's true that your family's income makes a big difference in qualifying you for most aid. But savings matter as well. Some critics maintain that schools punish those who, regardless of income, have scrimped and saved to pay for college. But schools have become much more sensitive when taking savings into account. It does not pay for parents to forgo saving money for college in the hope of receiving more aid. It is important, however, to find savings tools that will not hamper your ability to get more aid.

Most important, don't shortchange your retirement savings to save for college. The financial aid formula also assumes you can contribute "discretionary net worth," which is no more than 5.6 percent of your total net worth. And if you are older than 45, you will get an asset protection allowance as well, presumably because you need to use your savings for retirement. Your child's assets are a different story. Any money in your child's name is assessed at least a 35 percent rate. That's why it almost never pays to put savings in your child's name if you want to qualify for aid.

And if you are considering opening a 529 savings account, proceed with caution. These savings plans, available in most states, allow earnings to grow tax-free starting in 2002 (many states award a tax deduction for contributions as well).

The tax benefits of 529 plans are unmatched. Right now, however, it is unclear how 529 savings plans will be treated for financial aid purposes. In the past, earnings were categorized as the student’s income and, as such, reduced aid. Now that earnings are not subject to taxes, there is a chance that 529 plans will have no effect on aid.

That’s the best-case scenario. On the flip side, these plans could be treated more harshly than they were in the past. Joe Hurley, founder of Savingforcollege.com expects the Department of Education to offer some guidance on this subject this summer, before parents start applying for 2002/2003 financial aid.

Even if 529 withdrawals do affect aid, you don't have to skip the accounts altogether. Just make sure you only stash enough for the final year or two in the 529 account. Take out the biggest chunk to pay for senior year (when you no longer need to worry about qualifying for financial aid), and then the rest for junior year. In the student's first years of college, you may only want to withdraw a few thousand dollars or so, depending on your income.

Have a great day and God bless!