Making enough money to own the house of your dreams is something many people look forward to. Purchasing a home of your own is probably the biggest investment you will ever make in your life. However, the next biggest financial project that the average American family undertakes could surprise you. It has nothing to do with home improvement or retirement planning. Instead, it involves paying for your child’s college expenses.
Gaining Currency: The Business of Education
A four-year college term costs thousands of dollars. For advanced degrees, the cost is even higher. In 2013 the National Center for Education Statistics submitted a report titled “The Condition of Education 2013.” Prepared in conjunction with the U.S. Department of Education, the report established that:
- The percentage of first-time, full-time undergraduate students receiving financial aid increased from 75 percent in 2006-07 to 85 percent in 2010-11
- In 2011-12 the sticker price for the average public college was $20,997
In 2010-11, families with income levels up to $30,000 received financial aid worth $9,530 and paid a net price of $8,050. In comparison, families with income levels from $48,001 to $75,000 received financial aid worth $5,410 and paid a net price of $13,640 and the average amount of grants awarded to first-time, full-time undergraduate students was:
- In public colleges: $13,475
- In private non-profit colleges: $23,745
- In private for-profit colleges: $10,783
Sticker price denotes the published price of attendance prescribed by the college. Financial aid represents the money that reduces the final price that students have to pay. The net price represents the family’s actual payment for college expenses. This could come from:
- Their income
- Their savings, or
- A loan
Full Circle – An Overview of the Financial Aid Process
At first glance, the sticker price of any college might seem expensive, if not exorbitant. However, financial aid wipes away a substantial amount of that price. Thus, it enables college students to earn their degrees. It comes from several sources, such as:
- The federal government (approximately 73 percent)
- Colleges and universities (about 18 percent)
- State governments (about 5 percent)
- Several private organizations, e.g., companies, religious organizations (around 4 percent) and
- Banks and financial institutions
Financial aid comprises:
- Grants from the federal and state governments: They award grants based on the financial circumstances of the student. The student does not need to repay these.
- Scholarships from governments, colleges and private organizations: They provide grants based on the student’s skills and abilities in academics, sports, volunteer work, and so on.
- Loans from the federal government (low interest) or private lenders (high interest): Students need to repay these along with the interest component.
To receive financial aid, students must apply via the Free Application for Federal Student Aid (FAFSA). They must submit the FAFSA by January 1 of the year in which they plan to attend college.
Students could also apply for financial aid from the colleges they apply to or other financial institutions. Some institutions require applicants to submit forms such as the CSS/Financial Aid PROFILE. The relevant authorities award financial aid based on the details submitted in the application form.
What Lies Beneath – The Formula behind Financial Aid
Most formulas for evaluating- and awarding- need-based aid operate on the following principle and input your family’s income and assets into a calculator. The calculator segregates a portion of your family’s:
- Income (for meeting living expenses) and,
- Assets (for meeting any emergent expenses- usually about $50,000)
- Evaluates the remaining income and assets of the family and the student at various percentage rates
- Returns a grand total known as the Expected Family Contribution (EFC)
The EFC represents the amount your family needs to pay for your college education for the current year, and if the EFC is lesser than the cost of college, the difference represents your financial aid entitlement amount. For example, if:
- College expenses amount to $100,000 and
- Your EFC is $65,000
- Your financial aid entitlement is $35,000 ($100,000 – $65,000)
However, remember that all colleges might not be able to give you aid commensurate with your entitlement.
The Same, Only Different – Features of Aid Calculating Methods
Colleges use three different aid calculators. Most employ the FAFSA method. Others could use the College Scholarship Service PROFILE or Consensus. Aid calculators have in-built assessments that act like taxes. They allow you to take a deduction for income and federal taxes. However, if you get a bonus, the IRS, the state and the college bursar will all claim a portion.
Fueling Your Dreams – How to Maximize Financial Assistance for Your College Years
Given the rising price tags in colleges, you need to plan early in life. Some tips to help you maximize financial aid include:
- Completing and submitting the FAFSA always.
- Reducing the number of assets in the student’s name for reducing your EFC. Student assets earn a 20 percent assessment tax, while parents’ assets earn a 5.65 percent assessment.
- Avoiding excessive details on assets and income while filling the FAFSA. You are legally entitled to omit certain sources of income and assets (e.g., your primary residence, your vehicle, and furniture).
Because certain situations could reduce your EFC further, you should notify financial aid staff immediately when you encounter situations such as:
- The loss of a job
- A divorce
- A medical crisis with considerable expenses
- Becoming a dislocated worker
A dislocated worker is a person who receives unemployment benefits due to being laid off or due to unemployment after being previously self-employed. Dislocated workers also:
- Cannot revert to an earlier job
- Can be a displaced homemaker with no source of income
You should also notify your financial aid staff if you are:
- Repaying debts instead of storing cash in your savings accounts
- Offsetting capital gains from the sale of stocks by selling some loss-making stocks
- Reducing taxable income by maximizing contributions to tax-exempt retirement accounts
Financial aid can help ease the burden of funding college education. Therefore, the earlier you begin your preparations, the easier it would be to manage the finances. After all, every college and program has a price tag. However, educated citizens are necessary for a nation to prosper. This is why educated citizens are priceless assets for every nation.