Paying For College:
Understanding Financial Aid, Part 1

By Gordon Peck, Former Associate Dean of Admissions and Financial Aid, Davidson College

Courtesy of www.thesportsource.com.

As you begin the important process of selecting a college, you and your parents will probably be influenced by the stated cost of each institution. Please do not be! At least, not at first.

Too many students rule out a college that may be well suited to meet their needs because of that college's apparent high price. They assume that a student must be from a low-income family in order to qualify for financial aid. They are unaware of student employment opportunities, creative payment plans, and low interest loans. Some have not turned over enough stones in search of competitive scholarships and restricted grants. Others are simply bewildered by the perceived complexities of the financial aid application process.

In the pages that follow, we will attempt to dispel these misconceptions and to provide you with the information you need to plan the financing of the most important investment you may make in your lifetime: your college education. We will focus on three general areas of assistance:

Need-based aid will receive the most attention because, as the foundation of most college financial aid programs, it provides the largest dollar volume of assistance. Before we guide you through the analysis, it is important that you accurately interpret the college price tag.

College Costs

No matter where you enroll, your expenses will include direct educational costs and living expenses. Financial aid assistance is generally determined by your school year budget using five categories:

Typically the first category represents fixed costs payable directly to the college.

Room and board costs will be set by the college for resident (on-campus) students, but expenses may vary greatly for students living off campus.

Books, supplies, and personal expenses will vary with the student's academic program and personal spending habits.

Transportation costs for resident students are generally estimated on the basis of two round-trips home during the academic year while commuting students must estimate gasoline, parking and other related costs.

To be certain that you are comparing oranges with oranges when determining estimated college costs, we suggest that you use a chart similar to X1 (below) to record actual and estimated costs in each category for each college you are considering. Be sure you are comparing costs for the same academic year. College A may be publishing 2000-01 costs while College B may be listing 2001-02 costs.

Most colleges will provide estimates of costs in each category based on annual student surveys. Insist that the colleges you are considering provide these figures in updated form.

YOUR FAMILY CONTRIBUTION

Now that you have determined the estimated annual costs of your top choice of colleges, let us take a close look at how colleges determine your family's contribution toward college costs. Remember: do not rule out any college until you have analyzed all the possible means of reducing the real costs.

All colleges and government agencies expect you to pay something toward college expenses according to your family's financial strength. Most college financial aid offices will determine your family's ability to pay based on a standard financial aid "need analysis" system called Congressional Methodology. The analysis will examine your parents' income and assets as well as your own savings and summer earnings potential to determine an expected parent and student contribution toward annual college costs.

Through 2000-01, families have provided financial information to colleges on the Free Application for Federal Student Aid (FAFSA), the Student Aid Application for California (SAAC) or the Family Financial Statement (FFS). The analysis of your family is taken into account much more than your parents' annual income. You may assume that families with higher incomes will be expected to contribute more to college expenses, but the methodology also considers family assets (home equity, investments, savings) and family expenses. A family with six dependents and unusual medical expenses will be expected to contribute less than a family of three even though their annual income is similar.

In addition to the parents' contribution, you, the student, will be expected to contribute at least $700 towards your annual educational costs. The actual amount will depend on your earnings for the previous year and the savings you have been able to accumulate.

To the extent that each family's situation is unique, financial aid officers invite you to provide documentation which may substantiate unusual expenses or circumstances which cannot be adequately demonstrated on the FAFSA. Usually, high consumer debt may not be a legitimate basis for adjusting the results of the standard formula, but many other uncontrollable drains on income may be worth sharing with each aid office.

Okay, you still need a good estimate of what your parent's contribution might be. Table X2 provides an approximation of what many college, state, and private student aid programs will expect parents to pay at various income levels.

Figures on the chart are based on the following assumptions:

Your actual circumstances could lead to an increase or decrease. Please use these figures as a general guide only.

Add a minimum student contribution of $700-$1000 to the parent contribution you derived from the table, and you will have a rough estimate of the total family contribution you may be expected to pay at each of the colleges where you are accepted. Remember that the parents' contribution, as derived through the need analysis system, is a measure of the family's capacity to pay over time; it is not an amount that is expected to come solely from current income. While a few families may be able to provide the entire parent contribution from current income, most families use some combination of savings and borrowing to satisfy their share of the annual college costs. Supplemental loan programs, financing, and other options will be discussed later.

College Cost - Family Contribution = Financial Aid Eligibility

Once your estimated family contribution has been determined, it should be subtracted from the total costs of the various colleges you are considering (remember, we are talking about need-based aid; "merit" aid is another matter). Because the majority of colleges will base their analysis on the same methodology, the expected family contribution will be about the same at each college.

Knowing the total college costs at the schools you are considering (Table X1) and knowing your estimated parents' contribution (Table X2), you are now able to begin the comparison of net costs of the colleges you are considering. For purposes of illustration, let us say that your family of six is supported on an income of $52,000 and that net assets are valued at $40,000. Using Table X2, you estimate that your parents' contribution would be $6,187. You then subtract that $6,187 and $1,000 (student contribution), a total family contribution of $7,187 from the total costs at colleges A, B, C and D as follows:

As the various college financial aid offices use the standardized need analysis formula, family's annual contribution to your college costs should remain constant while your "need" or financial aid eligibility will vary with college costs. College D at $20,000 will be no less affordable than College A at $8,000 for the family used in this illustration. Knowing that the family contribution will be the same at Colleges A, B, C and D, this family can concentrate on important non-financial considerations in choosing the most appropriate college.

Packaging

After your financial aid eligibility is determined, the next task for the financial aid office is to determine which financial aid resources should be combined to form your financial aid "package". Packages may contain grants, scholarships, student loans, and campus employment. Sources of these may include federal and state funds, independent agencies, and college itself. Not all colleges are able to offer you a package that meets all of your financial need, and among those schools that do meet 100% of financial need, aid packages may vary greatly. To illustrate, look at three possible packages that might be offered to meet the $12,813 need of a student attending College D in the previous illustration.

The "shortfall package" provides $6,000 of financial aid but that amount falls $6,813 short of the calculated need. Most colleges will not offer you a package that falls so far short of your need unless your application materials arrive late or the institution simply has inadequate funds to provide full need for all its students. The "high self-help" package starts with a combination of loan and job (self-help) which totals $4,500 or 35% of the package. The "low self-help" package includes a total of $2,800 in self-help or 22% of the package, a more favorable package because the student's repayment and employment responsibilities are reduced. Both of these $12,813 packages meet 100% of the student's calculated need while holding the family contribution at $7,187.

You will be informed about your calculated need and the resulting financial aid package by way of an "award letter." Each college where you have been accepted for admission, applied for aid, and provided on-time financial aid application forms, will send you an "award letter" informing you of the amount and type of aid you will receive. This letter should reach you well before the deadline date for making your admissions deposit so that you will have time to compare packages and ask questions about your package.

Continue reading part two here.

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