How much will college cost? How much will I have to contribute? Are there any types of financial aid that will benefit me?

These are all questions that need to be addressed when applying for financial aid. This can be a very nerve wracking process, and this article will hopefully provide you with some understanding of how the system works.

Based on the latest figures, it is estimated that college will cost over $200,000 for a child born today. Over 75% and 60% of college students receive financial aid in four-year private and public colleges respectively. For 2004 – 2005, there was $122 billion in financial aid available to students, an 11% increase over the prior year.

The Free Application for Federal Student Aid (FAFSA) is the primary form that a student must file in order to qualify for Federal (and sometimes State) financial aid. During the fall prior to the student's first year of attendance, you should apply for your FAFSA pin number. The FAFSA form should be completed as soon as possible after January 1 st of each year. These forms are available at the high school guidance office, college financial aid offices or online at www.fafsa.ed.gov .

A few weeks after completing and submitting the FAFSA form, you will receive a Student Aid Report (SAR). The SAR will include the cost of attendance (COA) and the amount of the expected family contribution (EFC). The EFC is the amount that the student and/or the student's family is expected to contribute towards the cost of tuition etc. Make sure you double check the SAR for accuracy and make any needed corrections immediately.

This report is used by colleges and universities to put together a financial aid package for each student. These awards consist of money given by colleges and federal and state governments in the form of gift aid or self-help aid.

Gift aid consists of scholarships and grants such as Pell Grants or academic, artistic or athletic scholarships. Self-help aid consists of loan programs that must be paid back such as Perkins Loans, Federal Subsidized and Unsubsidized Stafford Loans, PLUS Loans, Signature Student Loans, and Work Study Programs.

The Expected Family Contribution (EFC) Calculation

There are two main methodologies utilized by colleges to calculate the EFC, the Institutional Method and the Federal Method. Most colleges use the Federal Method, which utilizes the household and financial data submitted on the FAFSA. The formula used was developed by Congress and is defined by statute.  

• 50% of student's income (AGI plus untaxed income and benefits) less $2,440-$8,890 (depending on marital and dependent status) and deductions for certain taxes, plus;  
• 35% of students assets, plus;
• 22-47% (based on income level) of parents' income less deductions for certain taxes, employment expense allowance and an income protection allowance, plus;
• 5.6% of parent's assets less deductions for retirement accounts, residence equity, the business or farm, and certain debts

Remember, the income used to determine the EFC is based on the year before financial aid is needed (September 2006 financial aid is calculated using 2005 income). Also note that the assets are valued on the date the form is signed and that prior or subsequent fluctuations have no impact.

Strategies to reduce EFC

There are several strategies that can be utilized to reduce the EFC. One is to know the assets not included in the calculation of a family's EFC. These generally consist of annuities, cash value of life insurance, retirement accounts such as 401(k)s, 403(b)s, Keoghs, SEPs and traditional and Roth IRAs, personal items such as cars, clothes and furniture, and your personal residence. Section 529 Plans and Education IRA's also affect this calculation.

Section 529 Plans are considered to be assets of the parents, which helps with financial aid qualification. Though withdrawals will be federal tax free, the income is considered to be the child's, which hurts those seeking aid.

Education IRA's on the other hand are considered as assets of the child, and the income is considered to be the child's. Both of which is harmful to those trying to qualify for financial aid.

Another strategy that can be used is to reduce income for college years. This can be done by changing investment strategies to reduce investment income. Or, limit the child's income to the income protection allowance of $2,420. Some people may have the ability to shift income between years or reduce salaries taken out of C corporations. You can also take advantage of the tax laws regarding capital gains and losses. Cash out capital gains two years before college or wait until after college, or sell capital assets to create up to a $3,000 capital loss during college years.

Since the inclusion amount of assets for the parent is less than that of the student, you can drain the assets of the child prior to college. Then, pay for college with the student's assets before using the parent's assets. Beware of shifting assets from the parents to children, as parents have a lower percentage in the financial aid calculation formula.

Another opportunity to reduce the EFC is to have 2 or more students in college at the same time. Please note, that a parent does not qualify as a student when calculating how many students from the household are enrolled in college.

Also, if the student is part of a divorced household, the parent with the lower income should be considered the custodial parent for purposes of the EFC calculation.

We hope that this article gives you a basic understanding of the Financial Aid process and answers some of the questions that you may have.

If you have any questions on a topic that is not addressed in this article we encourage you to contact our office.

• Perkins Loans (student) are low interest (rate is fixed at 5%) loans ranging up to $4,000 per year and $6,000 per year for undergraduates and graduate students respectively. The loans are available to undergraduate and graduate students with the lowest EFC.

• Federal Subsidized Stafford Loans (student) are awarded to students based on need. The federal government makes the interest payments until six months after the student leaves college. The variable interest rate as of 07/01/2005 is 4.7% and is capped at a rate of 8.25%.

• Federal Unsubsidized Stafford Loans (student) are available to most students who fill out a financial aid application. Interest begins accruing immediately. Repayment begins 6 months after the student leaves school.

• Federal Parents' Loans for Undergraduate Students (PLUS Loans) are available to the parents of college students with good credit history and are not need based. These loans are not federally subsidized. Repayment generally begins within 60 days of loan disbursement. The interest rate is variable (6.1% at 07/01/2005) and is capped at 9%. No collateral is required.

• Signature Student Loan program is available through Sallie Mae. These loans are in the student's name, but a parent usually must co-sign. Repayment may be deferred until after the student leaves school, but interest begins accruing immediately.  

• Work Study programs are available to undergraduate and graduate students and encourage community service work. They pay at least minimum wage.

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