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How Do Colleges Calculate Financial Aid? Some financial aid is more desirable than others. Unfortunately, colleges award different amounts of each type. The question is how to position yourself to get the most desirable package. The first step is to qualify. Then to get the best package, it’s a matter of applying to colleges that offer students like your child the most aid, especially scholarships and grants. Financial Aid consists of: Scholarships & Grants…….They’re free! To qualify for financial aid, you must complete the FAFSA (Free Application for Federal Student Aid, www.fafsa.ed.gov) and any other forms required by the schools to which your child is applying. The information you enter on the FAFSA helps determine your “Financial Need.” Financial Need is the difference between what you can afford to pay and the actual cost of a school. If you can afford the entire cost of a school, then your financial need (at that school) is zero, and you shouldn’t expect much—or any—financial aid from that school. Financial Need = Actual College Cost – What You Can Afford to Pay “What you can afford” is called your Expected Family Contribution (EFC). The EFC formula is complicated, but in a nutshell, it depends largely on four numbers. Each number is weighted differently, which can account for variations in aid packages—even for similar families. Also, be aware that there are two formulas. The Federal formula is used mostly by state schools and less well-endowed private colleges. The Institutional formula is used mostly by well-endowed schools. The following charts outline the maximum weights of each number in either formula:
As you can see, child’s assets increase your EFC far more than parental assets. So the fewer assets that are in your child’s name, the lower your EFC will be. This is one area where you can make a big difference in your EFC. You should also be aware that some schools factor home equity, retirement plan contributions and/or the cash value of life insurance into the EFC. Here are some web sites with more information about financial aid and scholarships: www.finaid.com If you have questions about financial aid or starting a college fund for your child, please don’t hesitate to call me. I’d be happy to answer any questions you might have. Thomas B. Horton, RFC, is an independent, fee-only financial planner in Shelby Township. He offers objective, no conflict advice on an hourly, as-needed basis. His practice specializes in comprehensive financial planning for individuals and families. Visit his web site at www.HortonFinancialPlanning.com or call (586) 997-3717 to schedule a no obligation appointment. © 2005 All Rights Reserved. No part of this article may be published without advance written approval.
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