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How Does Student Financial Aid Work?
websitebuilder • Sep 16, 2019
Beginning October 1st each year, high school seniors can apply for financial aid for their freshman year of college. So how does it work?
Student financial aid is funding to help the student pay for higher education. It comes from four sources: The Federal government, State governments, the colleges and universities, and private corporations and organizations. The greatest amount of aid comes from the Federal government and over half of that is in the form of student loans.
Financial aid is based on either the family’s financial circumstance (need-based) or the qualities of the student (merit). Financial aid can include grants, scholarships, work-study, and student loans. As a general rule, the admission’s office handles merit aid, and the financial aid office administers need-based aid funds.
There are two types of need-based aid, “self-help,” or money you have to repay or work for, and “gift,” which is free. Funds can come from federal and state governments, colleges and private sources.
The cost of attendance (COA) is the total cost of school for a given period (usually referring to a full academic year):
- Tuition and fees
- Room and board
- Travel to and from school
- Books and materials
The COA is the benchmark for your financial aid eligibility. The federal government and the college or university compares the COA to the student’s Expected Family Contribution (EFC), which is the amount the family is expected to pay each year toward the cost of college, to determine the student’s eligibility. If the COA is higher than the EFC, the difference is the student’s need-based eligibility. Unfortunately, not all of your need may be met, which leaves you with a certain amount of unmet need.
Depending on the college’s policies, the EFC is calculated in two different ways. Using the Free Application for Federal Student Aid (FAFSA), which determines the distribution of federal aid, the process is called the federal methodology. It is processed by the U.S. Department of Education. Then some schools, mostly private, also require the CSS Profile, which they use to distribute collegiate aid. This calculation is called the institutional methodology and is administered by the College Board.
The status of the student as to their independence in the process is largely misunderstood. A dependent must provide their parents’ financial information as well as their own, while an independent student’s EFC is based only on their income and assets. There are very specific rules that determine dependency, and it has nothing to do with the parents’ willingness to pay for college.
In the case of divorce or separation, the determination of which parent’s financial information must be used is based, not the tax exemption, but on the domicile circumstances.
Once the EFC is calculated, the financial need of the student is determined like this:
- COST OF ATTENDANCE (COA)
- EFC (Expected Family Contribution)
- FINANCIAL NEED
- RESOURCES OF THE STUDENT (gifts from family members, private scholarships)
- ADJUSTED FINANCIAL NEED
When the student has been accepted for admission, they will also receive a financial aid award letter that outlines the aid being offered.
The student must file the FAFSA each year and make sure to keep in contact with the financial aid office each year as the family’s circumstances can change.
Optimum Ed highly recommends doing an estimated EFC calculation ahead of looking at potential colleges and universities, so the family has a good idea of what their cost will be for a particular school.
There are two categories of financial assistance: need-based and merit-based. To qualify for need-based aid, need must be established. Merit-based aid is awarded for the qualities and qualifications of the student in such areas as sports, scholarship, music, drama, journalism, and so on. The calculation of the Expected Family Contribution (EFC) drives need-based eligibility.
Everyone agrees that parents need to save for their child's college education and to start that process early. However, no specific college saving strategy will work well for every family. The right approach is dependent on several variables to include tax bracket, the student's age, anticipated financial aid (both need and merit), and how much control parents wish to retain over their investments.
Campus Financial is an independent, fee-only, student financial aid consulting firm. Call our office in Midlothian, VA at (804) 937-2288 today!