Financial Aid Demystified

Jul 19th, 2011 by admin in Paying for College

College tuition has been rising faster than inflation. In New Jersey, state college tuition for the 2011/2012 school year is about $24K per year. This doesn’t include the cost of required text books, items for the dorms and other student expenses. For a 4 year degree the cost can easily exceed $100K. This is a daunting number that will make most parents look for ways to get help.

As a parent for a college bound student, I had a lot of questions about Financial Aid. How it is calculated? How much aid can we qualify for? How best to prepare and plan for it?

Financial aid calculations are based on parental and student income and assets during a base year. Initially, the base year is the junior year of high school. For example, my daughter graduated from high school in June 2011. So, our base year was 2010. You need to re-apply every year to continue to receive financial aid.

There are two methodologies used for calculations. The Federal Methodology is used for Federal and State aid and Institutional Methodology is used by the private schools. They use different information and calculations. To be considered for financial aid you will need to complete and submit FASFA (Free Application for Federal Student Aid) application available at Private schools will also have their own application or require a CSS (College Scholarship Service) Profile application that provides a closer look into the family finances and asks for additional information like the value of your house, income during year previous to the base year, assets in your retirement accounts and more. CSS Profile is available from College Board at

I found it helpful to calculate estimated Federal Expected Family Contribution (EFC) using this calculator Financial aid can be calculated by subtracting EFC from school annual tuition. Below are several examples using the calculator.

Assumptions: Household size – 3; Full time and dependant student; Age of older parent – 48; 1 student in college; student earns $2,000 per year; student has $1,000 in savings; Family assets exclude house value and assets in retirement accounts

To increase your chances for financial aid, you want to minimize your assets and income during the base year that is used for financial aid calculations.

Assets in retirement accounts like IRA, 401K, etc. are protected and not considered in the calculations. The Federal Methodology also does not consider the value of your house. In addition, depending on the age of the older parent, there is assets protection allowance that can vary from $43,000 for older parent who is 45 years old to $65,000 for older parent who is 60 years old. About 6% of unprotected assets are counted toward your contribution. For example if your unprotected assets total $100,000 then about $6,000 will be counted toward your Expected Family Contribution (EFC).

The financial aid calculations take much higher percentage of student assets and income than parents. The Federal Methodology considers 5.64% of parental assets toward the Expected Family Contribution and 20% of student assets. It is a good idea not to have assets in student name. A 529 plan owned by a parent for a dependant student is reported on FASFA as a parental asset. If you have an opportunity to have a 529 account under the grandparents name then it will not be considered at all in the calculations.

Private schools have much higher tuition cost but can also offer higher financial aid based on their own calculations and therefore can be more attractive than a state school. Ivy League schools offer some of the best financial aid packages and aim to meet 100% of admitted student financial need. For example, Princeton University offers full tuition, board and room if family income is below $60,000 and full tuition for incomes up to $120,000. Average grants based on income are listed on their website – You can also get an estimate of Princeton financial aid using their estimator at

Different schools have different deadlines for filing FASFA and CSS Profile applications. FASFA application is submitted in senior year of high school and is available January 1st. You can submit an estimated FASFA close to January 1st and then correct it with final numbers in mid February.

Most importantly if you have special family circumstances around health, unemployment, disability, etc. you should speak to the school financial aid officer soon after getting an acceptance letter. Even one phone conversation can make a difference of thousands of dollars in financial aid.

Summary of Useful Links –
Online FASFA application for Federal financial aid
FASFA questions and instructions
Federal financial aid estimator
CSS profile from College Board

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