Student financial aid is money given by the Federal and State governments and the colleges to help students pay for the cost of a college education.

There are two basic types of financial aid:

1)      Self-Help aid which consists of interest subsidized loans and work study; and,

2)      Gift Aid, which consists of grants and scholarships.

The amount and type of financial aid is based on two factors:

1)      The merit of the student ( scholastic, athletic, musical, etc.); and,

2)      The financial need of the student. By far, this is the most important factor in determining financial aid. Most of the financial aid given by the Federal and State governments is based on the financial need of the student. Also, most of the financial aid given by colleges is need-based.

NOTE: The Ivy league colleges and other highly selective private colleges base almost all of their grants and scholarships on the financial need of the student and not the student’s merit.

So how is the financial need of a student calculated?

            NEEDS ANALYSIS is the process of determining the financial need of the student. It is calculated using the following formula:

                              COST OF ATTENDANCE (COA)

-          EXPECTED FAMILY CONTRIBUTION (EFC)

=    FINANCIAL NEED

-          RESOURCES OF THE STUDENT

=   ADJUSTED FINANCIAL NEED

EXAMPLE: If the ‘cost of attendance’ at a particular college was $12,000 and the ‘expected family  contribution’ was calculated to be $4, 000, the ‘Financial need” of the student would be $8, 000. In this case the student would be eligible to receive $8,000 in financial aid. Whether he receives a financial aid award for the entire $8,000 is up to the discretion of the individual college. Nonetheless the financial aid eligibility of the student is directly related to the financial need. If the student, had other resources to help pay for the college cost, the financial need would be reduced on a dollar-for-dollar basis for these resources. In this example assume the student had received a $1,000 private scholarship from the local Chamber of Commerce.  Since private scholarships (scholarships which are not given by the college), are considered a resource, the  $1,000 scholarship would reduce the financial need down to’$7,000. This means the student would now be eligible for only $7,000 in financial aid from the college.

This time of year, students and families are pondering the loan question.  The fact of the matter is, most students will have to finance some or all of their education.  The College Board provides the following tips when considering student loans. 

1. Look at your child’s award letter and figure out which need-based loans your family has been given and for what amounts.
2. After you look at your family’s full financial picture—education cost, awarded aid, and family share—settle on the amount you or your child actually need to borrow.
3. Never borrow more than you need. Remember, you are not required to borrow the full amount of loan aid your child has been offered or to borrow the maximum loan amount.
4. Don’t forget about student employment as an alternative for borrowing. Although working at a job can seem like an extra burden for your child, so is struggling with high loan repayments after college.
5. Apply for your loans right away. You want to make sure that the loan is approved and the money paid to the college before your family has to make your child’s first student account payment.
6. Follow the loan application instructions carefully. Any mistakes you or your child make will delay receipt of the funds.
7. For a Stafford Loan, be prepared for the amount that is paid to the college to be less than the amount for which your child signed. An origination fee, guaranty fee, or both, may be subtracted from the loan before the check is sent to your child’s college.
8. If you will be taking out parent loans, start to keep track of your “loan tab”—the amount your monthly repayment will be—once you know the amount that you are borrowing.
9. If you feel your family needs to borrow more than the amount that’s been offered in your child’s award letter, talk with a financial aid counselor before taking on an additional loan.
10. If you or your child does take on an additional, unsubsidized loan, consider making interest payments while your child is in school. They won’t be much and will save you money—you’ll end up having to pay back significantly less than if you delay (and capitalize) the interest payments.

You need to keep in mind that there are two concerns with regards to the admissions process—getting accepted and earning merit-based assistance.  In the majority of colleges and universities, merit aid is handed out through a review process that takes place in conjunction and at times in concert with the review for admissions.  At some schools the financial aid office is responsible for both need and non-need assistance.  It’s important to figure out who holds the purse strings.

What is helpful is that those qualities and qualifications that will help get your son or daughter accepted will also put him or her in the running for school scholarships.  What are the areas of interest being scrutinized by the college administration and which factors count most in the selection process?

The admissions staff will generally try to select a well-balanced class, one that enriches the college-going experience for all students.  Colleges and universities seek to admit students who will contribute to challenging academics, a rich cultural environment, strong athletic programs, and varied extra-curricular activities.

It could be that the college is trying to achieve more specific recruiting goals.  For example, one school may be trying to increase the size of its student population, hoping this will create new academic departments and increase the size of the supporting faculty.  A different university may be seeking

greater student diversity.  Another may be attempting to raise their academic profile by raising admissions standards.

This demands that the schools develop certain criteria, standards, and recruiting policies.  Needless to say, colleges can only meet these specific recruiting goals by carefully screening each individual applicant.  Considering the thousands of applications that they must review, your student’s job as an applicant is to help them by making his or her selection for admissions as easy as possible.

Should you find out what the recruiting policies are for the schools you’re interested in?   Only if you want to get paid to go to college.

In general, admissions staffs emphasize the importance of a solid high school transcript. They look to see whether you’ve taken the most challenging curriculum available to you.  They check how well you fared in those classes.  Most colleges are swayed by students who take advantage of opportunities and don’t just settle for the easy “A.”

If Jamal took all honors and AP courses during high school and maintains a 3.3 GPA while Kaitlin is cutting a 3.8 GPA in all standard level classes, admission officers will more than likely look more favorably at Jamal.

Of course grades indicate a student’s capabilities and motivation; however, grades are only significant in light of the student’s curriculum.  Class rank allows colleges to measure your academic performance in comparison to your classmates.  In fact many colleges today reassess a student’s GPA to try and level the playing field.  In her Wall Street Journal article, “Why Colleges Scoff at Your Kid’s GPA,” Anne Marie Chaker discusses the problem of non-standardized GPA.  She explains, “The problem is that GPAs—always somewhat erratic because curriculums differ so much—have in some cases become almost meaningless as high schools experiment with a raft of ways to measure students.”  Certain institutions drop the pluses and minuses, while others disregard the entire freshman year of high school.  John Hopkins eliminates all but the core subjects and recalculates the GPA.  Some schools, like Haverford College in Pennsylvania, throw out the GPA altogether and look to the student’s class standing to determine entrance qualifications.

However manipulated, make no mistake; grades in conjunction with test scores are an easy way for colleges to screen thousands of applications down to a manageable number.   This is especially true at larger institutions.

Colleges and universities do use scores differently, however.  There are those that will set minimum cut-off for admission.  Then there are those that don’t require them at all.  The majority, however, have a more complex procedure for reviewing test scores.  A former dean of admissions for a prominent private college described their procedures as first considering the quality of program, quality of performance in that program, and how that performance is corroborated by teachers, counselors, and heads of schools in an application.  He also pointed out that tests are important, too, but they will control what admissions does, only if an applicant’s academic program is unchallenging and academic performance is poor or mediocre.  Even then, tests will always be looked at in the light of the student’s educational, linguistic, cultural and socioeconomic background.

The student’s grades and test scores say more about him or her than he or she may think. a director of admissions at a major mid-west university  ,pointed out, and if the admissions staff sees a student with 1500 SATs but a C average, that usually means he or she isn’t trying.”

Extra-curricular activities are becoming more important to the admissions process.  These after-school activities demonstrate the student’s leadership, teamwork, and commitment to a given pursuit.  Colleges don’t value one activity more highly than another.  They’d rather see students who maintain a high level of commitment to one activity than those sporting a list of twenty they only dabbled in.

These extra-curricular activities could also be the ticket to scholarship money if the school values your student’s attendance because he or she will participate in similar activities there, thus enhancing the school’s programs. Sports, leadership, performing arts, language and community service–don’t underestimate the power of after-school activities.   The question is, of course, what’s important to the school your student is applying to?   Find out.

Personal qualities are the hardest to define.  Through the essay, letters of recommendation, and interviews, the admissions committee draws their

A recent report from The College Board showed that tuition, fees, room and board at public colleges and universities rose 7.1% in 2005, an average $12,127 a year, while private institutions saw a 5.9% annual increase to $29,096 on average. If you want to make even the most stalwart investor weak in the knees, calculate how much four years of education will cost ten years from now.

So what are parents to do? Where and how much does a family need to save?

Financially, traditional college savings calculators are too simplistic often resulting in an investment that is an unreasonably high figure. But consider whether most folks paid cash for their home–probably not. So they shouldn’t expect to pay cash for college. If they have four years of college expenses saved by the first day of college, they are, in effect, paying cash for college. That’s unnecessary and unrealistic. Most families simply cannot save that amount of money, nor do they need to. In that regard, the government doesn’t expect the family to pay the entire cost of a college education, only their fair share based on their financial circumstances. Thus enter the financial aid formula for calculating Expected Family Contribution (EFC). This is the method the Department of Education uses (or The College Board via the CSS Profile) to determine the student’s fair share of one year’s cost of education, and then their financial aid eligibility.

The bottom line is, parents don’t have to save the whole enchilada, but they need to invest something. If they can have a year or maybe two of college expenses ready when the student begins college, they’re in good shape. They have options–choose to pay for college from loans, from the investment account, from your income or a combination of all three. They can also take advantage of the monthly installment plans.

Yet for parents with college bound children, it seems that it’s a choice, more often than not, between saving for college or saving for retirement. Without thought as to the long term effects, parents open 529 plans and begin dutifully investing for their child’s education. While their intentions are good, it would serve them to consider exactly what they are trying to accomplish and the tax, investment and financial aid implications of their choices, because a sound strategy for one area of financial interest may not be compatible with other areas.

Every investment vehicle has a purpose, but every investment vehicle is not appropriate for every investor. We’d all agree that a hedge fund would probably not be a good idea for a senior citizen on a limited budget. But what about college savings plans? Is a 529 Plan appropriate for every college investor? There a number of things to consider before answering that question.

Is there another sibling or family member intending to pursue a college education? Are there estate planning considerations? How much is the family actually going to be able to save on an annual basis? What is the age of the student, and once they reach college age, will he or she qualify for student financial aid?

A 529 plan locks up your money for qualified educational expenses at accredited institutions. If you don’t spend it for this specific purpose, you can either pass it on to another family member or remove the money at which time you will be penalized by the IRS. A single child family should seriously consider this before heading down the 529 path, unless there are other considerations at play such as estate planning for the parents or grand parents with larger sums of money being deposited for the use of the college-bound beneficiary.

Based on your anticipated cost of living raises as compared to the rate at which college costs are increasing each year, a projection of the student’s financial aid eligibility would be prudent. The latest tax laws stipulate that a 529 Plan is to be considered an asset of the owner (parents in most cases) and as such, will impact the outcome of the parent’s contribution from assets when calculating the student’s Expected Family Contribution (EFC). Using today’s rules and tomorrow’s projections, financial aid eligibility can be quickly estimated and a determination made as to whether or not, a reduction in the parent’s assets would positively affect the EFC. If so, a 529 may not be the most practical alternative for college savings. Consider that a family whose child could not qualify for financial aid today because mom an dad make too much money, may vary well qualify ten years from now as the cost of college outpaces one’s salary increases and asset accumulation. What was the last cost of living increase you received? Was it any where close to six or seven percent?

Based on the family’s budget, how much can practically be put aside each year for college — $5,000 or $10,000? For most middle-income families, investments are mom and dad’s 401k plans at work and the monthly budget allows for very little wiggle room. Starting early is certainly a wise decision and savings becomes a habit and that contribution to the college fund is not missed. Borrowing against a 401k may be an option, but because the loan must be repaid in a given amount of time or be considered a distribution for tax purposes, taking from pension plans should be the last resort. Not only does it affect retirement, it can potentially create a tax penalty.

The fact of the matter is parents can save for college and retirement at the same time. Current tax law allows both the husband and wife (even if they have pension plans at work) to each contribute $4,500 a year in after-tax dollars to a Roth IRA if their combined modified AGI is less than $150,000 a year (between $150,000 and $160,000, the amount they can each contribute decreases). If they’re over 50 years of age, $5,000 a year can be contributed, given the AGI parameters. The money grows tax-free, like a 529 plan. Withdrawals from Roth IRAs can be made without penalty to pay for qualifying higher educational expenses in the year that the expenses are incurred. Sound very much like a 529 plan, except that if the money is not used for college expenses, it’s still there for the parent’s retirement. One caveat, for persons who are not yet 591/2, withdrawals from a Roth IRA fall under the 72T provisions, which mean principle is withdrawn first which is tax free, then deferred earnings which are taxed as ordinary income. Withdrawals from a 529 plan, principle and earnings are tax free.

Having control of your investments is also a major consideration. Using 529 Plans, unless there are other over-riding reasons, takes control away from the investor. You are forced to invest in set series of portfolios, or you can only change your investments once a year. Since most 529 Plans use only one mutual fund company as the manager, you are limited to that array of funds as well, and your college investment is dependent on the success or failure of their fund managers. Using a Roth IRA housed in a brokerage account, you have the entire universe of securities to invest in and you can change your portfolio any time you wish.

529 Plans have certainly provided families a convenient means to save for college, but educational savings plans are no different than any other purchase. Before you jump in, do your homework. We can help.