How Do Colleges Determine Financial Need?

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A closer look at how financial aid impacts your potential family contribution

By Brett Carolan, CFP®

College financial aid is never a one-size-fits-all process. Considering that every college’s financial aid offerings differ, it’s no wonder that navigating the aid process can feel more difficult than the coursework your child will face.

Though tedious, taking the time to understand your child’s potential need-based financial aid options could save you money while ensuring your child receives a quality education. In fact, the U.S. government alone funds over $120 billion each year in need-based grants, loans, and work-study opportunities. Add in private scholarships, merit aid, and other sources, and your child may be able to substantially shrink his or her college costs.

It pays to do your homework.

529 College Savings Series

In this article, we’ll cover:

  • The different types of need-based college financial aid
  • How universities determine eligibility for financial need
  • How potential need-based aid fits into your college savings strategy

What Types of Need-Based College Financial Aid Are Available?

Financial aid for higher education is divided into two primary categories: need-based and non-need-based.

Need-based aid takes a student’s economic conditions into account to determine eligibility. This type of aid typically falls into three subcategories: grants, work-studies, and loans.

Non-need-based aid is awarded to students regardless of their economic conditions. Merit aid and some private scholarships fall into this category.

Grants: A grant is a form of financial aid (often funded by the federal or state government) that does not need to be repaid. Grants can be need-based, merit-based, or awarded to individuals that meet certain criteria. The federal government offers four types of grants:

  • Pell Grants: Available for undergraduate students based on financial need, the cost of the school they’re attending, and other factors.
  • Federal Supplemental Education Opportunity Grant (FSEOG): Federal grants given to students with exceptional financial need.
  • Teacher Education Assistance for College and Higher Education (TEACH): These grants help aspiring teachers pay for school if they agree to teach in low-income areas for a specific length of time.
  • Iraq and Afghanistan Service Grants: Available for children whose parent died serving in the military in Afghanistan or Iraq.

For the most part, grants are awarded based on student need. However, the competition for grants is tight because they do not need to be repaid. Keep in mind that for some schools the amount of other financial aid awards (i.e., scholarships) can lower the amount of your grant.

Work-Study Opportunities: This program allows students to work on campus or other approved locations to help pay for school. Common positions may include working at a student center, library, cafeteria, campus athletic center, or residence halls. Note that work-study positions and pay can vary among schools.

Loans: Loans are a form of financial aid that need to be repaid, usually with interest. Subsidized student loans typically offer more attractive terms than non-subsidized loans and are mostly used by students who demonstrate financial need. The government subsidizes these loans by paying the interest while a student is enrolled in school and for six months following graduation.

In addition to the three types of federal need-based aid, there are countless private scholarships available throughout the country that may include financial need as a stipulation. Corporations and other entities offering a scholarship based on need may require students to write an essay or perform another activity to apply, along with proving their financial need.

How Do Colleges and Universities Award Aid?

To qualify for any form of federal or state financial aid, you’ll need to fill out a Federal Application for Federal Student Aid (FAFSA) every school year. The FAFSA will ask information regarding your annual household income, assets, untaxed income, investments, and real estate to assess your child’s financial situation.

There are several myths surrounding the FAFSA, especially for students whose parents might make too much money to qualify for need-based financial aid. However, failing to fill out the form automatically means you’ll miss out on potential financial aid.

The truth is, there is no income cutoff to qualify for financial aid. Things such as household size and parents’ ages are taken into consideration when determining economic status, so don’t let income alone scare you away from filling out the FAFSA.

Filling out the FAFSA is 100 percent optional, but keep in mind that not completing the form cuts your federal and state financial aid lifeline. Without one, you’ll probably be footing the entire college bill through private scholarships, 529 college savings plans, and your own wallet.

Should I Include Potential Financial Need in My College Savings Strategy?

Planning for need-based financial aid is a lot like developing a strategy for your 529 college savings plan. There are enough variables and what-ifs surrounding college financial aid that it’s almost impossible to get it “just right.”

If you’re stuck on how much to contribute to your child’s 529 plan because of the potential for need-based financial aid, remember that grants, loans, and work-studies are never guaranteed. Your child may qualify for a work-study program, but that doesn’t mean he or she will be able to secure a spot. If they do qualify for a grant, remember that additional awards, such as a private scholarship from your church or workplace, can reduce or completely wipe out the need-based aid.

However, what is guaranteed is the money you’ve stashed in a 529. Even if you can’t contribute enough to cover all costs, saving a little each month in a 529 can help offset some of the financial burden later. Whatever you can’t cover with your 529 funds might be able to be made up for in other forms of need-based aid to limit your estimated family contribution.

While it’s comforting to know there are numerous sources available for college financial aid, not knowing ahead of time how much you’ll qualify for can complicate your savings strategy.

For further guidance in planning for college costs, talk to one of our experts today to create an action plan worthy of your child’s future.

Brett Carolan, CFP® serves as an advisor at Brighton Jones.

Read other posts in our 529 College Savings series:

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