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financial aid overview


These are only some of the frequently asked questions posed by students and parents of students to Admissions and Financial Aid professionals.

The term financial aid has become synonymous with higher education. To many students and their parents, receiving financial aid is as important as being accepted to the college of their choice.

While the term financial aid is known by all students and their parents, far few actually understand the particulars.

Almost all financial aid falls under one of four categories: (1) federal aid, (2) state aid, (3) institutional aid, and (4) outside aid - financial aid that comes from sources outside of the college being attended by the student.

In this article, I will primarily be addressing federal aid and the federal aid application. State aid varies from one state to another by amount offered and how eligibility is determined. Institutional aid varies from one institution to another. Some institutions offer need-based institutional aid and/or merit-based institutional aid. Most aid offered by an institution is in the form of a grant; that is, it does not have to be repaid by a student. Lastly, outside aid (mostly in the form of grants, but can include loans – see next paragraph) comes from a wide array of individuals and organizations. The trick is finding out how to apply for these. At the end of this article, I’ve provided some websites where you can look for outside financial assistance.

As a last resort, some institutions will direct students to information pertaining to alternative loans. These are loans provided by private lenders – banks and credit unions. Alternative loans are interest-bearing loans and will need to be repaid.

How do I apply for financial aid?

All students apply for federal aid by completing a Free Application for Federal Student Aid (FAFSA). This is a four-page application that takes into account a family’s size, number enrolled in college, income, and assets. Most high school guidance offices have copies of this form. The application is mailed to a branch of the Department of Education or the application can be completed online – http://www.fafsa.ed.gov.

Estimated Family Contribution

The student, and financial aid office(s) to where the student designated, receives a Student Aid Report (SAR). The financial aid office calls this an Institutional Student Information Record (ISIR). The SAR, or ISIR, contains a very important piece of information – the student’s Estimated Family Contribution (EFC). It is the EFC that determines whether a student can receive federal aid and if so, how much.

The student’s EFC is derived from a formula. For a dependent student, the formula takes into account the parents’ total income minus total allowances against income to arrive at available income. It then adds a contribution from assets (net worth minus allowances). This is the parents’ contribution. Then the formula takes into account the student’s total income minus total allowances against income to arrive at available income (times an assessment rate of 50%), it then adds a contribution from assets (net worth times an assessment rate of 35%). This is the student’s contribution. The combined parents’ and student’s contribution equals the EFC.

Pell and SEOG

Directly related to the actual numeric EFC are the Federal Pell Grant and Federal Supplemental Educational Opportunity Grant (SEOG). If a student’s EFC is 0, the student qualifies for the maximum Pell Grant – $4,050 for the 2004-2005 award year. As the EFC increases, the Pell Grant decreases. Only if a student is eligible to receive a Pell Grant is that same student eligible to receive an SEOG. An institution may award up to a $4,000 SEOG to a student who qualifies for a Pell Grant. To every institution that awards Pell Grants, the federal government allots a certain amount of money in the form of SEOG. This amount can vary from one institution to another. Therefore, what one institution may award to a given student in SEOG, that same student may receive a different amount from another institution.

Financial Need

The remaining federal aid (with the exception of the Federal Parent Loan for Undergraduate Students – PLUS) is determined by taking the total cost of attendance at an institution then subtracting the student’s EFC. The remaining value is the student’s financial need. For example, if the total cost of attendance at University X is $20,000 and a student’s EFC is $4,000, the student’s financial need at University X is $16,000.

Other Federal Financial Aid

To be eligible for a Federal Subsidized loan, a Federal Perkins Loan, or Federal College Work Study, a student must have financial need up to the total amount(s) of this aid.

Regarding the Federal Subsidized loan, a first-year undergraduate student is eligible to receive up to $2,625, a second-year undergraduate student is eligible to receive up to $3,500, and a third or four-year undergraduate student is eligible to receive up to $5,500. First-year, second-year, third and fourth years are determined by the number of credit or clock hours earned by the student.

If a third-year student were to receive a $5,500 Federal Subsidized loan, this would mean that the student has at least $5,500 in financial need.

Regarding the Federal Perkins loan, the maximum amount an undergraduate can receive in an award year is $4,000. Like the SEOG, the federal government allots a certain amount of money in the form of Perkins to every institution that awards this. This amount can vary from one institution to another. Therefore, what one institution may award to a given student in Perkins, that same student may receive a different amount from another institution.

Regarding Federal College Work Study, the amount varies. In order to receive any of this money, a student must work to earn it. The student receives an hourly wage per hour worked. Therefore, the amount of Federal College Work Study that appears on a student’s financial aid package may not be the amount a student ultimately receives.

The Federal Unsubsidized loan is only available to a dependent undergraduate student if that student does not have financial need. Loan amounts are the same as the Federal Subsidized loan. An independent undergraduate student is eligible to receive an additional $4,000 (as a first or second-year undergraduate) or $5,000 (as a third or fourth-year undergraduate). This is determined by the number of credit or clock hours earned by the student.

The Federal PLUS is usually the last federal aid program to be considered. It is a federal loan borrowed by a parent for their son or daughter who is a dependent undergraduate. The amount a parent is eligible to borrow is determined by taking the cost of attendance minus other financial aid received.

If I save money, won’t the federal government penalize me?

Most parents’ assets are not a factor in determining a dependent student’s EFC. Within the federal formula, an allowance called the Asset Protection Allowance is factored into the equation to offset the parents’ net worth of their assets. For example, in a two-parent household, if the age of the older parent were 45, the parents’ total assets would have to exceed $42,100 to count toward the EFC for the 2004-2005 award year. By assets, I am referring to cash and bank account(s), net worth of investments, and net worth of a business. In the formula, assets do not include home equity. If the parents do have discretionary net worth (net worth minus the asset protection allowance), only twelve percent of that amount is counted toward the EFC. For a dependent student, 35 percent of assets are counted toward the EFC.

If the parents participate in a qualified retirement plan – 401(k) or 403(b) – the amount that is contributed for the calendar year is considered untaxed income and must be reported as such. However, the accumulated amount does not have to be reported. For example, for the 2004-2005 award year, if the parents contributed $5,000 in the 2003 calendar year to a qualified retirement plan that has an accumulated total of $60,000, the parents must report on the FAFSA the amount of $5,000 as untaxed income. The $60,000 is not reported.

Regarding the parents’ and student’s income, several allowances are taken into account to offset the total income. These include: income tax paid, state tax allowance, fica tax, income protection allowance, and employment expense allowance (parents only).

Coverdell savings accounts and college savings plans do count as investments and must be reported. Prepaid tuition plans do not count as investments and therefore do not need to be reported.

What if my financial circumstances are unusual?

The FAFSA only takes into account certain financial information, but does not tell the entire story. Some institutions require students to complete the CSS PROFILE® application from The College Board. This application asks additional questions, such as home equity, that the FAFSA does not. Should you be in a position where you are unable to communicate your special circumstances, such as present loss of job by a parent, put this information in writing to the financial aid administrator at the college(s) to which you are applying. The financial aid administrator has the authority to make a professional judgement and override certain information from the FAFSA. This can result in your EFC being lowered. Sometimes the lowering of your EFC can result in additional financial aid, other times not. There are no hard and fast rules concerning professional judgement. It is up to the discretion of the financial aid administrator regarding whether action will take place and to what degree. In fact, you may encounter one financial aid administrator from one institution who will make a professional judgement, while another financial aid administrator from another institution may not.

Outside Aid

For some students regardless of whether they qualify for little or a lot of financial aid, outside scholarships can make the difference regarding whether they can enroll in the college of their choice. The Internet can be a great resource to look for outside assistance. You may wish to review the following sites:

For Additional Information

To learn more about the EFC, financial need, and federal and other aid programs, contact a financial aid office. Other financial aid-related websites include:

A special thanks to the author of this article:

Brian P. Madden
Test Engineer II, College Solutions

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This article continues here:

Financial Aid – an overview, by Brian Madden

Institutional Financial Aid - Part 1

Institutional Financial Aid - Part 2

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