How Financial Aid Works
Choosing a school requires more than weighing the traditional factors of school size, location, academic offerings, etc. It also requires a close look at how financial aid works and an understanding of the school’s financial assistance policies, since they may probably impact you.
There are two types of financial aid: Need based aid and Merit based aid.
Most American families qualify for need based aid. Need based financial aid does not mean that your family is “needy”, but rather that the cost of college exceeds your Expected Family Contribution (EFC), which is essentially your out-of-pocket expense. The EFC is the dollar amount that the family is expected to contribute each year towards college. It’s determined by a series of calculations that assess your family’s financials and compare it to the cost of college, which is done by completing the FAFSA form. Once your EFC is determined, any additional money you need beyond your EFC to cover the college’s sticker price is considered your need. The higher your family income, the higher your EFC will be.
In some cases, your EFC could be so high it could completely cover the full cost of the college each year, resulting in you having no need at all. But for average American family this is rarely ever the case.
Merit based aid, on the other hand, is strictly based on your qualifications as a student, independent of any need you may or may not have. It consists mostly of free money through school/private scholarships.
Who Qualifies for Financial Aid
Families believing they make “too much money” to be eligible for aid or that aid is only available for the lower income families, have much to learn about how financial aid works. The reality is that there are billions of dollars available for the very poor, or very average, or very bright, or even very rich!
A typical financial aid package would include:
- Federal and state grants (free need-base money)
- Scholarships from the school or private sources (usually merit based)
- Work study programs (need based aid)
- Low cost federal student loans (need based aid)
Show Me The Money
Just like businesses that are looking for qualified buyers and compete for your dollar, colleges compete among themselves for qualified students who will help them meet their enrollment goals each year. This intense competition for quality students, means that often colleges will mold the financial aid package for certain students to help in achieving their yearly enrollment goals. In other words, you’ll hear terms such as “tuition discount”, “merit scholarships”, “no-need” awards, and even “preferential packaging”.
To increase your chances for aid awards you should follow this strategy:
1) Apply early for financial aid. Remember, a lot of the aid available is first-come first-serve.
2) Apply to colleges where your qualifications place you somewhere in the
upper 25% of the applicant pool. Any smart college selection process
would include a range of colleges from “sure thing” to “reaches”.
Somewhere in between, you should include colleges for which your
qualifications are above average. This will help you get a better package.
3) Apply to at least 2 or 3 colleges which are similar in prestige and
price. Colleges that are similar are more direct “competitors” in
a sense. In other words, if you get one college offering you a
better aid package, you might be able to get the other college to
improve their aid package just to keep you away from their competitor.
What Questions Should I Ask?
It’s perfectly all right to ask colleges questions on how their financial aid policies work. After all, it may be the deciding factor on whether you attend the college or not. Questions to ask:
- Will you meet my full need (or a percentage of my need) for the full four years? (Some colleges may offer a generous grant-based aid package on your freshman year, only to turn it into mostly loans in your post-freshman years)
- Do you have a standard “unmet need” figure for each student? (Some colleges will typically leave a gap between your need and the cost of attendance. In many cases the gap is about $500).
- Do you have a per-student limit on the amount of aid you provide? (Some schools set a ceiling, for instance $9,000, on the maximum aid amount they’ll provide for any student).
- How do you deal with “outside private scholarships” when preparing an aid package? (Some colleges will use your outside scholarship to replace part of your collegiate grants rather than the loan component of your financial aid package).
- What is your expected “minimum student contribution” figure? (Many private schools will require students to contribute a minimum amount towards the EFC from their own earnings from work. It could range from $1,000 to up to $2,000).
- Does the college place time limits on financial aid? (This is a way of hurrying students along to complete their degree in four years). Does the college have a “need blind” admission policy? (Some schools may make their final admission decisions based on the family’s ability to pay the bill).
- Does the school require that you demonstrate a minimum level of need to qualify for aid? (Some schools may not consider a student for any aid unless they have at least $500 need).