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Financial Aid Basics

The distribution of financial aid money by colleges to families is an incredibly complicated process, but happily for families of college bound students, it became a whole lot simpler in October of 2011, for reasons you will soon learn. But let’s begin at the beginning.

There are two broad categories of financial aid distributed to families by colleges. Need-based aid, as the name implies, refers to aid that is determined by a family’s financial need. Merit aid, on the other hand, is based on an applicant’s academic, athletic, or other accomplishments. It may or may not take need into account. This article is concerned with need-based aid. For more information on merit aid, see the Merit Aid article.

Sticker Price Versus a Family’s Actual Cost

The first concept that families need to understand is that in order to even compare the sticker prices at different colleges, much less the actual cost to their family, they need to be sure they’re comparing apples to apples. The official name for a college’s sticker price is the Cost of Attendance. As defined by the federal government, it should include tuition and fees, room and board, books and supplies, transportation, and other personal expenses. In other words, it's meant to cover a student’s complete expenses for a year of college.

As you probably know, however, many families do not end up having to pay the full cost of attendance, or sticker price, at the college their child attends. Instead, what a family pays depends upon their financial circumstances. Let’s consider the case of a college that offers only need-based aid. At one extreme, wealthy parents  will pay the full cost of attendance, while at the other extreme, parents in a very low income family might not be expected to pay anything at all. (Students are generally expected to make at least a small contribution in the form of employment earnings.)

Parents who fall somewhere in the middle of the income spectrum will pay some portion of the sticker price, but until recently, they had no idea what that portion would be until after a student was accepted to a college in his senior year and received his financial aid award letter. The obvious drawback of such a situation is that families could not compare what different colleges would actually cost them until the end of the admission process.

Hurrah for Congress!

By passing the Higher Education Opportunity Act of 2008 , Congress struck a major blow for families of college bound students. The Act required each college to post access to a net price calculator on its website by October 29, 2011. These calculators estimate the net price of a college for a particular family, based on the family’s answers to a short set of questions about their finances. What is the net price? It’s defined as cost of attendance minus grant and scholarship aid.

A Closer Look at Net Price

Let’s consider a very simple example. Suppose your daughter applied to Plush Acres, where the Cost of Attendance is $45,000. If she’s offered a total of $10,000 in grant money, your net price ($45,000 minus $10,000) will be $35,000. This net price may include loans and work-study funds that are part of your financial aid award package, but one way or another it’s money you or she have to pay or she has to earn.

Using net price calculators should allow you to get a ballpark estimate of the net price for each of the colleges your son or daughter is considering – and to do so early in the application process rather than at the end. However, understanding and using them is not quite as simple as I’ve outlined above. To learn more about how to find and use net price calculators, as well as what their limitations are, read the Net Price Calculators article in this section.

For more information on controlling college costs, read the articles about Scholarships and Academic Strategies to Cut College Costs.

Next Article: Net Price Calculators

 

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