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Financial Aid Basics

Updated September, 2016

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 personal expenses. In other words, it should 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.

Important Note: Please understand that using a college's net price calculator does not mean that you have applied to that college for financial aid. To do so, you and your teen need to complete an official government form, entitled FAFSA (Free Application for Federal Student Aid). Some colleges require that you complete a second form as well, so be sure to check with each college to which your teen is applying to learn which forms need to be submitted to be eligible for financial aid.

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

Further Sources of Information on Financial Aid

I’ve barely skimmed the surface on the topic of financial aid, so don’t stop here. I strongly encourage you to learn as much as you can about it so that you can be a savvy consumer. Check out the following resources:

Free Online Resources 

Opportunities 2016-17. Preparing for College Guide and Workbook. This is a handy publication, published by the Educational Credit Management Corporation, that presents a clear overview of the financial aid process. The national version is available here and a version that also includes information specific to Virginia is available here.

Student Aid on the Web: Federal government resource that provides information on federal student aid for students.

Human Resources

Also, once you’ve identified which colleges your child will be applying to, don’t hesitate to call their financial aid offices for information.  I once spent the day with members of the financial aid office at The College of William and Mary and came away with considerable admiration for that intrepid crew.

Distributing aid money from federal, state, and institutional sources to families is an incredibly complex task governed by a slew of ever- changing government regulations. Consequently, you might imagine financial aid practitioners to be dispassionate bean counters, but the people I met with were engaging, empathetic professionals doing their best to stretch their available resources to meet the financial needs of students. Further, they emphasized that they are happy to answer questions from prospective families, and I urge you to take them - and their colleagues at other universities - up on the offer.

Next Article: Net Price Calculators


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