It's the time of year when many households are focused on filing their income taxes, but for those with family members soon to enroll or already enrolled in college, there's another important financial matter to address: financial aid.
College students who will be enrolled this fall should be thinking about financial aid now. The financial-aid application process starts Jan. 1, and there's still time to apply. But don't wait too long. Some states and colleges award financial aid on a first-come, first-served basis. So, the sooner you apply, the better your odds of getting the maximum aid package for which you are eligible.
Colleges participating in the federal financial-aid program require applicants to fill out the Free Application for Federal Student Aid, or FAFSA, while some private colleges also require the CSS/Financial Aid PROFILE, which asks more detailed questions. Both applications ask about family and student-owned assets as well as income for the previous year.
For families who have never applied before, or who simply don't think they qualify, it's important to understand some basics about how financial aid works and to understand that some common misconceptions about financial aid simply aren't true. Let's take a closer look at some of these myths and set the record straight.
Myth: Only students from poor families get financial aid.
Fact: Financial aid comes in many forms, and even though much of it goes to students from lower-income households, not all of it does. Only 5% of dependent students from households making $60,000 or more received a federal Pell Grant (the largest federal grant program) during the 2012-13 academic year, but many more likely received institutional aid--in other words, a grant from the college itself--according to data compiled by the College Board in its Trends in Student Aid 2014 report.
During the 2011-12 academic year (the most recent data available), about one quarter of all students from households making $106,000 or more and enrolled at four-year public colleges received a grant from that college as compared with 38% of those from households making $30,000 or less. One key difference: 78% of the institutional grant money awarded to students from the upper-income households came in the form of merit-based aid, which schools typically use to entice students with desirable academic, demographic, geographic, or other backgrounds to enroll. For students from lower-income households (those making $30,000 or less), only 43% of institutional grants came in the form of merit-based aid while the remainder was need based. (Incidentally, some colleges require that students fill out the FAFSA to be considered for merit-based aid while others do not.)
Students from upper-income households also are more likely to qualify for need-based aid if there are multiple family members attending college in the same year. In such situations, the expected family contribution--the amount the financial-aid formula expects families to spend to cover college costs--is divided among those family members attending college, increasing their chances of receiving aid. Additionally, at more expensive private colleges, even students from families with six-figure incomes may qualify for need-based aid due to the high cost of attendance. For more on this topic, read this article.
The larger point is that filling out the FAFSA may be worth the effort regardless of your household income level. It should only take about an hour and could save you thousands of dollars.
Myth: It's best not to save for college because it will only hurt my child's chances of getting financial aid.
Fact: I hear this one a lot, and it never fails to surprise me. Yes, it's true that the financial-aid formula "penalizes" applicants for saving money, but it's hardly a dollar-for-dollar hit. In fact, the amount you save will have a relatively small impact on financial aid, particularly if the money is held in the parents' name(s).
In a nutshell, every dollar saved in a parent-owned account reduces the student's potential financial-aid award by no more than 5.64% (assets held in retirement accounts such as a 401(k) don't count in the FAFSA but do in the CSS/Financial Aid PROFILE). So, if the parents hold $10,000 in their names, the formula assumes that up to $564 of that amount is available to pay tuition and other college costs. Or, to put it another way, you'll end up $9,436 ahead in saving for college ($10,000 minus the hit against financial aid) as compared with saving nothing at all.
The hit is somewhat greater for student-owned assets--20%--and that's one reason families are urged to save in the parents' names rather than the child's. But here, too, you'll likely come out well ahead by saving as compared with not saving. In fact, family income plays a much larger role in determining financial aid than savings does--with up to 47% of parental income and up to 50% of student income (above the first $6,260) counted in the calculation. So, by all means, don't skimp on saving for college just to boost your student's potential financial-aid award. You may, instead, be boosting the amount that you or your child ultimately must borrow to cover college costs.
Myth: Financial aid means free money for college.
Fact: That's true in some cases, but the financial-aid umbrella also includes money for college that must be repaid--in other words, loans. Most people don't like to think of loans as a form of financial aid, but the fact of the matter is that federal and private loans are a form of financial assistance, without which many students would not be able to attend college. In fact, about one third of all undergrads took out federal student loans during the 2013-14 academic year, making it far and away the most common form of financial aid. (In second place: institutional grants at 21%.)
Most importantly, once you receive your financial-aid award letter (which usually arrives shortly after an offer of admission for incoming freshmen), make sure to read it carefully so that you understand whether money is being offered in the form of grants or loans. If loans are included (and the odds are generally greater that they will be than that grants will), make sure you understand the terms of repayment so you don't overborrow--in other words, don't take out more in loans than you will be able to comfortably repay.
Myth: My son/daughter stands a good chance of earning a full-ride scholarship somewhere.
Fact: The world is full of budding young geniuses, athletes, musicians, and those with other unique talents. Alas, not all will receive that most coveted of academic rewards, the full-ride scholarship. In fact, very few will. An analysis of national financial-aid data by Edvisors.com publisher Mark Kantrowitz found that only 0.3% of full-time college students--that's 3 in 1,000--receive enough grants and scholarships to cover all college costs.
That isn't to say that your child can't be one of these 3 in 1,000 students, or that your child won't earn grants and scholarships that cover a good portion of his or her college costs. The average undergraduate student received $8,080 in grant aid in the 2013-14 academic year, according to the College Board. That probably won't cover all of your student's costs, but if a school wants him or her bad enough, it may very well offer more than that amount.
Myth: It's only necessary to apply for financial aid once.
Fact: Actually, applying for financial aid is a year-by-year process, and there's no guarantee that one year's award will be repeated in future years. In fact, if circumstances change--your family or student income dramatically rises or drops, or another family member enters or leaves college--this can result in a significant increase or decrease in student aid from one year to the next.
Have a personal finance question you'd like answered? Send it toTheShortAnswer@morningstar.com.
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