Preface: How to Save Up

Before we get into financial aid, let’s talk about what you can do to preemptively start saving for college. Even if your student is in 9th, 10th, or 11th grade (or perhaps even younger!), it’s never too early to start.

If you’re concerned that your family won’t be able to (or maybe doesn’t want to) pay for the cost of college attendance, a little bit of foresight can go a long way. One of the best ways to save for college is to make a 529 plan, an investment account meant specifically for educational costs, which can include K-12 tuition, student loan repayments, and of course, college.

If your parents make a 529 plan, they will receive huge tax benefits. This is because a 529 plan, similar to a Roth IRA, is pre-taxed, which means that you owe 0% taxes on any earnings you make investing it, for example, in the stock market. Generally, by the time the beneficiary is ready to go to college, 529 plan contributors should aim to have saved up about one-third of all expected college expenses. The remaining two-thirds can then be covered with a combination of current income and financial aid.

To add to that, one of the biggest benefits of a 529 plan is that it also counts as a “qualified asset,” which means that even though you have to declare it on the FAFSA, it won’t increase your family’s income, nor will it greatly affect your eligibility for financial aid.

And speaking of which…

What is Financial Aid?

It’s expensive to go to college. Whether you are a student about to take your first step into higher education or a parent who wants your child to have the best shot in the world, it’s important to educate yourself about financial aid. Simply put, financial aid is a way to help you cover the astronomical costs of a college education—which, over four years, can be more than the price of a house in some cities! So, for 85% of families with children attending college, financial aid is a must.

In the past, financial need played a large factor in a college’s decision to admit or reject a student. Now, many colleges have gone to “need-blind” admissions, meaning they won’t even look at your application for federal financial aid (the FAFSA) until they decide to admit you. (There are over 100 of these need-blind colleges.)  But, it’s important to know that need-blind does not mean free! Even if the college doesn’t take your difficulty in paying as an admissions factor, you still have to come up with that money—and that’s where financial aid comes in. 

Types of Aid

• Need-based vs Merit-based

  As you may know, there are two kinds of financial aid: need-based and merit-based. 

  Need-based aid is money offered to students because of their financial needs. Depending on the individual financial situation, a student’s family may have difficulty paying for college tuition without outside monetary aid. Need-based aid seeks to remedy that by offering money to these students in an effort to make attending college a more financially-feasible option for them. 

  Merit-based aid, on the other hand, is awarded to students based not on financial situations, but rather on student achievement, such as academic, athletic, or community-oriented successes. Because it is not need-based, low-income and high-income students alike are eligible for merit aid money, which can come from both colleges and private organizations.

• Scholarships

  Scholarships tend to be awarded based on factors external to a student’s need. There are scholarships for certain minorities and ethnicities, scholarships for high-performing athletes, musicians, and other skill sets, and the most common: merit scholarships. These, like grants, can be public or private, and can come from a variety of sources. 

  The National Merit Scholarship, given to U.S. students with exemplary PSAT/NMSQT scores, is one of most common and widespread examples of a merit aid scholarship, but there are hundreds of other scholarships out there with all kinds of different eligibility criteria. There is such a vast pool of scholarships that one may ask students for an in-depth essay about their experience as a first-generation American, while another may simply give money randomly to any high school student who enters their email address. (Here is a database of scholarships to get you started!)

  Unlike student loans, scholarships do not need to be paid back by student recipients. 

• Grants

  Similar to scholarships, grants are a great form of financial aid because students are not required to pay them back. Grants are often awarded based on need, which is determined through the information you fill out in the FAFSA (which we will cover more later), among other information you provide. There are many different types of grants, and one student may receive several at once.

  The most commonly-known federal grant for college financial aid is the Pell Grant, the largest federal grant program available in the United States, which is based on a family’s Expected Family Contribution, or EFC (we will also cover this more later). To be eligible for a Pell Grant, students must “display exceptional financial need”. The exact amount each student receives from a Pell Grant differs based on EFC; the maximum amount students received for the 2021-22 award year was $6,495.

• Loans

  Probably the most common form of financial aid, loans have a drawback. As can be deduced from the name, loans must eventually be paid back by the recipient, and they accrue interest. However, most student loans don’t require payments until students graduate, and some even delay the accrual of interest until you finish college. Interest-free student loans do exist, but they are rare.

  The bulk of student loans come from the federal government. These are called “federal direct student loans” and have a set interest rate for the life of the loan, explained here. They don’t need to be paid while you’re in school, but six months after you graduate, you need to start paying them back (with that interest). Students can borrow loans up to a total of $31,000 if they’re a dependent, and up to $57,500 if they’re independent. There are two kinds of federal loans: unsubsidized loans and subsidized loans.

• Unsubsidized Loans

  These kinds of loans start accruing interest immediately, such that, by the time a student graduates, they already need to pay more money than they initially borrowed. For example, if you borrow $1,000 at a 2.75% interest rate, and you graduate in four years, on graduation day, you’ll owe $1,114.62 in return. (Take a refresher on how compounded interest works here, and learn why to avoid it!)

• Subsidized Loans

  These kinds of loans largely work like unsubsidized loans, but the government “subsidizes” the interest while a student is still attending college, meaning the loan doesn’t start accruing interest until after the student graduates. For example, if you borrow $1,000 and take four years to graduate (or even up to six, although that’s the time limit for most subsidies), on graduation day, the student will still owe $1,000.

• Work Study

  Work study is a form of financial aid in which the student works—essentially, a part-time job, typically an on-campus one—to pay their way through college. The advantages are that you don’t have to pay any money back, as you’re technically earning your money, and the work study experience looks great on a résumé. Additionally, work study introduces students to the experience of being in the workforce, ideally in a field they’re interested in. On the other hand, as with any job, work study saps time and energy, making it harder to both study and participate in many aspects of college student life, e.g. organizations and clubs, college sports, dorm leadership, and Greek life. Throughout the 2020-21 academic year, the average amount of money students earned through federal work study was $1,510.

  However, if a student’s financial aid package includes work study, this does not mean the student automatically gets a job. Having work study in your package simply means you’ve been deemed “eligible” for work study, which means you can get a job—often a federally-subsidized one—but you need to contact your college and seek out jobs that require work study eligibility yourself. If you are unsuccessful in getting that job, you do not receive the work study money; for example, if you’re eligible for $2,000 of work study and do not work, you essentially forfeit those $2,000. Additionally, federally subsidized work study aid is limited by the offer in a student’s financial aid package. If your package contains $2,000 of financial aid, you cannot work for $2,200 and keep the change, so to speak.

  Note: because students get paid for work study, their work study money counts as income, and thus needs to be declared on taxes.

Where Does Financial Aid Come From?

Financial aid comes from a variety of sources, and it can be university-funded, government-funded, or privately-funded by organizations outside of governmental aid. A lot of the money comes through federal programs and subsidies. However, many financial aid grants, or “gift aid” money, are awarded to students by the universities themselves. This is especially true for private universities, like Columbia and Yale—the top two awarders of financial aid. 

There are still other places that financial aid can come from, and being aware of who’s footing your bill can be an important aspect in the college application, and decision, process.

• Public Aid

  In the United states, the bulk of financial aid actually comes from the government. We may not have free universities, unlike some countries in Europe, but our government—especially the federal government—provides merit-based aid, need-based aid, and even student loans.   

• University-Funded Aid

  Some financial aid comes straight from the colleges themselves. This can be in a mix of forms, from need-based grants given by many expensive private schools to work study programs. This is especially common in private universities, which often have higher tuition costs.

• Why Do Colleges Offer Merit Aid?

Colleges often offer merit aid to applicants, even those who come from wealthier families, as an added incentive for high-achieving students to choose their school over others. Even a student who is theoretically able to pay the full tuition is less likely to choose a school that doesn’t offer any merit aid over the one that offers a few thousand dollars a year. In fact, many colleges offer more merit aid than need-based financial aid because it attracts high-achieving students at less expense for the school; need-based financial aid tends to be more expensive for colleges, whereas merit aid can be exponentially cheaper and still attract many high-achieving students to their campuses.

• Private Aid

  Although uncommon and not usually as effective as other forms of financial aid, private financial aid is possible. This is usually in the form of scholarships, and thus doesn’t need to be repaid. Because private companies and organizations can give out aid as they see fit.

• Can I Choose Where My Financial Aid Comes From?

  Unfortunately, the answer is no. The origin of your financial aid is as much of the financial aid package as the money itself, and is not adjustable to your preferences. Obviously, you can still take out additional loans (likely at worse interest rates), but if you want something like work study or other aid offerings from the university instead of a loan, you’ll have to apply for it and hope the school ends up giving you that work study.

Applying For Financial Aid

• Free Application for Federal Student Aid (FAFSA)

  When it comes to need-based financial aid, filing the FAFSA is always the first step. The FAFSA, or the Free Application for Federal Student Aid, is an application that every state agency and school is then federally required to use in awarding federal student aid. In turn, any student wanting federal loans, grants, work-study, or any other kind of federal financial aid must fill out and submit the FAFSA. Students can find the FAFSA on the U.S. Department of Education’s website.

  Filling out applications tends to be a long, complicated process, and filling out the FAFSA is no different. In order to properly submit the FAFSA, students should prepare certain kinds of information and documents about themselves and their financial situations. These can include:

  • Social Security number (and those of your parents/guardians, if you’re a dependent)

  • Driver’s license number

  • Alien Registration number (if not a U.S. citizen)

  • Federal tax information or tax returns

  • Proof and records of untaxed income

  • Records of cash, savings and checking account balances, investments, assets, etc.

  While the FAFSA itself has its own annual federal deadline (June 30th), specific states and colleges that use the FAFSA for their own financial aid programs have vastly different deadlines, so applicants should stay on top of these deadlines to ensure they don’t miss financial aid opportunities. 

• Expected Family Contribution (EFC)

  One of the numbers the FAFSA uses to help evaluate a student’s financial need is the EFC. A student’s EFC, or Expected Family Contribution, is an index number that estimates a student’s ability to pay for one year of higher education. Colleges will use the EFC to determine the financial need of a student or their family by subtracting this EFC from the college’s cost of one year’s attendance, which usually consists of tuition, room and board, and dining costs. In other words:

Cost of Attendance - Expected Family Contribution (EFC) = Financial Need

EFC calculators can be found online—check out this one to see where your EFC stands.

• Don’t rely entirely on EFC to estimate how much your family will have to pay for college—while it’s a helpful index number, colleges are also required by law to provide net price calculators on their individual websites, which give an accurate estimate of how much a student will have to pay for college based on each specific institution. 

• College Scholarship Service Profile (CSS Profile)

  Over 300 schools, mostly private institutions, additionally use the College Board’s CSS Profile to determine how much non-federal financial aid they will give out to students. Arguably more in-depth and time-consuming to complete than the FAFSA, the CSS Profile is meant to provide schools with a more accurate understanding of students’, and their families’, financial situations that could impact their ability to pay for their education. The CSS Profile does this by requiring much more financial documentation, institution-specific questions, and sometimes even information regarding medical and educational expenses.

Appealing Your Financial Aid Package

Say you’re unhappy with the financial aid package you’ve received. Maybe you were hoping to join seven clubs and try out for four sports teams, but the “work study” portion of your package makes the prospect of doing that a lot tricker. Maybe you don’t want to take out so many student loans in order to attend an Ivy, but you’d also really like to go to Yale. What are your options?

One lesser-known option is to contest your financial aid package. Doing so requires more than just an announcement to the institution that you “don’t like it”, but contesting your aid package in and of itself probably won’t hurt your situation. (Don’t worry—the college won’t turn around and revoke your admission because of your “ingratitude”.) 

In fact, in the case that something has changed in your financial situation since you filled out the FAFSA—changed in a way that might make it more difficult for your family to provide its EFC off the cost—then you should absolutely contest your financial aid package. However, note that your financial situation needs to have changed already in order for you to successfully appeal for a college to give you more money; any changes that haven’t happened, but that a student is expecting to happen, will not be considered by schools.

Additionally, you can choose to decline certain parts of your financial aid package—for example, declining only the work study. However, this may cause some problems, as financial aid that students decline is not offered again by the college through alternative means. In other words, a student can’t turn down work study with the expectation that the money will be offered to them as a scholarship instead. If a student declines work study, they will have to come up with that money themselves in another way, possibly by taking out their own student loans that are inevitably worse than what they were initially offered. If you already know you’ll likely decline work study if given to you in a package, make sure that you don’t select the “work study” option when you fill out the FAFSA.

The best (and easiest) time to appeal your financial aid package is before you actually enroll in the offering college. This is especially the case if you’re weighing your enrollment options between multiple schools with differing financial aid packages. Some schools may even have deadlines in place for any financial aid package questions or changes students may have, so make sure your check those deadlines and submit your appeal before them!

Conclusion

Financial aid is an extremely tricky subject for people going into college, especially for first-generation students. However, with some help, it’s all entirely manageable. While this guide is meant to walk you through the financial aid basics, everyone’s individual circumstances are—understandably—unique. If you’d like more details about your family’s or your student’s particular situation, please feel free to request a free consultation, where we can dive into what financial aid might look like for you specifically!