Affording your Education – Or, Planning for Financial Aid
Elton Lin
It’s expensive to go to college. Whether you are a student about to attend a university for the first time or a parent who wants your child or children to have the best shot in the world, it’s important to educate yourself about financial aid.
What is financial aid?
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 them.) 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.
That’s where financial aid comes in.
What type of “aid” do I get?
In the US, that question isn’t as simple as you might think. There are various forms of financial aid, and they all come with different strings attached.
Scholarships. You don’t have to pay back scholarships, and they tend to be 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 below, can be public or private, and can come from a variety of sources.
Grants. Similar to scholarships, grants are a great form of financial aid because you don’t have to pay them back – ever! Grants are often awarded based on need, which is determined through the information you fill out on the financial aid application (the FAFSA) among other information you provide. There are many different types of grants and you may get several.
Loans. Probably the most common form of financial aid, loans have a drawback. As you might have deduced from the name, you have to pay them back eventually. And they accrue interest. Most student loans don’t require payments until you graduate and some even delay the accrual of interest until you finish college. Interest-free student loans do still 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 interest. They differ in when that interest starts accruing:
Unsubsidized loans: these start accruing interest immediately, so that, by the time you’ll graduate, you already have to pay more than you initially borrowed. For example, if you borrow $1000 at a 2.75% interest rate, and you graduate in four years, on graduation day you’ll owe $1114.62. (Take a refresher on how compounded interest works here, and learn why to avoid it!)
Subsidized loans: these work like unsubsidized loans, but the government “subsidizes” the interest while you’re still attending college. So if you borrow $1000, and take four years to graduate (or even up to six, but that’s the limit for most subsidies) then, on graduation day you’ll still owe $1000.
Work study. “Work study” is a form of financial aid where the student works to pay their way through college. The advantages are that you don’t have to pay it back (it’s money you earned) and it looks great on a résumé. Additionally, it allows students to get an introduction to being in the workforce – ideally in a field they’re interested in. However, the main drawback is that it saps time and energy and makes it harder to both study and do the typical “college” things – such as join organizations and clubs, play college sports, or participate in dorm leadership or Greek life – that the student might want to do.
All of these forms of aid can be roughly categorized into two camps: gift aid (grants and scholarships, which you don’t have to work for or pay back) and self-help aid (which you do pay off with your time or money).
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 organisations outside of the government. A lot of it comes through federal programs and subsidies. However, many financial aid grants (“gift aid” money) are awarded by the universities themselves. This is especially true for private universities, like Columbia and Yale (the top two awarders of financial aid). However, there are other places that it can come from – and being aware of who’s footing your bill can be an important aspect in the college decision process.
Public aid. In the U.S., the bulk of financial aid actually comes from the government. We may not have free universities (unlike some countries in Europe), but the government – especially the federal government – provides everything from Pell Grants (need-based federal aid) and National Merit Scholarships to Federal Direct 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 (which are often federally subsidized). This is especially common in private universities, which often have higher tuition bills.
Private aid. Private aid is possible, though uncommon – and it’s unlikely to foot a lot of your tuition bill. However, this form of aid is mostly in the form of scholarships and doesn’t need to be repaid. (You can search them on this website, with a lot of good filtering options.) Private companies and organisations give out aid as they see fit.
Your next question may be: do I have much of a choice on where my aid comes from? The short answer is no; it’s part of the “financial aid package” that your university awards you. Obviously, you can take out additional loans (at much worse interest rates, probably) 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.
When you’re accepted to a college, you’ll get a financial aid package comprising an assortment of work-study options, loans, scholarships, and grants. This is compiled from the information that you supplied in your FAFSA, and it’s expected to calculate your expected family contribution (EFC) – or how much the school decides that your family can reasonably pay. It will also determine how deeply you need to go into debt or how much you’ll have to work as a student if you accept that offer and attend that college.
What about EFC?
“But,” you say, “it’s still way too expensive!” Maybe you’re worried that your family won’t be able to, or won’t want to, pay up for the EFC – expected family contribution. This is where a little bit of foresight can go a long way. If your parents make a 529 plan to help you pay for college they will receive huge tax benefits, as a 529 plan, similar to a Roth IRA, is pre-taxed. This means that you owe 0% taxes on any earnings you make investing it, for example, in the stock market.
Maybe you’re wondering: but won’t that be one more thing that I have to put on the FAFSA, that’ll only decrease the amount of aid that I get? Not exactly. Yes, you do have to declare it on the FAFSA. However, it won’t much affect your eligibility for financial aid. Your 529 plan counts as a “qualified asset,” which means that it’s not going to increase your family’s income.
Check out this EFC calculator and see how various assets affect your eligibility or the amount that your family’s expected to shovel out.
Let’s talk a little more about work study
Work study is probably the most mystifying portion of a financial aid package – because it’s quite unlike anything else. Let’s clear some common misconceptions:
If I’m “eligible” for work study, will I automatically get a job?
No! If you’re deemed “eligible” for work study, it means that you can get a job – often a federally subsidized one. It does NOT guarantee you a job! To actually work, you’ll need to contact your university and arrange this.
If I DON’T get a job, how will I get that money?
You won’t. If you’re eligible for $2000 of work study but you don’t work, your aid package will be $2000 slimmer!
Do I get paid for work study?
Yes. You’ll get paid, and it does count as income – so you do have to declare it on taxes. (And file taxes if you haven’t before; congratulations, new taxpayer!) However, there are other ways you can get out of paying things like social security – so that the amount that you see on your award is the amount that you get!
Are there any limits?
Yes. Federally subsidized work study aid is limited by the offer in your financial aid package. If your package contains $2000 of financial aid, you CANNOT work for $2200 and “pocket” the extra.
But I don’t like my financial aid package!
Maybe you were hoping to join seven clubs and try out for four sports teams. But the “work study” part of your package may make that a tad tricky! Or you don’t want to take out so many loans to go to an Ivy. But you’d really like Yale! What are your options?
One option is to contest it. It’s not well known, but you can actually contest your aid package. Granted, you can’t just say “I don’t like it” – but contesting your aid package probably won’t hurt. The college isn’t going to turn around and revoke your admission. You absolutely should contest your aid package if something has changed in your family’s financial situation since you filled out the FAFSA that might make it more difficult for your family to provide its “expected share” off the cost.
Additionally, you can choose to decline certain parts of the package – for example, the work study portions. However, you can run into problems as a result. Aid that is declined isn’t offered through other means. So if you decline work study, you’ll have to come up with that money somehow – possibly by taking out your own student loans that are inevitably worse than what you’re offered. However you really shouldn’t select “work study” as an option unless you’re actually going to go through with it. You’re given this choice when you fill out the FAFSA.
How about some examples?
Understanding financial aid takes some study, so let’s look at a couple of examples as a way to take something fairly abstract and make it concrete. Here are two hypothetical examples of financial aid award letters for a student we’ll call “Taylor.” This example simplifies the math; in real life it won’t be quite this simple!)
University #1
| COA (Cost of Attendance) | Financial aid package | ||
|---|---|---|---|
| Tuition | $10,000 | Federal Pell Grant | *$6,195 |
| Fees | $1,195 | State Grant | $2,000 |
| Room & Board | $8,000 | Academic Scholarships | $5,000 |
| Books | $1,000 | Unsubsidized Direct Student Loan | $2,000 |
| Subsidized Direct Student Loan | $3,000 | ||
| Total COA | $20,195 | Total aid | $18,195 |
*In 2020, $6195 was the limit of a Pell Grant.
To attend university #1, Taylor would have to pay the difference between the aid offered and the COA: $20,195 – $18,195 = $2,000.
University #2
| COA (Cost of Attendance) | Financial aid package | ||
|---|---|---|---|
| Tuition | $50,000 | Federal Pell Grant | *$6,195 |
| Fees | $2,195 | University-sponsored institutional grant | $54,000 |
| Room & Board | $10,000 | Academic Scholarships | $2,000 |
| Books | $1,000 | Work study | $2,000 |
| Total COA | $63,195 | Total aid | $64,195 |
To attend university #2, Taylor wouldn’t have to pay anything and would receive the difference between the aid offered and the COA: $64,195 – $63,195 = $1,000. However, keep in mind that $2,000 in the second example comes from work study. Taylor will have to work for this money. Often, work study money isn’t actually used to pay tuition, but gives a student a bit of extra spending money during the school year.
Okay. Is THAT it?
Financial aid is an extremely tricky subject for people going into college, especially if you’re a first-gen student (meaning that your parents didn’t go to college). However, with some help, it’s all entirely manageable. This blog covers some of the most common things you’ll run into when you get a financial aid package – but it’s far from exhaustive! And – understandably – everyone’s individual circumstances are unique. If you’d like more details about your or your student’s particular situation, please sign up for a free consultation where we can dive into that.
And get ready to find a way to afford college!