Navigating thecollege financial aid process can be daunting even for the most highly educated among us. What are the differences among grants, scholarships, and loans? What does FAFSA stand for and who should complete it? And how does work-study actually work?
Your college education is an extremely important—and often extremely expensive—investment. Before you shell out thousands of dollars for an advanced education, give yourself a basic education of postsecondary financial aid. To help, we've put together a quick reference guide on common—and often confusing—financial aid terms. From award letters to tuition reimbursement, we've got you covered.
Award letter: Arriving in your mailbox around mid- to late April, your award letter basically outlines your financial aid package from the college(s) to which you applied. But be careful: Colleges aren't required to follow a standard format for award letters, and crucial information is sometimes missing or misleading—such as the cost of attendance! Colleges sometimes vastly underestimate the cost of transportation and textbooks, or make the financial aid package look more generous than it actually is. (To find out how much you'll end up paying for tuition at your college, U.S. News offers a list of net price calculators.)
[Get tips for comparing financial aid awards.]
Expected Family Contribution (EFC): This is the measure of your family's financial strength, and how much of your college costs it should plan to cover. This is calculated based on a specific formula, which considers taxed and untaxed income, assets, and benefits, as well as the size of your family and the number of family members attending college during the year. Your expected family contribution is calculated based on your FAFSA results.
FAFSA (Free Application for Federal Student Aid): You've probably heard of the FAFSA, but do you know what it is and just how important it can be for you and your family? Filling out the FAFSA is one of the first steps in the financial aid process, and determines the amount that you or your family will be contributing to your postsecondary education. The results of the FAFSA determine student grants, work-study, and loan amounts. We recommend that everyone fills out the FAFSA; it only takes about an hour to complete, and you may be surprised with the results.
Federal student aid: The largest form of student aid in the country, federal aid programs come in the form of government grants, loans, and work-study assistance and are available to students at eligible postsecondary institutions (colleges, vocational schools, and graduate schools).
Financial need: This is the amount of a student's total cost of attendance that isn't covered by the expected family contribution or outside grants and scholarships. A student must demonstrate financial need to be eligible for need-based financial assistance programs.
Grants: Did someone say free money? Unlike loans, grants—which can come from the state or federal government, from the college itself, or from private sources—provide money for college that doesn't have to be paid back. We'll take this opportunity here to remind you again to fill out the FAFSA; many grants determine eligibility by looking at your FAFSA results.
Loans: If scholarships and grants don't cover the entire cost of your tuition, you may have to take out a student loan to make up the difference. Federal student loans don't have to be paid while you're in college, and there are also a variety of loan forgiveness programs out there post-graduation. The rates and terms are generally more flexible than private loans.
[Learn about the new student loan changes for 2012.]
Room and board: Everyone needs to sleep and eat. If you plan to do it on campus, those fees are part of your total cost of attendance.
Scholarships: There really isn't much difference between a scholarship and a grant, though the general consensus is that scholarships are primarily awarded for academic merit (good grades) or for something you have accomplished (volunteer work or a specific project); however, there are many need-based scholarships out there, as well. Like grants, scholarships don't have to be repaid.
Tuition: College tuition is the "sticker price" of your education, and does not include room and board, textbooks, or other fees. Colleges often calculate tuition based on the cost of one credit, or "unit." For example, a college may charge $350 per credit for an undergraduate class. Many times colleges will simplify this by providing a flat fee for tuition; you're often required to take a minimum amount of credits and cannot exceed a maximum amount of credits. "True cost" is a little misleading, since there are other costs on top of tuition.
[Get more details about the net price of college.]
Tuition reimbursement: Tuition reimbursement, also sometimes called "tuition assistance," is increasing in popularity. Some employers will refund you the cost of your tuition if you're studying a work-related area. Tuition reimbursement can cover as little as one or two courses, or can cover up to the entire cost of your education.
Work-study/work award: The Federal Work Study program provides funds to eligible students (see FAFSA above) for part-time employment to help finance the costs of postsecondary education. In most cases, the school or employer has to pay up to 50 percent of the student's wages, with the federal government covering the rest. You could be employed by the college itself; or by a federal, state, or local public agency; a private nonprofit organization; or a private for-profit organization.
Of all the myths swirling around the college admissions process, the ones involving financial aid are probably the biggest whoppers.
Financial aid misconceptions can easily hurt families, which is why parents with a working knowledge of financial aid will often have a greater chance of capturing price breaks.
[Get more advice on how to pay for college.]
To help clear up some of the confusion, here are four of the most common financial aid myths.
1. I make too much money to qualify for financial aid. You shouldn't automatically assume that you won't qualify for need-based assistance. How much income you earn is only one part of the equation. What also matters is the price of a particular college. For example, some families that don't qualify for aid at moderately priced state schools may be in line for considerable help at pricey universities.
At Princeton University, for instance, families making between $160,000 and $180,000 qualified during the current school year for an average of $26,450 in financial aid.
You can obtain an early assessment of whether your family might qualify for aid by using a free financial aid calculator. A calculator will produce an estimated Expected Family Contribution, which is what colleges would expect you to pay, at a minimum, for one year of school.
You can find EFC calculators at the College Board and at TuitionCoach.
[Learn more about using aid calculators.]
2. My home equity will kill my chances for aid. Most colleges won't care if you own a house and won't count home equity against you if you do. That's because the majority of schools rely on the federal aid application, the Free Application for Federal Student Aid (FAFSA), which doesn't ask parents if they own a home.
Colleges that use an additional form, the CSS/Financial Aid PROFILE , will ask about a family's home equity. With rare exception, however, these colleges will limit the amount of home equity they consider when they evaluate a family's ability to pay. Colleges will typically impose a cap that rarely exceeds 2.4 times a family's income, according to Paula Bishop, a CPA in Bellevue, Wash. who assists families with financial aid issues.
Here is the list of the colleges and universities that use the PROFILE.
3. I have saved too much in my child's college fund to qualify for aid. This is a stubborn myth, which I addressed recently in my blog post on Why Saving for College Won't Kill Your Chances for Financial Aid. In reality, less than 4 percent of American families who apply for financial aid are penalized for their savings.
4. Completing financial aid forms is a waste of time. The vast majority of families should complete financial aid applications, because without filing these documents, they will have no hope of receiving need-based aid.
The FAFSA will be available beginning Jan. 1 for the 2011-2012 school year. The application should not take long if you gather the necessary documents before you begin. You can find out what information you'll need to complete the FAFSA by checking out the FAFSA on the Web Worksheet.
The latest PROFILE is available every fall. While the FAFSA is free, the PROFILE costs $25 for the initial application and college report, and all additional reports are $16 each. Some low-income families will be eligible for fee waivers.
Avoid These Financial Application Mistakes
For many families of college-bound students, the financial aid application can be just as important as the admissions application. This week, our experts weigh in on the mistakes that students make every year on the financial aid application. It might just save you thousands of dollars! Heather Pierre of Lancaster, Pa., asks:
Q: What are the most common mistakes students make on the financial aid application?
A: Follow the directions on the FAFSA.
Stacey Kostell, director of admissions, University of Illinois—Urbana-Champaign The most common mistakes when filling out the Free Application for Federal Student Aid (FAFSA) are easily avoided. These include:
• Mistyping the student's legal name, social security number, and birthday
• Forgetting to enter the PIN for the student and parent before submitting, as this serves as the electronic signature for the FAFSA
• Not answering all questions correctly and completely
• Failing to update the family's financial information immediately upon completing your tax return if an estimate was given prior to doing taxes
If you have any questions, be sure to ask a representative in your school's financial aid office.
See all of Stacey's expert admissions advice.
[Learn more about filling out the FAFSA.]
A: Mistakes on financial aid forms can cost you money.
Susie Watts, college consultant, College Direction Financial aid is available on a first-come-first-served basis. Making mistakes will delay the FAFSA form and could cause you to lose out. Here are some tips to keep in mind:
• When it refers to "you," it is referring to the student.
• Don't leave an income question blank—put in a zero instead.
• Most students under the age of 24 are still dependent.
• Avoid writing wrong social security and driver's license numbers.
• Remember to sign and date the form.
• Don't list your adjusted gross income as equal to total income.
• Remember to list colleges.
See all of Susie's expert admissions advice.
[Follow seven tips to avoid FAFSA errors.]
A: Don't wait—estimate.
Betsy Morgan, founder, College Matters LLC By far, the most common misconception about filing for financial aid is that one needs to file taxes before applying. Instead, families should gather up their financial data (pay stubs, bank receipts, etc.) and estimate.
On both the FAFSA and the CSS PROFILE, there is an option to indicate that while you intend to file taxes, you have not yet done so. This lets the colleges know that you are estimating. Try to get as close as you can to the real numbers, however, or your estimated award will not be accurate.
See all of Betsy's expert admissions advice.
A: Keep track of your FAFSA pin; you'll need it later!
Jim McCorkell, CEO, adMISSION POSSIBLE ® As simple as it may sound, students and parents should write down their FAFSA PIN and store it with the rest of their passwords where they won't forget it. Lots of students waste time trying to find or remember their PIN and ultimately have to reset it every year—and many parents have to do the same! This simple step can actually save a lot of time and help the application process go smoothly in future years.
See all of Jim's expert admissions advice.
[Explore the U.S. News paying for college guide.]
A: Complete the process accurately and on time.
Megan Dorsey, SAT prep & college advisor, College Prep LLC Every year students fail to receive aid due to application errors. A common error is failing to apply. Some families knowingly don't apply under the mistaken belief that they make too much to receive aid. Others fail to complete the application. Some universities require school-specific forms or the CSS PROFILE, while others don't.
Some students complete the application but submit incomplete or incorrect information, thus delaying the process. The final mistake is waiting too long to apply. Financial aid can be like going through a buffet—the people in the front of the line get their choice of the best offerings while those at the end may be left with table scraps. To ensure you receive the best possible offer, apply on time and make sure your application is complete and accurate.
6 Ways to Get Free Cash for College
States, colleges, and credit cards can add money to your college savings account
By Kim Clark
March 31, 2009 | 6:05 p.m. EDT
+ More
It sounds like just a new twist on the all-too common Nigerian scams or Madoff-style Wall Street bait-and-switch. But it's true: Some states, businesses, and colleges are really handing out free cash to help build up parents' college savings accounts.
There are a few catches, of course. Nobody should sign up for anything that sounds suspiciously good without doing a little homework. And most of the grants and rebates are comparatively modest: The typical family might reap a few hundred dollars. Few parents will get enough free cash to make up for the average 20-plus percent decline in 529 college savings plans over the past year. (Tax-protected education savings accounts are called 529s after the part of the Internal Revenue Service code that created them.)
Still, those who collect the grants when their children are young or who are diligent about maximizing rebates could generate several extra thousand dollars.
No wonder those handing out the grants say interest is booming. More than half a million people have signed up for at least one of the rebate or grant programs since the beginning of the year. "You may as well get free money," says Joseph Hurley, founder of savingforcollege.com, who says his credit card and shopping rebates have added thousands of dollars to his family's 529.
There are six sources of free cash for college savings:
States: In at least nine states
, government agencies or charities offer grants for college savings to local residents. Maine, for example, in 2009 started handing out $500 to babies born in the state for whom an adult opens a Maine 529. In states such as Arkansas, Colorado, Michigan, Minnesota, Rhode Island, and Utah, the matching grants go only to low- and middle-income families. Louisiana, New Jersey, and a few other states offer different kinds of grants or scholarship programs to encourage savers.
The catches: Each state has its own deadlines and red tape. Some require parents to fill out long forms early each year, for example. Utah's grants are so new and limited that only 19 families had qualified in the first three months of the program, which started January 1. And the Utah Educational Savings Plan, which awards the money, will stop accepting applications for the year on May 29.
Employers: In 2008, Unum started giving new parents grants of $700. The catches: Parents have to open a 529 savings account before the baby's first birthday, and the bonus is taxable.
Credit cards: Fidelity offers an American Express card that will rebate 2 percent
of all purchases to a Fidelity 529. Upromise just launched a Mastercard that will send rebate checks or funnel rebates to a Upromise 529 account or to reduce Sallie Mae educational loans. The new card will rebate at least 1 percent on all purchases, 10 percent on groceries at selected stores, and—if consumers choose—additional rebates on certain gasoline or restaurant purchases. Babymint, Futuretrust, and FreshmanFund offer credit cards that rebate at least 1 percent to any 529 account. The catches: Spenders who carry balances or pay bills late will most likely pay more in interest and fees than they will save for college. Travis Plunkett, spokesman for the Consumer Federation of America, notes that credit card companies are not charities; accordingly, they are probably making more money from their borrowers than they are giving back.
Websites: Babymint, Littlegrad, Futuretrust, Upromise, and other rebate websites will send cash back to shoppers who click through their sites to partner retailers. The catches: Some of the websites make you jump through a few hoops to collect your cash.
Colleges: Several hundred colleges are offering matching grants for parents who sock away college savings. A marketing company, Sage Scholars Inc.
, has persuaded 230 private colleges to guarantee "Tuition Rewards" scholarships to students from families who invest or shop with Sage's business partners. And 274 private college members of the prepaid Independent 529 plan give parents at least a half-percentage-point discount if they buy tuition for a youngster at today's cost. Dickinson College upped the discount ante last year, adding an extra 4 percent to its inflation discount. That means a family with a 10-year-old who puts about $29,000 in the plan today will have paid a year's tuition in 2017, even though a year's tuition in 2009 is nearly $40,000 and, at the current rate of inflation, will probably reach $60,000 in eight years.
The catches: Plenty. Both the Independent 529 and Sage Scholars networks of colleges are limited to a few hundred comparatively expensive private colleges. There's no guarantee members' children will apply to or be admitted to the member schools. Both programs require parents to sign up several years before they tap their money. And both cover only tuition, not room, board, books, or any other college-related expenses. Sage members build up Tuition Rewards only by investing or shopping with Sage partners, some of whom charge more for their products and services than competitors not affiliated with the firm. In addition, parents of students who don't attend a member school don't get a penny of the promised scholarships back. Sage rules allow colleges to count "rewards," which average about $1,700 a year, against scholarships they were going to give the student anyway, so students may not really get any extra money. If a student doesn't end up attending a member of the Independent 529 network, parents who withdraw their money can receive no more than 2 percent more than they contributed. (But they are also limited to 2 percent less than they contributed, which makes the prepaid plan comparatively attractive right now, when the stock market is weak.)
Relatives and friends: Freshmanfund.com
and Ugift offer electronic tools to make it easier to ask relatives and friends to donate to your college savings account in lieu of, say, a birthday or graduation gift. The catches: While Freshmanfund will funnel gifts to any 529, Ugift will work only with Upromise 529s. Some relatives and friends might find requests for donations to be, well, tacky. And, let's face it, you might not have many wealthy relatives. Ugift says that half of the birthday or other event donation requests result in total donations of no more than $100.