A Simple Breakdown of Financial Aid

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The big question: How do we figure out financial aid?

The calculation seems simple—the cost of college, minus the family’s ability to pay, equals a student’s financial need. But the financial aid process can be anything but straightforward. Here’s how to decipher the Free Application for Student Aid (FAFSA) and other options.

Calculate the cost. To find the school’s tuition and estimated living expenses, put the school’s name into CNN Money’s calculator, or search “[school name] cost of attendance” or “[school name] net price calculator.” If you’re planning years ahead, use The New York Times’ calculator for an estimate that accounts for future inflation.

Calculate your family’s ability to pay. In FAFSA terms, it’s called your Estimated Family Contribution (EFC), which is calculated with a formula that includes the family’s taxed and untaxed income, assets, benefits (such as Social Security), and family size. Keep in mind, the EFC doesn’t reflect your family’s actual ability to pay; it’s simply what the formula says you should be able to pay. And don’t expect it to be forgiving; analysis by the New York Times showed that many schools expect families to pay 20 percent of a $60,000 income and students to pay 20 percent of their assets. What’s more, colleges are free to adopt their own proprietary formulas for defining a family’s ability to pay.

Submit the FAFSA. Complete the application at fafsa.ed.gov. Younger high schoolers can use the FAFSA4caster. You can submit a FAFSA application between January 1 and June 30 each year, but it’s best to apply earlier, as some programs have limited funds.

Calculate the (real) cost of loans. Many students and parents don’t understand that when a school refers to “aid” or “awards” it often means loans—not scholarships. And it can be hard for a teen, who’s never had experience with a full-time salary or mortgage payments, to wrap their head around loans ranging from $5,000 to $100,000. That’s where the Repayment Estimator comes in—it shows what future monthly payments will look like for various loan amounts and types. Laura Shin, author of The Millennial Game Plan: Career and Money Secrets to Succeed in Today’s World, recommends not taking on loans that exceed your expected first-year salary.

Be cautious about parent loans. Cosigning, which makes you liable for the debt if your child fails to pay, is required for most private student loans. (In contrast, federal loans don’t require a cosigner, and offer other advantages over private loans—federal loans have typically lower rates that are fixed rather than variable, and offer a short grace period after graduation and forgiveness in some situations.) Also avoid taking on a Parent PLUS loan, which doesn’t qualify for the income-based repayment and forgiveness options that are granted to student borrowers. Your kids have plenty of ways to get help paying for school—but you can’t get a loan for retirement.

Reduce financial need. Seeing the impending cost of tuition and student loans may motivate students to find ways to lessen their financial need now. They could complete credits at a community college, choose a school that offers a better financial aid package, apply to several private scholarships each year, work part time while school is in session and full time during breaks, and of course, stick to a budget. The best student loan is the one you don’t need.

Read “The Ultimate College-Skills Crash Course” in the Summer 2016 issue of Marriott Alumni Magazine to learn more about helping your to-be freshman ace college life.

—Holly Munson