What You Need to Know about
Financial Aid
Who am I? Just
a parent with two kids in college, astonished at how badly the ins and outs
of financial aid are usually explained to the shell-shocked parent. Read
this carefully. You¡¯ll be depressed, but it¡¯ll all make a lot more sense.
¡¡è
If you
live in a nice town and earn enough to own a nice house, you don¡¯t qualify
for much financial aid. That giant annual cost you read about, especially
for private or out-of-state colleges? You¡¯ll have to pay most of it. Manage
your child¡¯s expectations accordingly. Don¡¯t promise a Mercedes when you
have a budget for a used Honda.
¡¡è
The
amount you¡¯re expected to pay is called the ¡¡ãExpected Family
Contribution¡¡À(EFC). It is based on a formula that relies mainly on the
family¡¯s income and number of children in college. For most of us, the EFC
is a number large enough to stop our heart and make us say ¡¡ãhow the hell am
I supposed to pay that?
¡¡è
If your
EFC is ten grand, in theory it will cost you as little as ten grand to send
your child to either UMass ($18k) or NYU ($53k), but in practice it¡¯s far
from that simple. And I guarantee you that if you live in Newton and own
your house, your EFC is not ten grand ¡§C it¡¯s three or four times that.
(It¡¯ll be halved when you have two in college, but don¡¯t cheer ¡§C remember
that you¡¯ll have twice the bills.)
¡¡è
The
difference between your EFC and a college¡¯s cost of attendance is your
¡¡ãFinancial Need.¡¡À This is a formal term. Again, most of us will have
difficulty simply coming up with the money for the EFC. But that¡¯s not
technically ¡¡ãFinancial Need¡¡À ¡§C it¡¯s just life. If you learn only one thing,
learn this: The
purpose of ¡¡ãFinancial Aid¡¡À is to address ¡¡ãFinancial Need.¡¡À It does not
address the daunting issue of how you come up with the money to meet the
EFC.
¡¡è
¡¡ãFinancial Aid¡¡À means grants,
scholarships, loans, and work study. When a college sends your child an aid
letter, it will list how much of each of these they¡¯re offering. It is the
grants and scholarships that are of paramount importance, as they are the
true discounts off the cost. The loans, like any other loans, need to be
paid back.
¡¡è
If the
financial aid does not equal the financial need, it is said that you have
¡¡ãunmet need¡¡À (colloquially referred to as the college having ¡¡ãgapped you¡¡À).
To use the example above, if your EFC is ten grand, in theory it will cost
you as little as ten grand to send your child to either UMass ($18k) or NYU
($53k), if they meet 100% of your financial need.
¡¡è
You can
now see that the phrase ¡¡ãcan¡¯t afford college¡¡À translates slightly
differently depending on your income. If your family is relatively well
off, it means ¡¡ãour EFC is really high ¡§C we qualify for very little
financial aid.¡¡À If you¡¯re a low income family, it may mean ¡¡ãour EFC is low,
but number one I don¡¯t have ten grand, and number two they¡¯ve gapped
my child.¡¡À
¡¡è
Every
student, no matter how high their parents¡¯ income, and no matter what
school they apply to, will qualify for federally-subsidized Stafford loans
if they fill out the FAFSA form, but these loans are small ($19,000 over 4
years). The fact that they¡¯re listed on an award letter as part of
Financial Aid does nothing to distinguish one college¡¯s offer from another.
Even though it¡¯s not much, your child should take the Stafford loan ¡§C it
has better terms than most other loan instruments (payments and interest
are deferred until after graduation).
¡¡è
When an
award letter lists some other parent or student loan on top of the Stafford
loan, they are misleading you. It¡¯s like a car dealer subtracting the
loaned amount from the car¡¯s cost. To get the real number, take the
college¡¯s cost, subtract any grants and scholarships, subtract any work
study, and subtract the child¡¯s Stafford loan. What¡¯s left is the amount
that will be on the actual bill you will receive. This is the amount that
you, the parent, will have to pay. It will most likely be higher than the
EFC, which was already high enough to give you a nosebleed.
¡¡è
Although
the ¡¡ãexpected family contribution¡¡À doesn¡¯t come with advice on how you are
expected to pay it, in fact the expectation is that the family will be able
to come up with the EFC through a combination of past money (savings),
current money (cash flow), and future money (loans). Add in any ¡¡ãunmet
need¡¡À and it becomes even worse. So when you get the bill, the EFC and
¡¡ãunmet need¡¡À numbers become academic, and what matters is THE REAL GAP
between that bill and what you have in savings, supplemented by cash flow.
Most families will need to borrow to fill THE REAL GAP.
¡¡è
Most
big purchases (house, car, etc) are selected on the basis of determining an
affordable monthly payment, but it is extremely difficult to get to this
number with college. The actual costs often aren¡¯t published by colleges
until summer. And the amount that the parents can contribute from savings
and cash flow isn¡¯t trivial to determine. But it is only through making
gross assumptions of all of these things (college cost, aid, number of kids
in college, rate of depletion of savings, and the amount that can be
afforded from cash flow) that THE REAL GAP ¡§C the amount the family (likely
the parent) will actually have to borrow ¡§C can be estimated.
¡¡è
When you see the size of
this number, you can estimate your monthly payments for a ten-year loan
(the term of most college loans). It is nearly the size of a mortgage. And
now you finally understand the problem ¡§C ¡¡ãfuture money¡¡À (loans) rapidly
turns into an amount of current money (cash flow) that you can¡¯t afford,
any more than you could afford to lease a Ferrari. To get the monthly
payment down lower, you can take that time-honored path of stretching out
the term of the loan, but now you¡¯re talking about a home equity loan. BE
CAREFUL! Do you want to be paying off your house into your retirement?
Scared yet?
