PTM Wealth Management, LLC
Paul T. Murray, ChFC, CDFA
350 North Main Street
Chalfont, PA 18914
Financial Aid 101
January 30, 2014
Many parents pay for college with a combination of
savings and financial aid. By learning the basics,
you'll be able to understand how the financial aid
process works, properly fill out aid applications, and
compare the aid awards your child receives.
What is financial aid?
Financial aid is money distributed primarily by the
federal government and colleges in the form of
student loans, grants, scholarships, and work-study
jobs. Loans and work-study must be repaid (through
monetary or work obligations), while grants and
scholarships do not. A student can receive both
federal and college aid.
Financial aid can be further broken down into two
categories: need-based, which is dependent on your
child's financial need, and merit-based, which is
awarded according to your child's academic, athletic,
musical, or artistic merit. Most financial aid is
How is financial need determined?
The federal government's aid application, the FAFSA,
uses a formula known as the federal methodology. A
detailed analysis of the formula is beyond the scope
of this discussion, but generally speaking, parent and
child income and assets are tallied and assessed at
certain rates. There are certain deductions and
allowances against income, and certain assets are
excluded from consideration, specifically, home
equity, retirement plans, annuities, and cash value life
insurance. The result is a figure known as your
expected family contribution, or EFC. This is the
amount of money you must contribute to college costs
to be eligible for aid. Your EFC remains constant, no
matter which college your child applies to.
Your EFC is not the same as your child's financial
need. To calculate financial need, subtract your EFC
from the cost at a given college. Because tuition,
fees, and room-and-board expenses are different at
each college, your child's financial need will vary
depending on the cost of a particular college.
Example: You fill out the FAFSA and your EFC is
calculated at $5,000. College A costs $20,000 per
year and College B costs $40,000 per year. Your
child's financial need at College A is $15,000 and
$35,000 at College B.
Colleges have their own way of determining financial
aid. Basically, the process works the same way as
with the federal government, except that the
institutional methodology embodied in the standard
college PROFILE application typically takes a more
in-depth look at your income and assets to determine
how "needy" your child really is. For example,
colleges often consider your home equity and
retirement accounts in assessing your ability to pay
Tip: Just because your child has financial need
doesn't necessarily mean that colleges will meet
100% of that need. In fact, it's not uncommon for
colleges to meet only a portion of that need, a
phenomenon known as getting "gapped." If this
happens to you, you'll have to make up the shortfall,
in addition to paying your EFC. College guidebooks
compare how well colleges meet their students'
financial need under the entry "average percentage of
need met" or something similar.
How do I apply and when?
The FAFSA can be completed manually and mailed
to the regional processor listed on the form, but the
better option is to complete and file it online at
www.fafsa.ed.gov. The online version flags suspected
mistakes immediately and takes only one week to
process (compared to two to four weeks for paper
The FAFSA relies on information from your previous
year's tax return, so it can't be filed before January 1
in the year that your child will be attending college
(the official federal deadline for filing the FAFSA is
June 30, but many colleges have an earlier deadline).
Parents should try to submit the FAFSA as close to
January 1 as possible because some financial aid
programs operate on a first-come, first-served basis.
What counts the most?
Your current income is the
most important factor in
determining need, but other
factors play a role, such as
your total assets, how many
family members are in
college at the same time,
and how close you are to
Page 1 of 2, see disclaimer on final page
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any
individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance
referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult
with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
Even if you haven't completed your federal income
tax return, Uncle Sam lets you base your FAFSA
answers on an estimated return, though you will have
to provide a copy of your final income tax return later.
After your FAFSA is processed, your child will receive
a Student Aid Report either in the mail or
electronically (depending on how the FAFSA was
filed), which highlights your EFC. Colleges that you
list on the FAFSA will also get a copy of the report. In
addition, you will need to submit the institutional
PROFILE form to colleges that require it by the stated
deadline (this form is typically submitted electronically
as well). Then, the financial aid administrator at each
school will try to craft an aid package to meet your
child's financial need.
Comparing aid awards
Sometime in early spring, your child will receive
financial aid award letters that detail the specific
amount and type of financial aid that each college is
offering. When comparing awards, first check to see if
each college is meeting all of your child's financial
need. Then, look at the loan component of each
award and compare actual out-of-pocket costs.
Remember, grants and scholarships don't have to be
repaid and so don't count toward out-of-pocket costs.
If you'd like to lobby a particular school for more aid,
tread carefully. A polite letter to the financial aid
administrator followed up by a telephone call is
appropriate. Your chances for getting more aid are
best if you can document a change in circumstances
that affects your ability to pay, such as a recent job
loss, unusually high medical bills, or some other
unforeseen event. Also, your chances improve if your
child has been offered more aid from a direct
competitor college, because colleges generally don't
like to lose a prospective student to a direct
competitor. Remember, the fewer loans, the better.
Common federal aid programs
Here are some names you'll be hearing as you
navigate the world of financial aid:
• Stafford Loan--The most common federal student
loan for college and graduate students. Interest
may be subsidized (paid by the government during
school, the grace period and deferment periods) or
unsubsidized. For undergraduate students, the
interest rate is fixed at 3.8% for both subsidized
and unsubsidized loans disbursed July 1, 2013
through June 30, 2014.
• Perkins Loan--A federal student loan for college
and graduate students with the greatest financial
need. The interest rate is fixed at 5%.
• PLUS Loan--A federal education loan for parents
of college students and independent graduate
students available through financial institutions. A
separate application is required, though filing the
FAFSA first is a prerequisite. Parents can borrow
the full cost of their child's education, minus any
financial aid received; the only criteria is a good
credit history. The interest rate is fixed at 6.4% for
loans disbursed July 1, 2013 through June 30,
• Pell Grant--The Pell Grant is available to
undergraduates with exceptional financial need.
A word about merit aid
In recent years, merit aid has been making a
comeback as colleges use favorable merit aid
packages to attract certain students to their
campuses, regardless of their financial need.
However, the availability of college-sponsored merit
aid tends to fluctuate from year to year as colleges
decide how much of their endowments to spend, as
well as which specific academic and extracurricular
programs they want to target.
Besides colleges, a wide variety of groups offer merit
scholarships to students meeting certain criteria.
There are several websites where your child can input
his or her background, abilities, and interests and
receive (free of charge) a matching list of potential
How much should you rely on
With all this talk of financial aid, it's easy to assume
that it will do most of the heavy lifting when it comes
time to paying the college bills. But the reality is you
shouldn't rely too heavily on financial aid. Although
aid can certainly help cover your child's college costs,
student loans often make up the largest percentage of
the typical aid package, not grants and scholarships.
As a general rule of thumb, plan on student loans
covering up to 50% of college expenses, grants and
scholarships covering up to 15%, and work-study jobs
covering a variable amount. But remember, parents
and students who rely mainly on loans to finance
college can end up with a considerable debt burden.
How much should you
rely on financial aid?
Although financial aid can
certainly help cover your
child's college costs,
student loans often make
up the largest percentage of
the typical aid package, not
grants and scholarships.
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