Introduction to Financial Aid

How much financial aid am I eligible to receive?
What financial aid do you offer?
What percentage of your students is awarded financial aid?
Do I qualify for financial aid?
How do I apply for financial aid?

These are only some of the frequently asked questions posed by students and parents of students to Admissions and Financial Aid professionals.

The term financial aid has become synonymous with higher education. To many students and their parents, receiving financial aid is as important as being accepted to the college of their choice.

While the term financial aid is known by all students and their parents, far too few actually understand the particulars.

Almost all financial aid falls under one of four categories: federal aid, state aid, institutional aid, and outside aid (financial aid that comes from sources outside of the college being attended by the student).

In this article, I will primarily be addressing federal aid and the federal aid application. State aid varies from one state to another by amount offered and how eligibility is determined. Institutional aid varies from one institution to another. Some institutions offer need-based institutional aid and/or merit-based institutional aid. Most aid offered by an institution is in the form of a grant; that is, it does not have to be repaid by a student. Lastly, outside aid (mostly in the form of grants, but can include loans – see next paragraph) comes from a wide array of individuals and organizations. The trick is finding out how to apply for these. At the end of this article, I will provide some websites where you can look for outside financial assistance.

How do I apply for financial aid?

All students apply for federal aid by completing a Free Application for Federal Student Aid (FAFSA). This is a six-page application that takes into account a family's size, number enrolled in college, income, and assets. Most high school guidance offices have copies of this form. The application is mailed to a branch of the Department of Education (or, the application can be completed online at http://www.fafsa.ed.gov).

Estimated Family Contribution

The student (and financial aid office(s) to where the student designated) receives a Student Aid Report (SAR). The financial aid office calls this an Institutional Student Information Record (ISIR). The SAR, or ISIR, contains a very important piece of information - the student's Estimated Family Contribution (EFC). It is this EFC that determines whether a student can receive federal aid and how much.

The student's EFC is derived from a formula. For a dependent student, the formula takes into account the parents' total income minus total allowances against income to arrive at available income, then adds a contribution from assets (net worth minus allowances, then a percentage of this). This is the parents' contribution. Then the formula takes into account the student's total income minus total allowances against income to arrive at available income (times an assessment rate of 50%), then adds a contribution from assets (net worth times an assessment rate of 20%). This is the student's contribution. The combined parents' and student's contribution equals the EFC.

Financial Need

The remaining federal aid (with the exception of the Federal Parent Loan for Undergraduate Students - PLUS) is determined by taking the total cost of attendance at an institution, then subtracting the student's EFC. The remaining value is the student's financial need. For example, if the total cost of attendance at University XYZ is $40,000 and a student's EFC is $4,000, the student's financial need at University XYZ is $36,000. To be eligible for any financial aid, a student must have financial need up to the total amount of this aid.

Pell and FSEOG

Directly related to the actual numeric EFC are the Federal Pell Grant and Federal Supplemental Educational Opportunity Grant (FSEOG). If a student's EFC is 0, the student qualifies for the maximum Federal Pell Grant of $5,550 for the 2012-2013 award year. As the EFC increases, the Federal Pell Grant decreases. Only if a student is eligible to receive a Federal Pell Grant is that same student eligible to receive an FSEOG. An institution may award up to a $4,000 FSEOG to a student who qualifies for a Federal Pell Grant. To every institution that awards Federal Pell Grants, the federal government allots a certain amount of money in the form of an FSEOG. This amount can vary from one institution to another. Therefore, what one institution may award to a given student in an FSEOG, that same student may receive a different amount from another institution.

TEACH Grants

The Teacher Education Assistance for College and Higher Education (TEACH) Grant Program provides up to $4,000 annual grants to students who plan to become teachers. Candidates must agree to serve as full-time teachers at certain schools and within certain high-need fields for at least four academic years within eight years of completing the course of study for which a grant was received.

Federal Perkins Loan

Regarding the Federal Perkins loan, the maximum amount an undergraduate can receive in an award year is $5,500. Like the FSEOG, the federal government allots a certain amount of money in the form of a Federal Perkins loan to every institution that awards this. This amount can vary from one institution to another. Therefore, what one institution may award to a given student in a Federal Perkins loan, that same student may receive a different amount from another institution.

Federal Work-Study

Regarding Federal Work-Study, the amount varies. There are no specific award limits for FWS earnings, other than the requirement that the amount of the FWS award not exceed the Student's financial need. In order to receive any of this money, a student must work to earn it. The student receives an hourly wage per hour worked. Therefore, the amount of Federal Work-Study that appears on a student's financial aid package may not be the amount a student ultimately receives. Federal Direct Subsidized Loan

A first-year dependent undergraduate student is eligible to receive up to a $3,500 combined Federal Direct Subsidized and/or Unsubsidized loan, plus a $2,000 additional Unsubsidized loan.

A second-year dependent undergraduate student is eligible to receive up to a $4,500 combined Federal Direct Subsidized and/or Unsubsidized loan, plus a $2,000 additional Unsubsidized loan.

A third-, fourth-, or fifth-year dependent undergraduate student is eligible to receive up to a $5,500 combined Federal Direct Subsidized and/or Unsubsidized loan, plus a $2,000 additional Unsubsidized loan.

Federal Direct Unsubsidized Loan

The Federal Direct Unsubsidized loan is only available to an independent undergraduate student, or a dependent undergraduate student, whose parents have applied for, but were unable to borrower, a Federal Direct PLUS loan.

A first-year independent undergraduate student is eligible to receive up to a $3,500 combined Federal Direct Subsidized and/or Unsubsidized loan, plus a $6,000 additional Unsubsidized loan.

A second-year independent undergraduate student is eligible to receive up to a $4,500 combined Federal Direct Subsidized and/or Unsubsidized loan, plus a $6,000 additional Unsubsidized loan.

A third-, fourth-, or fifth-year independent undergraduate student is eligible to receive up to a $5,500 combined Federal Direct Subsidized and/or Unsubsidized loan, plus a $7,000 additional Unsubsidized loan.

Federal Direct PLUS Loan

The Federal Direct PLUS loan is usually the last federal aid program to be considered. It is a federal loan borrowed by a parent for their son or daughter who is a dependent undergraduate student. The amount a parent is eligible to borrow is determined by taking the cost of attendance minus other financial aid received.

Private Student Loans

After receiving your financial aid package, you may discover you still have significant unmet expenses you need to cover to pay for your education.

Private student loans may be a good option to help you fill the gap between what federal, state and school assistance provides and what you actually need in order to afford higher education. Private loans (sometimes called alternative student loans) are credit-based consumer loans to be used specifically for paying educational expenses.

Private loans, like auto or home loans, are based on your creditworthiness. Most students will need a creditworthy co-signer, such as a parent or other relative, in order to obtain a private loan. Terms and conditions applicable to these loans vary greatly.

Factors such as interest rate, Annual Percentage Rate (APR), length of repayment, loan minimum and maximum as well as fees should be carefully considered when researching and choosing a private loan.

If I save money, won't the federal government penalize me?

Most parents' assets are not a factor in determining a dependent student's EFC. Within the federal formula, an allowance called the Asset Protection Allowance is factored into the equation to offset the parents' net worth of their assets. For example, in a two-parent household, if the age of the older parent were 50, the parents' total assets would have to exceed $46,600 to count toward the EFC for the 2012-2013 award year. By assets, I am referring to cash and bank account(s), net worth of investments, and net worth of a business. In the formula, assets do not include home equity. If the parents do have discretionary net worth (net worth minus the asset protection allowance), only twelve percent of that amount is counted toward the EFC. For a dependent student, twenty percent of assets is counted toward the EFC.

If the parents participate in a qualified retirement plan {401(k) or 403(b)}, the amount that is contributed for the calendar year is considered untaxed income and must be reported as such. However, the accumulated amount does not have to be reported. For example, for the 2012-2013 award year, if the parents contributed $17,000 in the 2012 calendar year to a qualified retirement plan that has an accumulated total of $500,000, the parents must report on the FAFSA the amount of $17,000 as untaxed income. The $500,000 is not reported.

Regarding the parents' and student's income, several allowances are taken into account to offset the total income. These include: income tax paid, state tax allowance, fica tax, income protection allowance, and employment expense allowance (parents only).

Coverdell Education Savings Accounts, 529 College Savings Plans, and the refund value of 529 Prepaid Tuition Plans count as assets and must be reported.

What if my financial circumstances are unusual?

The FAFSA only takes into account certain financial information, but does not tell the entire story. Some institutions require students to complete the CSS/Financial Aid PROFILE® application from The College Board. This application asks additional questions, such as home equity, the FAFSA does not ask. Should you be in a position where you are unable to communicate your special circumstances, such as the present loss of a job by a parent, put this information in writing to the financial aid administrator at the college(s) to where you are applying. The financial aid administrator has the authority to make a professional judgement and override certain information reported on the FAFSA. This can result in your EFC being lowered. Sometimes the lowering of your EFC can result in additional financial aid, and other times it does not. There are no hard and fast rules concerning professional judgement. It is up to the discretion of the financial aid administrator regarding whether action will take place and to what degree. In fact, you may encounter one financial aid administrator from one institution who will make a professional judgement, while another financial aid administrator from another institution who does not.

Outside Aid

For some students regardless of whether they qualify for a little or a lot of financial aid, outside scholarships can make the difference regarding whether they can enroll in the college of their choice. The internet can be a great resource to look for outside assistance. You can start with the following:









Additional Information

To learn more about the EFC, financial need, federal and other aid programs, contact a financial aid office. Other financial aid-related websites include:










Brian P. Madden
Senior Test Engineer, Business Technology
The College Board