Financial Aid 101

Tax & Money Tip of the Week: 
Financial Aid 101
April 27, 2011 | No. 40

Many parents pay for college with a combination of savings and financial aid.  Here are some of the basics.

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 broken down into two categories, need-based and merit-based.  Need-based awards are given based upon financial need.   Merit-based awards are granted according to your child’s academic, athletic, musical, or artistic merit.

How is financial need determined?
The federal government’s aid application, the FAFSA, uses a formula known as the federal methodology.  Generally speaking, the 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.

Colleges have their own way of determining financial aid, but basically the process works the same as with the federal government with some exceptions.

How do I apply and when?
The FAFSA can be filed manually, but the better option is to complete and file it online at  The online version flags suspected mistakes immediately and takes only one week to process compared to four to six weeks for paper FAFSAs.

The FAFSA can be filed beginning January 1st in the year that your child will be attending college through June 30th.  Timely submission of the FAFSA is important because some financial aid programs operate on a first come, first-served basis.

If you should have any questions, please don’t hesitate to give us a call.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®

…until next week.

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