Financial Aid

Question: I’m really having a hard time understanding my financial aid papers. I noticed on my budget worksheet that certain amounts are calculated for room and board (I live off campus), personal expenses, dependent care, and transportation. How is this supposed to benefit me, and was it necessary to calculate this in my budget?

When a college prepares a budget sheet such as the one you describe, what they are really doing is showing you the figures on which they have based the amount of aid they are awarding you.

Typically, the aid that colleges give out to cover non-tuition expenses (such as your room and board, dependent care, transportation, etc) comes in the form of loans that must be repaid. Look over the itemized estimates on your budget sheet. Do you think the numbers are fairly accurate? If you feel that they are high, that could mean that you will require less loan than the college expects you to take out, so that could be good news for you.

If, however, you find the numbers are low in one or more areas, then you should contact the financial aid office at your college as soon as possible and explain your reasoning. Hopefully, they will adjust your aid to reflect the new figures you present, but you have to be prepared for the possibility that they will question them. For example, if the figures you cite for rent, childcare, etc. exceed the norms in your area, the college may be hesitant to up your aid to cover them (not necessarily—just want you to be ready to do battle, if need be!).

Thus, the budget worksheet “benefits” you to the extent that it enables you to see the estimates that the financial aid folks used when they calculated your aid package. Sometimes such budget sheets can be helpful to students, too, because they provide a sense of typical costs in the categories listed. If the amounts you are paying are much greater, it could mean that the college miscalculated, but it could also mean you’re getting a bum deal somewhere along the way and might want to check out better options.

Best wishes to you as you wade through the financial aid quagmire. It can sometimes seem like an education in itself, can’t it?

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Question: My husband and I are 54 and 53 respectively and want to increase our contributions to our TSP 401(K) plan and Roth IRAs. Our daughter, who is applying for September 2003 college admission, is also applying for financial aid. Is it wise to increase contributions to our retirement accounts this year? What are the pros and cons of doing this?

This response to your very good question begins with a giant disclaimer. It is difficult to give accurate, specific financial suggestions without knowing a lot more about your family’s situation and the colleges on your daughter’s list. Only a bona fide financial advisor who is privy to your personal information can give you advice that will help you make the best decisions. Moreover, college financial aid methodologies do vary from institution to institution. In other words, this free advice comes with a you’re-getting-what-you’re-paying-for caveat!

Now, having said all that, here are some thoughts: the down side of putting money into your 401K (we’ll get to the Roth in a minute) is that whatever money you are deferring goes into the financial aid formula as “untaxed income.” This could mean that your daughter will receive less aid than if the same amount was counted as taxed income. (One way or another, it still counts as your income. It’s not being “hidden” from the financial aid guys.) The other drawback to putting money into the 401K is that you will have less cash available to handle your expected family contribution to college costs.

On the plus side however, is that if you are at your peak incomes right now (maybe likely given your age group?), then you will be getting the top tax savings on retirement deferrals.

College financial aid officers rarely sympathize with parents who object to counting retirement deferrals as “income.” The good news, however is that most colleges do not count the accumulated retirement assets already in place in any financial need formula—just the income you’re putting in there now.

The main thing to understand is that money you are deferring in the years you are applying for aid is not hidden from the financial aid formula. In fact, it is counted heavily since it is not offset by taxes.

Roth IRAs are different because they are for education. Those amounts in a given year are not usually counted as income but as an asset. That is an advantage because assets don’t go to the bottom line the way income does. So the Roth deferrals will not reduce your eligibility for need-based aid (or the amount you will probably receive) as much as the 401K deferrals. Additionally, the Roth monies can be used to pay for education without incurring withdrawal penalties, as is the case with the 401K.

Again, your best bet is to talk to a financial advisor, but hopefully this will give you some sense of how this confounding process works.

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Question: Is it better to get an A in an easier course, or risk getting a lower grade in an advanced course? I’ve got a 4.0 now, and I’m interested in schools like Columbia and Yale. There are some math and science courses at my high school that I can probably get through but I’m not sure I can ace them.

Read the rest of this entry &raquo

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Question: Can you explain the different kinds of scholarships that are available?

This is an area of great confusion for both parents and students. The two key words to keep in mind when thinking about scholarships are merit and need.

Merit-based scholarships go to students who are superb academic performers. They are usually awarded on a competitively. Examples of these are the National Merit Scholarships. Competition can be very keen for some larger merit-based awards and because of the subjective evaluation process, the best-qualified candidate does not always win.

Need-based scholarships go to students whose financial resources do not enable them to afford the full cost of the college or university to which they’ve been accepted. These scholarships are available at many schools and can be quite large depending on the financial-aid resources of the particular college. Need-based scholarships are sometimes the only way that students can afford to attend costly schools.

There is another, more elusive category of college scholarships. I call these restrictive specialty scholarships. Most colleges have a special group of awards (usually provided by graduates of the school) that bestows money upon enrolling first year students according to unique considerations. For example, church-affiliated colleges may have some specially endowed scholarships for young men and women who are members of that denomination. Other specialty awards might go to students from certain geographic areas. The variety of requirements and restrictions can be wide.

To find out what scholarships you, as a high-school senior, might qualify for, check with your college advisor. Sometimes one general application will suffice to apply for the full range of merit/need-based scholarships your school and community offer. Many private scholarships are advertised in the local newspaper every year, so be alert to their listings. And–as always–turn to your public library or the Web for current books and listings of other scholarship sources.

Start early and look diligently. Finding scholarship money for college takes time.

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Question: Our family’s income is in the $20-30,000 range. We have two teenagers who will be ready for college soon. We live from paycheck to paycheck. How can we possibly afford a four-year, private college education?

Welcome to the club. Your situation is typical of thousands of American families. The problem is the lack of quality financial aid information and families’ reluctance or inability to dig out that information.

What you may not realize is that families looking to find a good, private four-year college or university have two things going for them. First, there is a tremendous pool from which to choose and, second, it’s a buyer’s market. Depending on your selection requirements, there are probably six-to-ten (or more) excellent schools you could consider as candidates. Don’t let cost alone be your decision point.

My personal advice to parents about financial aid has always been, “Send your son or daughter to the best and most expensive school he or she can get into.” This generally causes great concern for parents, especially the “most expensive school” part. There’s some logic to this argument, though.

In general, schools that have higher costs have better financial aid programs. The word to keep in mind is “endowment.” College endowments contain the money received from loyal alumni every year during the campaign known as Annual Giving. This pool of funds is then invested as carefully as possible to get the largest return on investment. Interest generated from the endowment is then used, in part, as a source of financial aid for needy students. Obviously, this is a simple explanation of a complex process.

The best situation is to have your son or daughter accepted to a school that maintains a policy of meeting your family’s full demonstrated financial need. More about that later. Right now, the best thing you can do is get as much information as possible. If you have access to the Internet, you’ll find much helpful data there.

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Question: How can I know if a college is offering me a good financial aid package?

Along with those welcome letters of college acceptance come the financial aid packages. Some can be impressive; others are disappointing.

In previous columns here, we’ve talked about the term “meeting your full demonstrated need.” That means a college or university comes up with a financial aid package that supplies you with the full difference between your Expected Family Contribution (EFC) and the full student budget for the current school year.

The EFC is calculated by the College Scholarship Service (CSS) in Princeton, New Jersey. Every family with an aspiring college student is required to fill out a form called the CSS Profile. The Profile provides details of the family’s financial resources. The form’s information is processed by the CSS and an EFC is generated and reported to all the schools to which the student is applying. The financial aid offices of those schools then undertake to prepare a package of scholarships, loans, and jobs that covers most–if not all–of your demonstrated need.

When you receive your package, take note of what percentage is loans versus the percentage of grants and scholarships. Grants and scholarships don’t have to be repaid; loans do. A general rule of thumb is that the higher-priced, selective, liberal-arts colleges and universities tend to give a higher percentage of scholarships and grants. Public institutions general supply less financial aid because they are being supported, in part by tax dollars and are subject to state funding ups and (mostly) downs.

If you have been accepted by both a public university and a private college or university, check the bottom line carefully. It is entirely possible that you may be able to go to a private school costing twice as much (or more) for about the same, or even less, money. It sounds illogical, but it happens every year. That’s the difference among financial aid packages.

Most importantly, don’t be afraid to call the respective financial aid offices at the schools to which you’ve been admitted. They’ll be happy to explain what their packages mean.

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