Bulletins

Financial Aid-The Basics

by Daniel A. Kosmatka, CPA, PFS, CFF, CGMA

Dear clients and friends,

College financial aid is money provided by colleges, governments, organizations, and businesses to help students pay college expenses. This money is characterized as either self-help aid or gift aid. It is awarded based on either need or merit.

Self-help aid must be repaid through financial obligation (loans) or service to the college (work-study). These offers are awarded primarily on the basis of need. Gift aid is financial aid that does not require repayment or work (i.e., grants and scholarships). It may be awarded based on either merit or need. Obviously, gift aid is the most desirable form of financial aid.

Merit-based aid is awarded to a student with a special talent (e.g., academic, musical, athletic, etc.). Students who have a high GPA, a high class rank, and excellent standardized test scores can earn substantial merit scholarships that can cover a significant amount of college costs. Heavy involvement in activities that colleges are most interested in (athletics, leadership, journalism, music, etc .) will help earn even more scholarship dollars.

The better college financial aid awards usually are given to students with merit. The student's unique skills and abilities and the college's interest will determine the amount of merit-based aid that will be offered. Need-based financial aid is awarded solely on the financial needs of the family. Practitioners can play a major role in determining the amount of need-based aid the student may be eligible to receive. Effective strategies can have a significant impact on financial aid eligibility.

Much financial aid awarded comes from the federal government. Federal student aid is available to students enrolled in an eligible program at a school participating in the federal student aid programs. An eligible program is a course of study that leads to a degree or certificate and meets the U.S. Department of Education's requirements. Eligible schools include four-year or two-year public or private educational institutions, career schools, or trade schools.

Aid covers school expenses, including tuition and fees, room and board, books and supplies, transportation, and some personal expenses. Once need has been established, eligible students may be offered some combination of the following types of federal student aid by their college of choice:

a. Work-study. The Federal Work-Study Program encourages community service and work related to each student's course of study. Students earn at least the current federal minimum wage, but the amount might be higher depending on the type of work and the skills required.

b. Loans. The federal government offers two primary loan programs that may be part of a college's financial aid offer to an eligible student: Perkins loans and Stafford loans. These loans are desirable because they offer low-interest rates and generous repayment terms.

c. Grants. The federal government offers several grant programs for certain low-income students or students in certain fields of study (such as the TEACH grant). After submitting the financial aid application, the student will receive a Student Aid Report that indicates the amount of money the family (student and parents) is expected to contribute to the student's college expenses for the upcoming school year. This is called the Expected Family Contribution (EFC). All colleges will use this number as the basis for awarding their need-based financial aid.

Receiving a Financial Aid Award

Families will receive college financial aid awards that will state the amount and type of financial aid offered. Students may accept, decline, or negotiate any part of an aid award. The college should not be allowed to pressure students into accepting an aid award before they have time to receive and compare awards from other colleges. Students should request an extension to reply if they have not received all aid awards. When a particular college will not grant an extension, students can accept the aid award to safeguard the award at that college. The acceptance does not commit the student to attending the college; it merely holds the aid award for the student.

Example: Comparing financial aid awards.

Jason has been accepted to four colleges. Financial aid awards he received for each of those colleges are as follows:

Allen

Bard

Cole

Dude

College

College

College

College

Cost of Attendance

$ 20,000

$ 20,000

$ 25,000

$ 30,000

(COA) Resources

(0)

(0)

(0)

(0)

EFC

(5,000)

(5,000)

(5,000)

(5,000)

Financial Need

$ 15,000

$ 15,000

$ 20,000

$ 25,000

Financial Aid Award:

Grants

$ 5,000

$ 6,000

$ 10,500

$ 12,500

Work-study

0

1,000

1,500

1,500

Loans

10,000

7,000

7,000

8,000

Total Financial Aid Award

$ 15,000

$ 14,000

$ -12,000

$ 22,000

Out-of-pocket Cost (COA

less Total Award)

$ 5,000

$ 6,000

$ 6,000

$ 8,000

True Cost to Family (COA less Grants)

$ 15,000

$ 14,000

$ 14,500

$ 11,500

Although the $22,000 total financial aid award from Dude College is substantially more than the $14,000 total financial aid award from Bard College, attending Dude College will result in the family having higher out-of-pocket costs ($8,000 for Dude college versus $6,000 for Bard College), as well as a higher true cost ($17,500 for Dude college versus $14,000 for Bard College). This is because the true cost to the family is the Cost of Attendance (COA) minus the grant (gift) aid. The loans and work-study I funds, although considered financial aid, are out-of-pocket costs. These out-of-pocket costs are then added to the EFC to determine the true (total) out-of-pocket costs. Grant (gift) aid is the best measure of the financial quality of an award because it does not have to be paid back or earned.

Very truly yours,

Daniel A. Kosmatka, CPA, PFS, CFF, CGMA
Dennis W. Donnelly, CPA, PFS
Michael R. Gohde, CPA, PFS