What comes to mind when you think about financial aid? If you are anything like me, grants come to mind and you feel like you can't qualify for financial aid if you have too much money. That kind of financial aid definitely exists, but there is another form of financial aid, merit-based financial aid. These are scholarships, and finding these are a great way to get the cost of college down. The key to getting the best deal on college is to determine what kind of family you are.
Need-Based Financial Aid
This is what most people think about when they think about financial aid. Need-based financial aid comes in the form of grants and scholarships. To qualify for need-based financial aid you have to demonstrate a financial need. The formula for this type of financial aid starts with the cost of college and it subtracts out what a formula thinks you should pay (this is called the expected family contribution). This means that you can qualify for more aid at different schools. The next thing you need to know is that just because you qualify for financial aid does not mean that the institution has the dollars to give you. There are good resources out there that will allow you to determine how your prospective schools award need-based financial aid.
Merit-Based Financial Aid
The other flavor of financial aid is merit-based financial aid. This is aid that is awarded based on the merit of your student. These come in the form of scholarships. The way that merit-based financial aid is awarded is completely up to each school. Most of the elite schools don't even offer merit-based aid. Some have scholarships that are competitive; for example the top 15% of incoming students get a full ride and everyone else gets nothing. Some schools have use a grid, or automatic scholarship system. With these you use the student's GPA (grade point average) and look that up on the left side of the grid. You then use the student's ACT or SAT score and look that up on the top of the grid. Where those intersect is the amount of scholarship your student receives. Lastly, there are some schools that offer packages to compete for students. This tends to happen with the smaller private schools, and these are basically tuition discounts given to you for attending that institution.
A Word Of Caution
There are people out there who hold themselves out as college-funding experts (insurance salespeople) who propose to have a silver bullet and they are well-trained in sales (read: tugging at your emotional strings). The formula for need-based financial aid is based on parent assets and income, and student assets and income. By far, the most important variable is the income of the parents. If your income is high, it's unlikely (but not impossible) that you will qualify for need-based financial aid. Parent assets, or savings, matter, but not nearly as much. If you have a high income, no amount of shifting assets is going to help you.
That being said, the well-trained insurance salespeople will tell you things like, "you are being penalized for being responsible and saving into a 529 account because you're not going to get any financial aid, and I hate to see responsible people like you get screwed." Then they'll tell you that you should take all your savings and buy either an annuity (insurance against living too long) or a cash-value life insurance policy (insurance against losing your income due to premature death). They'll pitch things like "you can borrow against the policy so you are banking with yourself."
These strategies will not help you pay for college. They will help an insurance agent get a big commission check, leaving you over-insured. You are not penalized for saving for college. They are implying that financial aid is a right. It's not a right; it's a way to help families who would normally not be able to send their children to college. It helps with social mobility. The notion that you are penalized for saving by not getting financial aid is analogous to being penalized for having a good job because you don't qualify for food stamps. Further, you don't borrow from yourself and pay yourself interest like they claim. You borrow from the insurance company with your cash value as collateral, and you pay interest to the insurance company.
If you encounter someone who offers you a silver bullet, cover your wallet and walk away.
By figuring out what kind of family you are (on the need/merit scale), it will help you determine a game plan for figuring out what kind of net you should cast. For example, if you determine you are a high need family, then you can look at finding ways to get your expected family contribution down as for as possible and then find schools that are likely to meet 100% of your need. If you are a high merit family, then you can start looking for schools that want student's with the characteristics your student has. Use this as a guide and hopefully you child will have a successful college experience without robbing your retirement or leaving your child with too much student loan debt.
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