The financial aid process can be absolutely daunting at first glance, but it is actually based on several basic calculations. It is crucial, however, to have a general knowledge of how aid is determined so you can get the highest possible amount.
A few things to remember:
The goal of all financial aid calculations is to arrive at a single number called your Expected Family Contribution, or EFC. This number is what colleges will use to determine how much aid a student will be given.
Paperwork is Crucial. Your first step should be to fill out the Free Application for Federal Student Aid, commonly known as FAFSA. You will submit this form to the U.S. Department of Education, which will then calculate how much money you can afford to pay for one year of college. The DoE uses the Federal Methodology formula to calculate aid, which only counts income and physical assets (cars, property, etc.).
Some private colleges request addition information on assets like retirement accounts and home equity. You will submit this information by filling out the College Board’s PROFILE form in addition to the FAFSA. The PROFILE form uses Institutional Methodology, which is somewhat stricter in calculating benefits, so do not be surprised if the PROFILE assigns you a lower rate of aid than the FAFSA.
Keep your money out of the student’s name. The EFC assesses any money in a child’s name (savings accounts, stock accounts) at a rate of 20 percent. But if that same money is in a parent’s name, it will only be assessed up to a rate of 5.65 percent.
Basically, for every $100 in the student’s name, the college will expect them to spend $20 of it on college. If that $100 is in a parent’s name, however, the college will expect them to spend only $5.65 of that to pay for college. If you have a significant amount in savings, this can make a huge difference.
Timing is everything, especially for stock sales.
If you sell stock on or after January 1 of your child’s junior year of high school, or the year after, the earnings are considered income and taxed up to 47 percent.
If you sell that same stock on December 31st, those earnings will be counted as an asset and taxed at a mere 5.65 percent.
Don’t assume you don’t qualify! This is one of the most common mistakes families make. Because of the formulas described above, it is often difficult to know beforehand whether or not you qualify for aid. The only way to find out is to make sure you file your FAFSA on time. As they say: never up, never in!