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Raymond James & Associates, Inc.Doug GatesSenior Vice-President, InvestmentsOne Progress PlazaSuite 165Saint Petersburg, FL [email protected]
Financial Aid forCollege
September 12, 2014
ABCs of Financial AidThese days, it's hard to talk about collegewithout mentioning financial aid. Yet thispairing isn't a marriage of love, but one ofnecessity. In many cases, financial aid may bethe deciding factor in whether your childattends the college of his or her choice, oreven attends college at all.
That's why it's important to develop a basicunderstanding of financial aid before yourchild applies to college. Without suchknowledge, you may have troubleunderstanding the process of aiddetermination, filling out the proper aidapplications, and comparing the financial aidawards that your child receives.
But let's face it. Financial aid information isprobably not on anyone's top ten list ofbedtime reading material. It can be anintimidating and confusing topic. There aredifferent types, different sources, and differentformulas for evaluating your child's eligibility.Here are some of the basics to help you getstarted.
What is financial aid?
Financial aid is money distributed primarily bythe federal government and colleges in theform of loans, grants, scholarships, orwork-study jobs. A student can receive bothfederal and college aid.
Grants and scholarships are more favorablethan loans because unlike loans, they don'thave to be repaid--they're free money. In awork-study program, your child works for acertain number of hours per week (either on oroff campus) to earn money for collegeexpenses. Obviously, an ideal financial aidpackage will contain more grants andscholarships than loans.
Need-based aid vs. merit aid
Financial aid can be further broken down intotwo categories: need-based aid, which isbased on your child's financial need, and meritaid, which is awarded according to your child'sacademic, athletic, musical, or artistic merit.
The majority of financial aid is need-based aid.However, in recent years, merit aid has beenmaking a comeback as colleges (particularlyprivate colleges) use favorable merit aidpackages to lure the best and brighteststudents to their campuses, regardless of theirfinancial need. However, the availability ofmerit aid tends to fluctuate from year to year
as colleges decide how much of theirendowments to spend, as well as whichspecific academic and extracurricularprograms they want to target.
Sources of merit aid
Ask the colleges your child is applying toabout the availability of merit aid. Does thecollege offer any grants or scholarships foracademic, athletic, musical, or other abilities?If so, what is the application procedure?College guidebooks can give you an idea ofhow much merit aid (as a percentage of ageneral student's overall aid package) eachcollege had provided in past years.
Besides colleges, a wide variety of private andpublic companies, associations, andfoundations offer merit scholarships andgrants. Many have specific eligibility criteriaand deadlines.
In the past, sifting through the possibilitiescould be a daunting task. Now, with theInternet, there are websites where your childcan input his or her background, abilities, andinterests and receive (free of charge) amatching list of potential scholarships. Thenit's up to your child to meet the variousapplication deadlines. However, though thisavenue is certainly worth exploring, suchresearch and work to complete theapplications shouldn't come at the expense ofapplying for the more common need-basedfinancial aid.
Sources of need-based aid
As mentioned, the majority of financial aid isneed-based aid, and the remainder of thediscussion will focus on this type of aid, exceptwhere noted. The main provider ofneed-based financial aid is the federalgovernment, followed by colleges. Statescome in at a distant third.
The amount of federal aid available in anygiven year depends on the amountappropriated in the federal budget, and thisaid is spread over different financial aidprograms. For colleges, need-based aidcomes from a college's endowment, andpolicies may differ from year to year, resultingin an uneven availability of funds. States, likethe federal government, must appropriate themoney in their budgets.
The federal government's aid application iscalled the FAFSA, which stands for Free
What is financial aid?
Financial aid is moneydistributed primarily by thefederal government andcolleges in the form of loans,grants, scholarships, andwork-study jobs. A student canreceive both federal andcollege aid, and the aid can beeither need-based ormerit-based.
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Application for Federal Student Aid. Thefederal government and colleges use theFAFSA when federal funds are beingdistributed (colleges are responsible foradministering certain federal financial aidprograms).
When colleges distribute their own financialaid, they use one of two forms. The majority ofcolleges use the PROFILE application,created by the College Scholarship Service ofPrinceton, New Jersey. A minority of collegesuse their own institutional applications.
States may either use the FAFSA or requiretheir own application. Contact your state'shigher education authority to learn about thestate aid programs available and theapplications you'll need to fill out.
How is financial needdetermined?
The way your child's financial need isdetermined depends on which aid applicationyou're filling out. The FAFSA uses a formulaknown as the federal methodology; thePROFILE (or a college's own application) usesa formula known as the institutionalmethodology. The general process of aidassessment is called needs analysis.
Under the FAFSA, your current income andassets and your child's current income andassets are run through a formula. You areallowed certain deductions and allowancesagainst your income, and you're able toexclude certain assets from consideration,namely, your retirement plans, annuities,home equity, and cash value life insurance.Generally, parents are required to contribute5.6% of their assets, while children arerequired to contribute 20% of their assets.
The result is a figure known as the expectedfamily contribution, or EFC. It's the amount ofmoney that you'll be expected to contribute tocollege costs to be eligible for aid. Your EFCremains constant, no matter which collegeyour child applies to.
An important point to remember is that yourEFC is not the same as financial need. Tocalculate your child's financial need, subtractyour EFC from the cost of attendance at yourchild's college. Because colleges aren't all thesame price, your child's financial needfluctuates with the cost of a particular college.
Example: You fill out the FAFSA, and yourEFC is calculated to be $5,000. Assuming thatthe cost of attendance at College A is $18,000per year and the cost at College B is $25,000,
your child's financial need is $13,000 atCollege A and $20,000 at College B.
The PROFILE application (or the college'sown application) basically works the sameway. However, the PROFILE generally takes amore thorough look at your income and assetsto determine what you can really afford to pay(for example, the PROFILE looks at yourhome equity and retirement assets). In thisway, colleges attempt to target those studentswith the greatest financial need.
What factors count the most in needsanalysis? Your current income is the mostimportant factor, but other criteria play a role,such as your total assets, how many familymembers are in college at the same time, andhow close you are to retirement age.
Submitting aid applications
The FAFSA can be completed manually andmailed to the address listed on the form, or itcan be completed and filed online atwww.fafsa.ed.gov. The online route isprobably better because mistakes are flaggedimmediately and electronic FAFSAs take onlyone week to process (compared to two to fourweeks for paper FAFSAs).
The FAFSA is filed as soon after January 1 aspossible in the year your child will be attendingcollege. You must wait until after January 1because the FAFSA relies on your taxinformation from the previous year. (Theofficial federal deadline for filing the FAFSA isJune 30, but many colleges have an earlierdeadline.)
You should try to submit the FAFSA as closeto January 1 as possible because somefinancial aid programs operate on a first-come,first-served basis. Even if you haven'tcompleted your federal income tax return,Uncle Sam lets you base your FAFSAanswers on an estimated return, though youwill have to provide a copy of your finalincome tax return later.
The PROFILE (or individual collegeapplication) can usually be filed earlier thanthe FAFSA. The specific deadline is left up tothe individual college, so make sure you keeptrack of it.
After your FAFSA is processed, your child willreceive a Student Aid Report in the mailhighlighting your EFC (the colleges that youlist on the FAFSA will also get a copy of thereport). Then, the financial aid administrator ateach school will try to craft an aid package tomeet your child's financial need.
What counts the most?
Your current income is themost important factor in thegovernment's needs analysisformula, but other criteria playa role, such as your totalassets, how many familymembers are in college at thesame time, and how close youare to retirement age.
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Comparing aid awards
When your child is accepted at a particularcollege, the college's financial aidadministrator will attempt to create a financialaid package to meet your child's financialneed. Sometime in early spring, your child willreceive these financial aid award letters thatdetail the specific amount and type of financialaid that each college is offering.
When comparing awards, first check to see ifeach college is meeting all of your child'sfinancial need. Colleges aren't obligated tomeet all of it. In fact, it's not uncommon forcolleges to meet only a portion of a student'sneed, a phenomenon known as getting"gapped." If this happens to you, you'll have tomake up the shortfall, in addition to payingyour EFC. College guidebooks can give youan idea of how well individual colleges meettheir students' financial need under the entry"average percentage of need met" orsomething similar.
Next, look at the loan component of eachaward and compare actual out-of-pocketcosts. Remember, grants and scholarshipsdon't have to be repaid and so don't counttoward out-of-pocket costs. Again, you wouldlike your child's need met with the highestpercentage of grants, scholarships, andwork-study jobs and the least amount of loans.
If you'd like to lobby a particular school for
How much should we rely onfinancial aid?
With all this talk of financial aid, it's easy toassume that it will do most of the heavy liftingwhen it comes time to paying the college bills.But the reality is you shouldn't rely too heavilyon financial aid. Although aid can certainlyhelp cover your child's college costs, studentloans make up the largest percentage of thetypical aid package, not grants andscholarships.
As a general rule of thumb, plan on studentloans covering up to 50% of college expenses,grants and scholarships covering up to 15%,and work-study jobs covering a variableamount. But remember, parents and studentswho rely mainly on loans to finance collegecan end up with a considerable debt burden.
more aid, tread carefully. A polite letter to thefinancial aid administrator followed up by atelephone call is appropriate. Your chances forgetting more aid are best if you can documenta change in circumstances that affects yourability to pay, such as a recent job loss,unusually high medical bills, or some otherunforeseen event. Also, your chances improveif your child has been offered more aid from adirect competitor college, because collegesgenerally don't like to lose a prospectivestudent to a direct competitor.
Positioning Your Income and Assets to EnhanceFinancial Aid EligibilityThere are strategies you can implement to tryto enhance the amount of federal financial aidyour child receives. These strategies takeadvantage of the federal rules about whichfamily income and assets are counted indetermining your family's expected familycontribution (EFC). But remember, anyincreased aid may consist entirely of loans,not grants or scholarships.
Strategies to reduce income
• Time the receipt of discretionary income toavoid the base year, which is the year priorto the year you fill out the FAFSA
• Pay all federal and state income taxes dueduring the base year, which will reduceassessable cash and increase your taxdeduction on the FAFSA
• Have your child limit his or her income forthe base year to the amount of the studentincome protection allowance
Strategies to reduce assets
• Use cash (an assessable asset) to paydown consumer debt, which is not countedin the federal methodology
• Use cash to make large planned purchasesthe year before your child starts college
• Use counted assets to pay down yourmortgage, which increases your homeequity (an excludable asset)
• Shift counted assets above your assetprotection allowance (a sum automaticallyexcluded from consideration) to assetsexcluded by the federal methodology (e.g.,home equity, retirement plans, cash valuelife insurance, annuities)
• Use your child's assets to pay for the firstyear of college, which reduces (forsubsequent years) the student assetcontribution factored into your EFC
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Finding the Funds to Pay for a College Education
Finding the funds to pay for your child's college education is like filling a test tube. The length ofthe tube represents the cost of education at any one school--tuition, fees, books, room andboard, transportation, and personal expenses.
The first ingredient is what you'll have to contribute from your own pocket: the expected familycontribution (EFC), which is determined by the federal government's financial aid formula. Thiscan come from savings and/or loans.
Your EFC is the same regardless of the college your child chooses. The difference between yourEFC and the cost of a particular college equals your child's financial need, which is a variable.
To meet this financial need, your child might be eligible for financial aid in the form of loans,grants, scholarships, and/or work-study funds from the federal government, college, and/orindependent organizations. Your child may not receive all the financial aid he or she needs. If so,you'll have to top off the tube with more of your own funds, which are in addition to the EFC.
Note: This illustration represents one possible financial situation. Actual percentages vary fromstudent to student.
Your expected familycontribution
Your expected familycontribution, or EFC, is thesame regardless of the collegeyour child chooses. Thedifference between your EFCand the cost of a particularcollege equals your child'sfinancial need, which is avariable.
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Major Federal Financial Aid Programs
Grants
There are several federal grant andscholarship programs. To be eligible, youmust complete the FAFSA.
The two main federal grants are the Pell Grantand the Supplemental EducationalOpportunity Grant (SEOG). The Pell Grant isfor undergraduate students with financialneed, and the grant is available to all studentswho qualify. The SEOG is reserved forundergraduate students with the with the mostfinancial need. The SEOG is administered oncampus, which means that each collegereceives a limited amount of money for thisprogram, and the financial aid administrator ateach college decides which students willreceive this grant.
Scholarships
The two main federal scholarship programsare the Robert C. Byrd Scholarship Programand the AmeriCorps Program.
The Robert C. Byrd Program provides annual$1,500 scholarships to students who havedemonstrated outstanding academicachievement and the promise of continuedacademic excellence.
The AmeriCorps Program offers monetaryawards in exchange for up to two years ofcommunity service work before, during, orafter college or graduate school. Thecommunity service work is in one of fourareas: education, the environment, humanservices, and public safety. The federalgovernment provides the funding, while statesand nonprofit agencies do the hiring.
Work-study
The federal work-study program is afederally-sponsored financial aid program thatsubsidizes jobs for both undergraduate andgraduate students. It is based on a student'sfinancial need. To apply for federalwork-study, your child should contact the
The federal work-study program encouragesjobs that are related to your child's course ofstudy and/or the community (employment maynot involve political or religious activity). Thesejobs can be either on- or off-campus, and theypay at least minimum wage. Money earned ina work-study job is paid directly to the studentat least once per month (undergraduatestudents are paid by the hour; graduatestudents either by the hour or on a salarybasis). The student can then spend the moneyin any way he or she wishes.
The federal work-study program is acampus-based program. This means that thefinancial aid administrator at each collegeadministers it. Each school receives a certainamount of money for the federal work-studyprogram, and once the money is awarded,there is no more until the following year.
Tip: Because federal work-study is afirst-come, first-served program, it is in yourchild's best interest to apply as early aspossible. In any case, make sure your childapplies before the college's applicationdeadline.
If your child qualifies for a work-study job, theamount of the total work-study award willdepend on your child's level of financial need,the time your child applies, and the total fundsavailable at your child's college or university.
Caution: You cannot earn more money thanyour award stipulates. For example, if youreceive a $2,000 work-study award, youremployment lasts until you earn $2,000, andthen it is over for that academic year.
Loans
There are many types of federal financial aidloans for college. The main loans are theStafford Loan, the Perkins Loan, and thePLUS Loan. These loan programs aresummarized on the table in the next section.
financial aid office of the college he or she willattend.
Federal Work-Study
The work-study program is afederally-sponsored financialaid program that subsidizesjobs for both undergraduateand graduate students. Itencourages jobs that arerelated to a student's course ofstudy and/or the community,and is based on a student'sfinancial need.
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Comparison of Federal Higher Education Loans
UnsubsidizedStafford Loan
SubsidizedStafford Loan
Perkins Loan PLUS Loan
Description A low-interest,federal studentloan
A low-interest,federal studentloan
A low-interest,federal studentloan available tostudents with thegreatest financialneed
A loan made toborrowers withgood credithistories; mayborrow the fullcost of education,minus anyfinancial aidreceived
Available to Undergraduateand graduatestudents enrolledat least half-time
Undergraduatestudents onlyenrolled at leasthalf-time
Undergraduateand graduatestudents (can beless thanhalf-time)
Parents ofundergraduate,students enrolledat least half-time,and independentgraduate andprofessionalstudents
Lender Federalgovernment only
Federalgovernment only
College Federalgovernment only
Borrower Student Student Student Parent orgraduate/professionalstudent
Based onfinancial need
No Yes Yes No
Interest rate forloans disbursedJuly 1, 2013through June 30,2014
3.8% fixed forundergraduates;5.4% fixed forgraduate students
3.8% fixed 5% fixed 6.4% fixed
Interestsubsidized
No Yes1 Yes1 No
Grace period 6 months 6 months Generally 9months
6 months
Loan limits foracademic year2013/2014
Dependent undergraduates: 1styear - $5,500 ($3,500 subsidized),2nd year - $6,500 ($4,500subsidized), 3rd to 5th year -$7,500/year ($5,500 subsidized),$31,000 maximumIndependent undergraduates anddependent undergraduates whoseparents don't qualify for PLUSloans: 1st year - $9,500 ($3,500subsidized), 2nd year - $10,500($4,500 subsidized), 3rd to 5th year -$12,500/year ($5,500/yearsubsidized), $57,500 maximumGraduate students: $20,500 peryear, $138,500 maximum includingundergraduate loans
Undergraduatestudents:$4,000/year$20,000 limitGraduatestudents:$6,000/year$40,000 limit(includingundergraduateloans)
Student's totalcost of education,less any otherfinancial aidreceived by eitherthe student orparent
1 The federal government pays the interest on the loan while the student is in school at leasthalf-time, in a grace period, or in a deferment period.
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Financial Aid CalendarIf your child is applying for financial aid for college, here is a calendar highlighting the importanttasks to be done during senior year of high school.
September October November
• Create a timetable offinancial aid deadlines forthe federal government andfor the individual collegesstudent is applying to
• Research college-specificgrants and scholarships andgather supporting materials
• Research privatescholarships
• Request applications fromprivate scholarships andgather supporting materials
December January February
• Obtain a hard copy of thefederal government'sfinancial aid application, theFAFSA (Free Application forFederal Student Aid), or goto www.fafsa.ed.gov andget a PIN (personalidentification number) if youplan to file the FAFSAonline
• Obtain financial aid formsrequired by selectedcolleges
• Compile income taxinformation to help incompleting the FAFSA
• Complete and submit theFAFSA as soon as possibleafter January 1
• Complete college financialaid forms
• Work on private scholarshipapplications
• Continue to submit privatescholarship applications
• Verify that all requiredfederal and college financialaid forms have beensubmitted, and follow upwith any necessary items
• Watch for Student AidReport (SAR) from thefederal governmentshowing your family'sexpected family contribution(EFC) to college costs
March April May
• Watch for financial aidaward letters from colleges
• Watch for notifications fromprivate scholarship sources
• Receive financial aid awardletters from various collegesdetailing financial aidpackage being offered
• Compare financial aidawards
• Sign and return financial aidaward letter
• Contact financial aid officeto check status of aid
• Notify financial aidadministrator of changes incircumstances that mayaffect your family's ability topay EFC
June July August
• High school graduation! • Sign student loanpromissory notes
• Receive federal studentloan counseling
• Off to college!
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Raymond James & Associates,Inc.
Doug GatesSenior Vice-President,
InvestmentsOne Progress Plaza
Suite 165Saint Petersburg, FL 33701
September 12, 2014Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014
This information was developed by Broadridge, an independent third party. It is general in nature, is not acomplete statement of all information necessary for making an investment decision, and is not arecommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may notbe suitable for all investors. Past performance may not be indicative of future results. Raymond James &Associates, Inc. member New York Stock Exchange/SIPC does not provide advice on tax, legal or mortgageissues. These matters should bediscussed with an appropriate professional.
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