THE ABCs OF FINANCIAL AID
After countless hours of tests, essays, interviews, and prayer, your child finally has been accepted by her dream college. Now comes the hard part: paying the freight. With the cost of a four-year education at top schools such as Princeton University or Stanford University exceeding $120,000, and even in-state costs at many public universities reaching $10,000 a year, financial aid has become a crucial--and stressful--part of the college decision. Here are some answers to typical questions:
NOTE: This is an extended, online-only version of the article that appears in the November 10, 1997 issue of Business Week.
Q: What is financial aid?
A: In a nutshell, it's the mixture of grants, scholarships, loans, and often jobs that a college provides to help defray schooling costs.
Q: Are some types better than others?
A: Yes. Grants and scholarships don't have to be paid back. Think of them as free money, and hope that your student receives an aid package that maximizes them and minimizes loans, which must be repaid.
Q: My child has applied for admission. Will she automatically be considered for aid?
A: No, especially not need-based aid. You must complete the Education Dept.'s Free Application for Federal Student Aid (FAFSA) after Jan. 1 of the senior year. Some schools require the College Scholarship Service Profile form. Family-income information from both forms is sent to the schools you request. Many colleges have their own financial aid forms, too.
Q: How do colleges figure out how much I'll need?
A: After pumping your FAFSA data through a confusing federally sanctioned formula, they calculate your expected family contribution (EFC). The difference between your EFC and a college's total cost is your need at that institution. The bottom line: If you have total family income of more than $100,000 and a moderate net worth, your EFC will be so high you won't have demonstrated need at most schools.
Q: How can I figure out my EFC myself?
A: You can get a quick estimate by using the online EFC calculator at www.finaid.org. You just plug in detailed information like family size, income, and costs for a particular college, and the program calculates your EFC.
Q: Will my EFC be the same at every school?
A: Yes, under the federal methodology. But some schools use something called the institutional methodology, which takes into account additional types of assets, such as your family's home equity. That could result in your need being less at those schools.
Q: But my kid is smart! Won't she be eligible for a merit scholarship?
A: Not necessarily. Many top-tier institutions such as the University of Pennsylvania don't grant non-need-based aid as a matter of principle. Often, your student's chances for merit aid rise as the reputation or quality of the school drops, or if a top school needs more students such as your child.
Q: What if I can't pay my EFC from savings?
A: Borrow. There are federally subsidized or guaranteed loans for students and parents. Banks, and many schools, are education lenders. Home-equity loans are becoming popular, too. Nellie Mae, the largest nonprofit student lender, pegs the average debt of all college students at $18,800 in 1997, up 129% since 1991. If Junior is going to be a Wall Street investment banker after graduation, that's still chicken feed. If your child chooses social work, however, set an extra place at the dinner table.
Q: What types of federal loans are available?
A: Probably the most popular is the Stafford Loan, which is made to students. It's issued directly by schools, education lenders, and private banks. If you have financial need as determined by the FAFSA, a Stafford Loan can be subsidized, with the feds paying the interest while you're in school. Otherwise, your loan is unsubsidized, with you liable for interest from day one. The interest rate is variable, pegged to the T-bill rate, but won't exceed 8.25%. Borrowers pay a fee of up to 4% to secure these loans, so it can pay to shop around for a lender who quotes slightly better fee deals or offers rebates to borrowers who make all their initial loan payments on time.
Parents can borrow, too, under the government's PLUS Loan program. The interest rate is variable, with a cap of 9%, and interest is payable from the date of the first disbursement until the loan is paid in full. There's a fee of up to 4% of the loan.
Q: How much can be borrowed?
A: Using Stafford Loans, dependent undergraduate students can borrow $2,625 their first year, $3,500 the second year, and $5,500 in each of the third and fourth years as long as the remainder of the academic program is a full academic year. An undergraduate student can have no more than $23,000 in total Stafford debt.
The yearly limit for PLUS Loans is the student's total annual cost of attendance minus any other financial aid awarded that year.
Q: Can I use my PC to file financial aid information?
A: Yes, both of the major information forms can be filed electronically, saving you transportation and handling time. You can use a Macintosh, IBM-compatible PC, or Unix computer to file your FAFSA on the Web if you use Netscape Navigator versions 3.0, 3.01, 3.02, or 3.03. Or users of IBM-compatible computers can download the Education Dept.'s FAFSA Express software, which allows you to file your completed FAFSA by modem. Details for both filing methods are at www.ed.gov/offices/ope/express.html.
Likewise, you can file your CSS Profile form on the Web. But since you probably will be supplying your credit card number to cover the cost of processing your information, CSS warns that you file the data at your own risk unless you use a secure Web browser such as Netscape Navigator or Communicator or Microsoft Internet Explorer.
Q: Where do I find more information on scholarships and aid?
A: Go Web, young man. Your first stop should be the excellent Financial Aid Information Page site (www.finaid.org), sponsored by the National Association of Student Financial Aid Administrators. Next, check out the Education Dept.'s site (www.ed.gov/offices/ope/finaid.html). Then try fastweb (www.fastweb.com), a megadatabase of scholarships. And major lenders such as Nellie Mae (www.nelliemae.com), Sallie Mae (www.salliemae.com), and many banks offer good advice.
James E. Ellis
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