Paying for College – What You Need to Know

This article written by Ron Valpey originally appeared in the Winter 2014/2015 issue of Around Concord Magazine.

Total US student loan debt now exceeds one trillion dollars, more than the total US credit card debt. College costs continue to outpace inflation with no relief in sight, and navigating the process of paying for college is daunting at best. Following are a few critical components in the process; knowing them can make the process far less frustrating!

FAFSA and the Profile

The Free Application for Student Financial Aid (FAFSA) and the College Scholarship Service (CSS) Profile Form  (or simply the “Profile”) are applications used by colleges and universities to determine student- aid eligibility. The FAFSA is used by all schools to determine federal aid and by some schools to determine how their own funds (institutional aid) will be awarded. The Profile, far more detailed than the FAFSA, is used by approximately 400 private colleges and universities to determine institutional aid.

The FASFA outcomes for federal-aid purposes are relatively uniform throughout the country. The FASFA and Profile outcomes for institutional aid, however, can vary dramatically. Two, otherwise identical schools, may award the same federal aid under the FASFA but completely different institutional aid under the FASFA, Profile and/or other assessments.

Reportable versus Non-Reportable Assets and Income

Various incomes and assets are counted differently for determining aid, with student income and assets generally counted at a higher rate than parents’ assets and incomes.

Reportable assets include, among other things, parent and student taxable income, cash, savings, non- retirement investments, trust accounts, certain trust payments, real estate, tax deductible retirement contributions in the year they’re made, UGMA or UTMA (Uniform Gifts to Minors Act or Uniform Transfers to Minors Act) accounts, parent- or student-owned 529 college savings plans, non parent 529 distributions and family owned businesses (if owning more than 50 percent and employing more than 100 people).

Non-reportable assets and income include, among others, primary residences, automobiles, life insurance cash value, personal property, retirement plans, annuities, limited partnerships, 529s not owned by the parent or student, and certain untaxed income.

The asset and income review on the Profile form and other assessments can vary greatly from the FAFSA. The end result, regardless of the assessment utilized, will be the expected family contribution (EFC).

The EFC is the minimum amount that the school will expect to be paid out of pocket. Cost of attendance (COA) includes tuition, room & board, fees, textbooks, travel, personal and other expenses. The COA minus the EFC results in the financial need (aid eligibility).

Federal, State and Institutional Aid

Federal aid comes in the form of loans, grants, scholarships and work-study programs. State aid in New Hampshire, although very limited, includes grants and scholarships. Institutional aid is specific to the school and varies greatly with the most desirable aid being grants and scholarships that are effectively tuition reductions, which-unlike loans-are essentially gifts that don’t have to be repaid.

Subsidized versus Unsubsidized Loans

While the student is in school, the interest due on subsidized loans is paid by the federal government, allowing the student to defer payments without accruing additional interest charges. Unsubsidized loans can also allow for payment deferral, but interest starts to accrue immediately upon the loan disbursement and eventually must be repaid.

Need and Merit Aid

Need aid is based on a student’s financial profile, while merit aid is based solely on the student’s academic performance without regard to financial need. Aid may also be based on need and merit or a wide array of other criteria. Athletic scholarships, for example, are often based both on need and merit as well as athletic ability. It’s not uncommon for an athletic scholarship to require the recipient be able to continue playing competitively, avoid injury and maintain a certain grade point average.

This is just a basic introduction to a very complicated and complex process. The best course of action is to learn about the process early, preferably at least two years in advance of admittance, since the FAFSA and other assessments may look back up to two years.