; dObtaining Financial Aid

Guidelines For and Forms of Financial Aid

Let's say you are in the more typical situation of not having adequately saved for your and your family's college educational expenses.  Now what?  At this point, you will need to review the rules on obtaining various forms of financial aid and scholarships that might be available to you and your family members.  Every family, regardless of income levels, should thoroughly explore potential college financial aid sources.

The best form of financial aid is so-called "gift aid," which does not have to be repaid.  The most common forms of gift aid are grants and scholarships.  Grants are frequently determined on the basis of the student's financial need while scholarships are typically awarded on the basis of merit and academic performance.

So-called "self-help" aid is assistance that must be earned or repaid.  There are a variety of loans available to assist in financing college expenses.  Some are "subsidized" loans (like Stafford and Perkins loans) where the rate of interest is relatively low and that interest does not start to accrue or require repayment until graduation of the student.  Unsubsidized loans might have a reasonable rate of interest but will start accruing interest immediately. 

Government and college subsidized work-study programs are another source of self-help aid that is readily available the more financially needy the student is.

Lastly, if the child is open to a four-year military career as an officer after graduating from college, ROTC scholarships and stipends are particularly generous.  The ROTC benefit will cover at least two and up to four years of tuition, book and fee expense as well as providing a cash stipend of a few hundred dollars per month to the officer candidate.  Another indirect benefit of the ROTC route is the fact that major corporations very heavily recruit management employees out of the armed services officer corps regardless of the individual's specific undergraduate degree.

Financial Aid Opportunities – Search By School

How is this entire process initiated?  As you explore the process through my related Web links (given below), you will see it is slightly more elaborate than I am briefly describing to you here.  But the following is a good road map.

First, you, your spouse and the college-bound child will sit down with a good hard-copy college guide that you have picked up at the library or purchased.  Some of my favorites are located at my Web site-click Educational Savings then click College Guide Books (you may obtain the noted books at virtually any public library if you do not desire to purchase them).  There are also superb ways to do your college searching on-line.   You can link to my favorite sites by going to my Web site, clicking on Educational Savings and then College Guides On-line.

After conducting your college review, you and your family will have tentatively picked out a half dozen or so college prospects for the child.  Some may be public colleges and universities and others may be private colleges.  At this point, do not presume out of hand that you will be unable to afford the additional $10,000 or $15,000 of annual tuition expense at the private college.  As we will see, typically the private colleges are well endowed and they have a lot of grant and scholarship money based on both financial need and merit.

So far you have tentatively picked out as many colleges and universities as you feel fit the needs and desires of your child.  Now go to the Web site of each of these colleges to check up on available grants and scholarships that that specific college or university offers.  After going to the appropriate college Web site, click on the Admissions tab.  That category is where you generally will find information on grants and scholarships.  The general College Guide books won't give you enough specific information although if you can get a paper catalog of the specific college or university (available at many libraries), you will be able to see details on grant and scholarship information.

Be prepared to be amazed at the number of opportunities available.  The more that you are in financial need and/or your child is intellectually talented, the better off you are going to be to cash in on these opportunities.  If you are both relatively poorer off financially and your child is gifted, you should be able to cover most or all of tuition, room and board.  If your child is in this last category, the more expensive, private schools will actually be your better bet for a full ride.

NOTE:  Throughout the book, I have pointed out to you some of the more egregious scams that are foisted on the public.  Although what I am talking to you about now is not properly categorized as a scam, there is a potential for exploitation here.  There are a number of financial aid services that are promoted to parents to provide the type of assistance that I am talking about.  Most of these services charge a hefty fee to do what we have just learned you can readily do for yourself.  Moreover, sometimes the service will do a less competent job of locating available money than you could do for yourself.  Are all of these financial aid services scams?  No.  Indeed, the help of a professional in this all-important area can be very reassuring.  But do tread cautiously here and by all means attempt to do the work yourself before you retain an outsider to help you.  Also, you may want to look at a couple of superbly written books on financing college expenses written by clear experts in this field.  If so, go to my Web site, click on Educational Savings then Information on Financial Aid and look at the books written by Kristen Davis and the Barron's Guide.

There are numerous free-access Web sites providing general information on financial aid and the availability of grant and scholarship money.  Go to my Web site (at http://www.personal.kent.edu/~maltieri/web/guide/home.htm), click on Educational Savings and then Information on Financial Aid. The best of these sites is the Department of Education's Finding Out About Financial Aid and Funding Your Education and the Web links off of them.  Via the site, you will be able to obtain much of the information that people from financial aid services could sell you.  The Department of Education's site is free, comprehensive, and an excellent Web starting point relative to what we have just talked about.

The FAFSA Application

As you will see on the U.S. Department of Education's Student Financial Assistance site that was just referenced, part and parcel of the entire process of obtaining financial aid in any form (loans, grants or scholarships) requires the filing of the Free Application for Federal Student Aid (FAFSA).  As you study the financial aid information provided by the colleges that you have selected, you will see the FAFSA heavily emphasized.  The college will provide you with a Web link to the FAFSA homepage (or you can access it via my Web site click on Educational Savings and then FAFSA) that will allow you to file the FAFSA on-line.  Alternatively, you can obtain a hard copy of the FAFSA from most public libraries or the financial aid office of the college that your child is interested in attending.

Any financial aid that is based on financial need – whether loans, grants or scholarships – will be predicated on your filing the FAFSA.  Therefore, of all the various things we have talked about relative to financial aid, the timely filing of a complete FAFSA application is by far the most important single item.

It is wise to file the FAFSA as early in the applicable year as possible.  If your child is entering college in the fall, you should have your FAFSA application filed by January or mid-February of that year.  What information is included on the FAFSA?  Your and your child's financial resources will all be detailed on the FAFSA.  Wealth owned in your child's name counts much more heavily toward the family's ability to pay than wealth in your and your spouse's name (in this regard, be wary of the time you gift property to your child as noted on the next page).

NOTE:  The FAFSA will request your and your child's tax information from last year.  If you are doing what I (and most colleges) advise and are filing the FAFSA in late January or early February of the year your child will attend college, you will be requested to provide information from last year's tax return-a return you probably have not yet completed since it is not due until April 15.  What now?

The FAFSA allows you to estimate your tax information from last year if you haven't already filed your tax return.  At this point, I would strongly recommend doing the following.  Go back and restudy the information I gave you on computerized tax preparation software on page 48.  By the end of January you will have received your W-2 Form from your employer as well as miscellaneous other tax information from banks, etc.  Purchase one of the tax preparation programs and use the tax information available to you by the end of January to create a draft tax return for last year.  This process will force you to become familiar with the tax preparation software and will generate for you a tax return with numbers that are either exact or at least fairly close to being accurate.  Again, the FAFSA specifically allows you to use those approximate tax return numbers to complete your FAFSA.  Later, you will finalize and file your tax return and provide updated tax information to FAFSA if there were material changes from what you had earlier given them.

Gifting Property to Children and Possible Effects on the FAFSA

In the Tax Planning section of the book, we discussed generally the technique of gifting appreciated property to children (see page 46).  There I noted that a possible negative implication of this tax planning technique is that by increasing the child's wealth, we diminish the possibility of the child obtaining financial aid to finance his or her college expenses.

More specifically, in completing the FAFSA, wealth that is in the child's name will count about three times more toward the family's ability to fund educational expenses than if such wealth was in the parents' name.  Additionally, the parents' assets are buffered by an "asset protection allowance."  The child does not get any asset protection allowance.  Therefore, if you are using this tax planning technique of gifting appreciated property to the child to fund college expenses, you will want to time the gift so that it doesn't impair the FAFSA reporting.

Example:  Mark and Debbie are in the 28% marginal tax bracket (see page 11) on their ordinary income and a 15% rate of taxation on their long-term capital gains (see page 46).  Son Bryan is 18 years old and is in the 10% bracket on ordinary income and is subject to a 5% rate of taxation on long-term capital gains.  Mark and Debbie own stock that they bought for $1,000 that is now worth $11,000.  In completing the FAFSA, the value of that stock will count in the family's computation of ability to pay Bryan's college expenses, but will be factored in at a significantly less rate if the stock is in Mark and Debbie's name rather than Bryan's name.  When the family files Bryan's FAFSA report, the stock is in Mark and Debbie's name.

On the basis of the FAFSA, Bryan's financial aid office at his college grants $5,000 of financial aid against the total $15,000 cost for tuition, fees and room and board.  At this point in time, it may be prudent for Mark and Debbie to transfer legal ownership of the stock to Bryan and have Bryan sell the stock in his name.  This would affect tax savings of $1,000 (the $10,000 gain ($11,000 sales price minus $1,000 cost) taxed at Mark and Debbie's 15% long-term capital gain rate versus the $10,000 gain taxed at Bryan's 5% long-term capital gain rate). There should also be some state income tax savings here as well.

Bryan would then take his $10,500 of after-tax wealth (the $11,000 sales price minus his $500 tax cost) to help pay the remaining $10,000 of tuition, fee and room and board expense.

A Note on the SAT and ACT College Entrance Exams

As we have discussed, there is a large amount of scholarship and grant money available to meritorious students.  How do the college financial aid and scholarship people determine which students better merit scholarship money when the criteria is academic performance?

One of the disturbing trends in American education is the phenomenon of "grade inflation."  What has happened in recent years at all educational levels (grade school, high school and higher education) is a marked increase in the grade point averages of students.  Despite that general GPA increase, scores on standardized exams have stagnated or gone down.  Thus, the inherent academic knowledge of American students has apparently not increased while GPAs generally have.

Although widely acknowledged in academic circles, the general public is not as familiar with this problem.  The people who run college financial aid and admission offices are, however, well aware of it.  Therefore, the student applicant's scores on the college admissions exams – the SAT and ACT – are often given more weight by admissions and financial aid officers than the student's GPA in the determination of that student's academic achievement.

Where am I going with all of this?  Most colleges accept either the SAT or ACT score in the admissions and scholarship-awarding process.  Check the admissions criteria for the school that you and your child have selected in order to confirm this.  As I have just explained, a high score on the SAT or ACT will carry great weight in both the admissions and scholarship awarding process.  With preparation, most students can greatly improve their SAT and/or ACT scores.

NOTE:  As a parent, you can drive yourself to utter frustration trying to motivate your child to prepare for the college entrance exams.  It is probably a distinct minority of high school students who have sufficient discipline and motivation to really attack the SAT/ACT preparation process (in my own family, maybe half of my children have this ability).  Remember the old adage, "You can bring a horse to water but you can't make him drink."  This saying has particular meaning here.  But if you do have a child who is motivated enough to prepare for the college entrance examinations, read on.

If you think your child is the type that will put in sufficient time and effort to prepare for the SAT and/or ACT exams, there are superb resources to enable that child to dramatically improve his or her scores.  Excellent hard copy and computer programs are available to assist the student's SAT or ACT preparation (go to my Web site, click on Educational Savings then SAT/ACT Preparation Programs – these SAT/ACT sites also are excellent for general college searching and information on college careers and financial aid).  My personal favorites are the Princeton Review and Kaplan courses.  These courses have an excellent historic prospective on both the SAT and ACT exams, complete specific outlines of subject matter that will be tested and (most importantly) copies of old exams and model answers.  Although the old exams are not repeated word-for-word, there is a great continuity in the style and substance of the questions.  If your child spends sufficient time studying these old exams and the other related material, the child most probably will significantly improve his or her SAT or ACT scores.