ABCs OF FINANCIAL AID These days, it's hard to talk about college without mentioning financial aid. Yet this pairing isn't a marriage of love, but one of necessity. After all, financial aid may be the deciding factor in whether your child attends the college of his or her choice or even attends college at all. That's why it's important to develop a basic understanding of financial aid before your child applies to college. Without such knowledge, you may have trouble understanding the process of aid determination, filling out the proper aid applications, and comparing the financial aid awards that your child receives. But let's face it. Financial aid information is probably not on anyone's top 10 list of bedtime reading material. It can be an intimidating and confusing topic. There are different types, different sources, and different formulas for evaluating your child's eligibility. Here are some of the basics to help you get started. What is financial aid? Financial aid is money given to your child to help him or her pay for college. Financial aid can be one of four types: loans, grants, scholarships, or work-study. Grants and scholarships are more favorable than loans because they don't have to be repaid--they're free money. In a work-study program, your child works for a certain number of hours per week (either on or off campus) to earn money for college expenses. Obviously, an ideal financial aid package will contain more grants and scholarships than loans. Need-based financial aid vs. merit aid Financial aid can be further broken down into two categories--need-based aid, which is based on your child's financial need; and merit aid, which is not based on your child's financial need. The majority of financial aid is need-based aid. However, in recent years, merit aid has been making a comeback as colleges (particularly private colleges) use favorable merit aid packages to lure the best and brightest students to their campuses, regardless of their financial need. Who provides merit aid? The best place to look for merit aid is at the colleges that your child is applying to. Does the college offer any grants or scholarships for academic, athletic, musical, or other abilities? If so, what is the application procedure? Keep in mind that the availability of college-sponsored merit aid is likely to fluctuate from year to year as colleges decide how much of their endowments they want to use, as well as the specific programs they want to target. Besides colleges, a wide variety of private and public companies, associations, and foundations offer merit scholarships and grants. Many have specific eligibility criteria. In the past, sifting through the possibilities could be a daunting task. Now, with the Internet, there are websites where your child can input his or her background, abilities, and interests and receive (free of charge) a matching list of potential scholarships. However, though this avenue is certainly worth exploring, such research (and subsequent work to complete any applications) shouldn't come at the expense of researching and applying for the more common need-based financial aid. Who provides need-based financial aid? The main provider of need-based financial aid is the federal government, followed by colleges. States come in at a distant third. The amount of federal aid available in any given year depends on the amount that the federal budget appropriates, and this aid is spread over several different financial aid programs. For colleges, need-based aid comes from a college's endowment, and policies may differ from year to year, resulting in an uneven availability of funds. States, like the federal government, must appropriate the money in their budgets. The federal government's aid application is known as the FAFSA, which stands for Free Application for Federal Student Aid. The federal government and colleges use the FAFSA when federal funds are being distributed (colleges are responsible for administering certain federal financial aid programs). When colleges distribute their own financial aid, they use one of two forms. The majority of colleges use the PROFILE application, created by the College Scholarship Service of Princeton, New Jersey. A minority of colleges use their own institutional applications. The states may use the FAFSA or may require their own applications. Contact your state's higher education authority to learn about the state aid programs available and the applications that you'll need to complete. The FAFSA is filed as soon after January 1 as possible in the year your child will be starting college, usually the second semester of your child's senior year of high school. You must wait until after January 1 because the FAFSA relies on your tax information from the previous year. The PROFILE (or individual college application) can usually be filed earlier than the FAFSA. The specific deadline is left up to the individual college, and you'll need to keep track of it. How is my child's financial need determined? The way your child's financial need is determined depends on which aid application you're filling out. The FAFSA uses a formula known as the federal methodology; the PROFILE (or a college's own application) uses a formula known as the institutional methodology. Under the FAFSA, your current income and assets and your child's current income and assets are run through a formula. You're allowed certain deductions and allowances against your income, and you're able to exclude certain assets from consideration. The result is a figure known as the expected family contribution, or EFC. It's the amount of money that you'll be expected to contribute to college costs before any federal aid is forthcoming. Your EFC remains constant, no matter which college your child applies to. An important point: Your EFC is not the same as your child's financial need. To calculate your child's financial need, subtract your EFC from the cost of attendance at your child's college. Because colleges aren't all the same price, your child's financial need will fluctuate with the cost of a particular college. For example, you fill out the FAFSA, and your EFC is calculated to be $5,000. Assuming that the cost of attendance at College A is $18,000 per year and the cost at College B is $25,000, your child's financial need is $13,000 at College A and $20,000 at College B. The PROFILE application (or the college's own application) basically works the same way. However, the PROFILE generally takes a more thorough look at your income and assets to determine what you can really afford to pay (for example, the PROFILE looks at your home equity and retirement assets). In this way, colleges attempt to target those students with the greatest financial need. How does my child's financial need relate to his or her financial aid award? When your child is accepted at a college, the college's financial aid administrator will attempt to create a financial aid package to meet your child's financial need (colleges aren't obligated to meet all of it). Again, you would like your child's need met with the highest percentage of grants, scholarships, and work-study and the least amount of loans. When comparing the financial aid packages that your child receives, make sure to compare your actual out-of-pocket costs among colleges, not necessarily the ratio of loans to grants in one particular package.