College Financial Aid: Do Your Homework

If one or more of your children will reach college age soon, you may be wondering how you will manage all the costs. For many families, a financial aid package provides some level of tuition support in the form of grants, scholarships, loans, or work-study placements. Aid is primarily based on the family’s need. If it is determined that you’re able to afford the cost of college, your quest for assistance may be challenging, but not impossible.

Forms must be filled out in order to assess whether you qualify for aid or not. You can get an idea of your eligibility, however, before applying for aid by using the following formula:

The Five Percent Test

Take 5% of the value of your total family assets (including home equity, savings, and investments) and add this figure to your adjusted gross income (AGI) from last year’s tax return. Divide that result by the estimated, annual cost of college. If the result is six or less, you could qualify for financial aid. If the final number is higher, you may have a difficult time convincing financial aid officers of your need.

No matter what you expect your chances to be, it is still worthwhile to go through the application process. Many different factors enter into the final outcome. Public and private institutions alike offer varying amounts of aid, and you may be pleasantly surprised.

Funding Sources

If aid is denied by your chosen institution, there are other options. The Federal government, state government, banks, insurance companies, and religious, ethnic, civic, and fraternal organizations are a few alternative funding sources. The number of Federal aid programs available is encouraging. But keep in mind that potential yearly budget cuts may have an impact on some of the following popular programs, while others may remain unaffected:

Pell Grant—These grants are generally awarded to undergraduates based on need and family income. The size of the grant depends on program funding. The maximum award for the 2015—2016 award year is $5,775, and does not need to be repaid.

Federal Supplemental Educational Opportunity Grant (FSEOG)—Students who receive financial aid from the FSEOG are awarded in amounts from $100 up to $4,000. The award is determined by a student’s financial situation and Expected Family Contribution (EFC). It is eligible for use at approximately 4,000 colleges and universities. The money given by the FSEOG is only available to students who are currently enrolled in school or have already been accepted for future enrollment. For those students currently finishing high school or other courses prior to college, it is important to apply for the FSEOG early due to the length of the application process, and because available funding may be granted before the completion of the process. Like the Pell Grant, the FSEOG is essentially “free money” that does not need to be repaid after student graduation.

Federal Perkins Loan—These loans are generally available for students in exceptional financial need who will be enrolled either full time or part time. The amount an individual can borrow depends on his or her financial situation, the amount of other aid to be received, and the availability of funds at the specific college or career school. A student should apply for Federal student aid early to assure being considered. Due to limited funds, however, not everyone who qualifies will receive a Perkins Loan.

An undergraduate student may be eligible to receive up to $5,500 a year. The total an individual can borrow as an undergraduate is $27,500. A graduate or professional student may be eligible to receive up to $8,000 per year. The total an individual can borrow as a graduate student is $60,000, which includes amounts borrowed as an undergraduate.

Federal Work-Study Program—This program provides an award in exchange for work. The typical school work schedule is about 12 to 15 hours per week (up to 40 hours per week during vacations). These jobs may be on or off campus, but they are generally with a government agency or non-profit organization if they are off campus (under some circumstances, a school may have arrangements with a private for-profit company). While the pay is generally modest, it is at least minimum wage. However, hours and compensation cannot exceed the Federal Work-Study award.

Direct Subsidized Loan—The U.S. Department of Education offers low-interest loans to eligible students to help cover the cost of college or career school. Students may be eligible to receive subsidized and unsubsidized loans based on their financial need.

An undergraduate student can borrow an annual amount of $3,500-$7,500, up to a lifetime limit of $23,000, depending on grade level. For loans first disbursed between July 1, 2015, and July 1, 2016, there is a 4.29% interest rate.

Unsubsidized Stafford Loan—As of July 1, 2012, the Department of Education ceased offering subsidized loans to graduate students. However, unsubsidized Stafford loans are available for eligible graduate students who can borrow up to $20,500 a year, with a maximum total of $138,500.

Direct PLUS Loan—Parents of dependent undergraduate students enrolled at least half-time and graduate students are eligible for this loan. The amount of the loan is generally limited to the actual “cost of attendance” minus any financial aid already received. Parents taking this loan must pass a credit check. PLUS loans have a fixed interest rate of 6.84%.

Some states base their programs not only on need, but also on academic performance. The recipients of state loans generally must be legal residents of the state and enrolled in a college or university within their state. In addition, some states have “reciprocity agreements” with other states. Remember, you may qualify for more aid than you think, and it is always better to apply. For more information, visit the U.S. Department of Education website at www.ed.gov.

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