The Financial Aid Game The sticker price of college is daunting. Here's how to pay less

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The Financial Aid Game
Troy Onink, 03.10.09, 06:00 PM EDT

The price of college, after growing faster than inflation for three decades, is enough to give all but the wealthiest families sticker shock.

Four-year private colleges now charge an average of more than $37,000 a year, including tuition, fees and room and board, with expenses at the most elite colleges topping $50,000. (See "The Most Expensive U.S. Colleges.") Four-year public colleges, on average, top $18,000 per year. Even the average cost of attending a two-year public college has reached $14,000 per year.

That's the sticker price. Your family's actual cost will vary depending on how much financial aid, need-based and/or merit-based, your student receives. Merit aid is a separate topic and intertwined with the question of admissions, since schools use this aid to attract the students they want most. It's always difficult--and even harder this year--to predict how much merit aid a student will be offered by any given school, yet it can be crucial to determining where your child goes. For more, see "The Mysteries Of Merit Aid."

By contrast, need-based aid is generally based on set formulas determining a student's and parents' ability to pay for college out of both their income and some of their assets. These formulas may not be entirely fair or generous, but at least they're somewhat predictable.

The formulas are used to come up with something known as your "expected family contribution." The EFC is subtracted from the college's total cost of attendance, including tuition, fees, room and board. If the family's EFC is less than the cost, the student is eligible for need-based aid. (Yes, you can appeal the results and ask a school for more help in special circumstances. But first, you must go through the formulas.)

The needs-based calculation may be predictable, but it's not simple. There are different methods for determining a family's EFC. One, the "federal methodology," determines eligibility for federal Pell Grants and Stafford student loans. It is also used by public colleges and most private ones to determine how much need-based "institutional aid" a family will get--basically, how much of a price break a school will give you. The Free Application for Federal Student Aid (FAFSA) is the form used to determine a student's need under the federal methodology.

Another formula, called the "institutional methodology," is used by about 300 pricier private colleges to determine need for their institutional grants and scholarships. These schools require families to fill out both the federal form and a so-called CSS Profile, which asks additional questions and calculates contributions somewhat differently. It's sort of like filling out your 1040 income tax form only to find that you must then fill out form 6251 to calculate the alternative minimum tax.

In some ways, these forms are more intrusive than tax forms, since they ask about your assets (and in some cases, asset transfers and purchases) as well as your income. The formulas don't count your retirement accounts as available for college, and the federal formula ignores your home equity too. Some private colleges, however, do expect you to tap into that equity--or, these days, what's left of it.

But for most families, it's income that matters the most, with the EFC rising sharply as a family moves up the middle-class ladder. As the table shows, a family of four with an income of $140,000 claiming the standard deduction will pay about $22,000 in federal tax in 2008 and will be expected to contribute (under the federal formula) at least $28,000 per year toward the cost of college in 2009. That is a combined total of $50,000 per year, or 36% of the family's adjusted gross income.

2008 AGI

2008 Federal Tax

2009 Federal EFC

$40,000

$0

$1,000

$60,000

$2,000

$5,000

$80,000

$5,000

$11,000

$100,000

$9,000

$17,000

$120,000

$16,000

$22,000

$140,000

$22,000

$28,000

$160,000

$27,000

$35,000

$180,000

$32,000

$41,000

$200,000

$38,000

$47,000

$300,000

$72,000

$74,000

AGI: adjusted gross income.
EFC: expected family contribution.
Dugg on Forbes.com


The determination of your need is an annual affair, meaning that if you've lost your job or profits from a business you own have evaporated, your need could rise from one year to the next. There is, however, no guarantee that the school your child is attending will meet that new, greater need.

Even if you're unlikely to qualify for need-based aid, complete the financial aid forms. Many colleges won't consider your child for "merit" aid if you don't fill them out.

Note that if you have two children in college, your EFC won't be twice what it would be for one child. In fact, in the federal formula, the parent's portion of the family contribution gets split equally among the number of students in college. So if your income is $200,000 and your EFC is $47,000, your EFC for each child is $23,500.

The CSS Profile applies a little more than half the parents' contribution to each of two students. Bottom line: If you have more than one child attending a pricey private college, you may qualify for need-based aid even at a fairly high income level.

That's the good news. The bad news is that making contributions to retirement plans or certain other tax-saving moves can actually increase a family's EFC above those shown on the table. Say your adjusted gross income as reported on your tax return is $140,000, but you and your spouse, between you, contribute $20,000 to your 401(k)s. The college formulas add that $20,000 back to your income, raising the expected family contribution.

In effect, the formulas don't acknowledge that parents with college-age children need to save for their own retirements, even if these parents have no traditional pension plans and their 401(k)s have been devastated by the market. Yet any amount parents have already sheltered in retirement accounts--even $1 million or more--isn't counted as "available" for college. This is something that parents of younger children should keep in mind as they decide whether to save for their own retirements or for college costs first.

So what happens if a student is deemed eligible for need-based financial aid? He or she may be awarded anything from grants and scholarships to student loans and work-study funding. Yes, loans and work-study are considered "aid." Remember that, except at a minority of the wealthiest schools, there's no guarantee that the student's total need will be met.

The Stafford student loan comes in two versions: subsidized and unsubsidized. Subsidized means the government pays the interest due on the loan while the student is in college; with an unsubsidized loan, the interest builds during college and is added to the loan balance. The same is true of loans made directly by the government.

Pretty much any student can get an unsubsidized Stafford loan, but students must demonstrate financial need to get a subsidized loan. Parent PLUS loans are also available to creditworthy borrowers and carry reasonable interest rates and repayment terms.

As for straight grants from the federal government, they go to families of modest means. The federal Pell grant for the 2009-2010 academic year is worth up to $5,350 per student, but the student must have an EFC of less than $4,617 in order to be eligible for any portion of that. Students with a $0 EFC can receive the maximum grant amount of $5,350.

Apart from loans, middle-class students get their federal aid through tax credits and deductions. This aid is also need-based, since the breaks are phased out for higher-income folks.

The good news on the tax front is that the $787 billion stimulus expanded eligibility for a $2,500 college credit for 2009 and 2010. That's a credit, not a deduction, so it's $2,500 cut from your tax bill. Married couples with adjusted gross incomes of up to $160,000 and single parents earning up to $80,000 can claim the full credit for 2009. (For more details, see "The New, Improved College Tax Credit.") Moreover, the Obama administration has proposed making this expanded break permanent.

If you're completing your 2008 taxes now, be aware that eligibility for the 2008 education credits is more limited. For married couples filing joint tax returns, eligibility for the $1,800 Hope Credit and $2,000 Lifetime Learning credit begins to phase-out at an AGI of $96,000. For single parents, the phase-out begins at $48,000. You can only claim one credit per child.

If your 2008 income is too high to claim these credits, you might be able to take a $4,000 deduction for tuition and fees instead. For details on all the 2008 tax breaks available, download IRS publication 970, available at irs.gov.

Troy Onink is a college funding consultant who provides advice on paying for college at stratagee.com.