It’s hard to talk about the cost of college without having a basic understanding of financial aid.  With the cost of attendance (COA) at public, in-state colleges over $20,000 per year (tuition, books and supplies, room and board, misc. expenses) knowledge is power to help lower the student’s and parent’s out of pocket costs, and minimize college debt.

Financial aid is money distributed primarily by the federal government and colleges in the form of loans, grants, scholarships, and work-study jobs.  The average family borrowed 27 percent of the costs of college last year and 29 percent came from grants and scholarships.  The remaining costs were covered by income and savings.

The majority of financial aid is “needs-based” aid (based on parents and students income and assets), and “merit-based” aid (scholarships) comes from the colleges.  Merit-based aid is awarded according to the students’ academic, athletic, musical, or artistic merit (GPA and SAT/ACT scores are the biggest factor).  Merit-based aid is used by the colleges to lure the best and brightest students to their campuses and can vary widely from college to college.  Private colleges will have the best merit based aid packages.

Needs-based aid is calculated based on the Department of Education formulas.  The federal government application is called the FAFSA (Free Application for Federal Student Aid).  The federal government and colleges use the FAFSA to determine and offer federal funds, loans, and merit-based aid.

Financial need is determined by a formula called the Federal Methodology.  Today’s high school seniors file the FAFSA as early as possible in January of 2013. The FAFSA can be simple for some families, but complex and subject to errors that can cost thousands in financial aid for other families.  The Expected Family Contribution (EFC) is determined by this application.  The EFC is the amount the parents are expected to contribute, not the students.  The EFC can be very large and seemingly unattainable for some.  The EFC is subtracted from the COA (cost of attendance) to determine the student’s financial need.   The students financial need will be funded in offer letters from the various colleges applied to.  The offer letter shows the financial package coming from Pell grants, state grants, merit-based aid, subsidized and unsubsidized loans.  Some schools are willing to negotiate their offer based on a secondary review of the families’ personal circumstances, e.g. medical or employment changes.

College costs are soaring, but the return on investment for a four year degree, easily over $100,000, still makes sense in the long run.  However, poor planning and common mistakes from not understanding the rules of the road can result in loss of financial aid and an increase in out of pocket costs by thousands of dollars.

(Dennis Twenge is a certified financial planner in Salem. He can be reached at dtwenge@