How to Get the Most Out of the Student Aid Maze

Many people wake up to the reality of college costs when their children approach their final years in high school. Then, when the college catalogues are on the kitchen table, parents suddenly realize that they don’t have the $3,000, $10,000 or even $50,000 annual tab.

Does that mean your child will have to forgo a higher education? Never.

There is an abundance of federal, state, local and private aid available to college students. Those who have time to plan can maximize the amount of aid they get. But aid is available even for those enrolling in college this fall.

Still, it is difficult to negotiate the student aid maze. And those who know a few tricks of the trade are likely to get significantly more than those who don’t.

The first step in applying for student aid is to fill out a financial aid eligibility form, which is usually available through high school counseling offices. That form is going to ask for information about the assets and income of both the parents and the student. Parents and students are also expected to provide copies of recent tax returns. A federal aid processing center will take that information and feed it into a complex formula that determines how much financial help the student needs.

The basis of the formula is that both parents and students are expected to contribute to college costs. What the family can’t afford will be subsidized by federal, state, local and private scholarships, grants and loans.

Generally speaking, the formula assumes that the student is able to use the bulk of his or her savings to pay for college. Mom and Dad will have to use some of their savings, but how they’ve saved and invested will have a significant impact on how much they’re expected to contribute.

For example, parents who have the bulk of their savings in a qualified retirement plan will have to pay much less than those with a similar amount in plain savings accounts. And parents who have refinanced consumer debts into home equity loans currently get a break compared to those who didn’t.

To illustrate, consider two hypothetical families. Family A has $100,000 in retirement savings and $10,000 invested in mutual funds. They refinanced their car and credit card loans into a $50,000 home equity loan, which also cut the equity in their home to $50,000.

Family B has $100,000 in the stock market and $10,000 in retirement savings. Between credit cards and car loans they owe $50,000 in consumer debt. But they have $100,000 untapped equity in their home.

Mathematically, these two families are nearly identical. But when it comes to student aid, they’re nothing alike.

All other things being equal, Family A would be expected to contribute about $3,360 to their freshman’s college bill, while Family B would be expected to come up with a whopping $11,200.

The massive disparity is the result of two factors--equity in retirement accounts are not currently counted as an asset for financial aid purposes, while general savings are. (Current-year contributions to retirement accounts are counted as an asset, however.)

And home equity counts against you, but you get no credit for consumer debt. Starting in the 1993-94 school year, equity in a personal residence will no longer count against you. But equity in rental and investment real estate will.

When the aid application is completed, your child will designate which colleges should get copies. The colleges will put together aid packages that include all the basic sources of aid, including Pell grants, supplemental education opportunity grants, work-study awards and federally subsidized loans.

If the child has applied early enough, there may also be state and private aid awarded. But since there is a limited amount of aid available, those who wait until the school year starts are likely to get much less than their early-bird peers.

What happens if the aid provided simply isn’t enough? That depends on the reason for the shortfall.

Aid counselors are able to review and increase awards if they believe the financial eligibility statement misrepresents the family’s ability to pay.

If the family must pay for the care of an aging relative or if the parents recently divorced, the counselor may revise the student’s aid eligibility, for example. There’s no way to ensure a higher aid amount, though. It’s largely a subjective decision made by the aid counselor.