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Frequently asked questions about college financial aid

What types of college financial aid are available?
There are two basic types of financial aid available to help pay for a college education: gift aid and self-help aid. Gift aid is the best, because it’s money that you don’t have to repay. Common types of gift aid include grants, which are usually based on a student’s personal financial need, and scholarships, which are primarily awarded based on academic performance. Fellowships are another form of gift aid, based on an individual’s merit, and are usually reserved for those pursuing a graduate degree. Self-help aid is money that you must earn or repay. Loans are considered a type of self-help aid, because they must usually be repaid with interest. Government-run work-study programs, which provide a cash stipend in exchange for work at a specified job, are another common form of self-help aid.

What is need-based financial aid?
Need-based financial aid is college aid that is awarded to students based on their income, as well as the income and size of their family. Need-based aid can come in a variety of forms, including loans and outright grants.

What is merit-based financial aid?
Merit-based financial aid is aid that is awarded to you for your academic, artistic, or athletic skills. Eligibility is based on your special talents, combined with your test scores, grades and hobbies. Those criteria set merit-based aid apart from need-based aid, which is awarded according to your income level and similar factors.

What is a school’s Cost of Attendance (COA)?
Colleges prepare a budget, technically known as their Cost of Attendance, or COA, to help students plan their educational expenses and apply for financial aid. The typical budget includes tuition, fees, books and supplies, room and board, travel, and personal and incidental expenses.

What is the expected family contribution (EFC)?
A key factor that determines whether your teenager can receive college financial aid is your expected family contribution, or EFC. Your EFC is calculated according to a formula set by Congress. It takes into account the family’s income, savings and other factors. As a general rule, parents are expected to contribute about 6 % of their savings to fund their child’s education. But, since the child presumably has fewer overall expenses, about 35 % of his or her savings will be expected to be used to meet college costs. Your EFC will then be compared to the cost of attending the college your child has selected to determine whether he or she is eligible for financial aid.

What is the Federal Methodology (FM)?
The Federal Methodology, or FM, is the formula the government uses to determine the amount of money a family is expected to contribute to their child’s college education. As a result, it’s a key factor in determining whether your son or daughter will qualify to receive financial aid from the government. Some colleges and universities use a different formula to determine how they dole out funds of their own. Such a formula is called an Institutional Methodology (IM), and can vary from one campus to the next.

What is the need gap for college aid?
Colleges and the federal government have a formula for determining how much you are expected to contribute toward your teenager’s college education. There’s also a formula to determine how much that education will cost. The difference between those two figures is your need gap. Unfortunately, the school probably won’t have the cash to fill that gap and you will be responsible to bridge it on your own. According to FinAid, the Financial Aid Information page, "Schools have limited funds available for financial aid, and they must determine how to best allocate the funds to their neediest students. Very few schools can afford to meet the demonstrated need of all their students, so most assume that all students and/or parents must pay a certain minimum amount, regardless of their need. Others give financial aid only to the neediest students." The college will expect the student to obtain some of the funds to fill the need gap by working, while parents may be expected to borrow money through educational loans such as the federal Parent Loan for Undergraduate Students (PLUS).

What exactly is the Free Application for Federal Student Aid (FAFSA)?
Completing a Free Application for Federal Student Aid (FAFSA) is the first step in seeking financial aid for college. The forms are available at all colleges and most high schools. It takes only an hour or two to fill out a FAFSA, and it costs nothing to have the application processed by the government.

Do I have to fill out the FAFSA to get financial aid?
You must complete a Free Application for Federal Student Aid (FAFSA) if you hope to get any sort of financial aid to attend college or trade school. Some private colleges also require that you complete the standard Financial Aid Form (FAF), which asks for more information than the FAFSA. One reason why colleges and universities insist that you complete the FAFSA is that state governments and schools themselves have only a limited amount of money to offer needy students. If you qualify for aid from Uncle Sam, those other funds can be used to supplement the federal money you receive or used to help another needy student get a higher education.

If I turn in the FAFSA sooner, will I have a better chance of getting financial aid?
The deadline for completing and returning a Free Application for Federal Student Aid, or FAFSA, is May 1 of the year that you or your child expects to enter college. However, the completed application should normally be submitted at least two months sooner -- by March 1 -- if you hope to be eligible for state aid. You must complete the FAFSA to obtain any sort of financial aid to attend college or trade school. Ideally, you should file a completed FAFSA in January of your senior year in high school. But don’t file too early: An application received before January 1 of the year you expect to start college will be automatically rejected.

What is the Student Aid Report (SAR)?
The first step in determining whether you are eligible for college financial aid is to complete the federal government’s Free Application for Federal Student Aid form (FAFSA). About six weeks later, you will receive a Student Aid Report (SAR). The report will summarize the information you provided on the FAFSA and will indicate the amount of money you may be eligible to receive through a Pell Grant, the most common form of federal aid. The SAR will also provide an estimation of the Expected Family Contribution (EFC). That’s the sum the government expects you and your family to contribute toward your college expenses.

Do grants have to be repaid?
A grant is perhaps the best kind of college financial aid because, by definition, it is a gift that you don’t have to repay. Most grants are need-based, which means they are awarded based on the student’s income and other financially related factors. A scholarship is a particular type of grant, awarded on the basis of a student’s grade-point average and other measures of academic merit.

What are Pell Grants?
The best way to finance a college education is to get a grant. It’s free money that never has to be repaid. For undergraduates, the single largest source of cash is the federal government. Its Pell Grant program offers money to low and moderate-income people who want to go to college. The lower the family’s income, the more the student can receive. It’s important to apply for a Pell Grant even if it’s clear that you or your family makes too much money to qualify. That’s because it’s a prerequisite for getting a government-subsidized student loan or a grant from the college itself. Pells are generally available to full-time or even half-time students at accredited academic, technical or vocational institutions.

What is a work-study program?
The federal work-study program isn’t really a grant, but it isn’t a loan, either. Work-study programs are administered by the college aid office and are usually open to both middle-income and low-income students. The student works at the job until the full reward -- say, $1,200 -- is earned, and then the job is over. However, the student may be able to qualify for another work-study job. The work-study program can provide students with valuable work experience as well as cash. The program is open to graduate and undergraduate students alike. Some employers have been so impressed that they have hired their former worker-study students upon graduation.

What is the Health Education Assistance Loan?
Health Education Assistance Loans, sometimes called HEAL loans, are available to students who plan to pursue health-related careers. The loans are made by financial institutions and schools. They are available to students studying medicine, osteopathy, dentistry, veterinary medicine, optometry, podiatry, public health, pharmacy, chiropractic, health administration, clinical psychology and a handful of other fields. HEAL loans aren’t based on financial need, and they aren’t subsidized by the government. Interest accrues from the moment the loan is obtained until it is repaid. Payments can be postponed while you’re still in school or if you qualify for a deferment, but the interest will keep accruing.

What is the federal Perkins Loan?
A Perkins Loan is a federal loan available to disadvantaged students who want to go to college. The loans are available to graduate and undergraduate students alike. Like Stafford loans, repayment of Perkins loans is guaranteed by the government. But unlike other federal loans, Perkins loans are made by the school through a combination of federal and school funds. As a result, the school itself is considered the lender. Perkins loans used to be known as National Direct Student Loans, but were renamed in 1986.

What are PLUS loans?
If you’re trying to pay for your child’s education but your child doesn’t qualify for a loan or grant himself, you can take out a PLUS loan. PLUS stands for Parental Loans for Undergraduate Students. They are federally guaranteed loans made directly by the government or by a financial institution to parent borrowers. These loans allow parents to borrow money to pay the education expenses of their dependent children. Interest is charged from the date the loan is issued until it is paid in full. The lender deducts an origination-insurance fee from the amount of the loan -- 4% for loans obtained on or after July 1, 1994 -- which you must pay back. There is no grace period for PLUS loans; you must begin repaying the loan within 60 days of receiving the money. It’s worth noting that rates on PLUS loans are generally higher than rates on student loans.

What are Stafford loans?
Most government loans for college expenses are Stafford loans. They used to be called Guaranteed Student Loans (GSLs) or Federal Insured Student Loans (FISLs). A Stafford loan is made directly by the government or by a financial institution to finance a student’s college or graduate-school education. The loan may be subsidized (based on financial need) or unsubsidized (available regardless of need). If the Stafford loan is subsidized, the government will pay the interest on it while the student is in school or during any authorized period of deferment. If the Stafford loan is unsubsidized, interest is charged from the time the loan is obtained until it is fully repaid. The student has the option of making the interest payments while still in school, or letting it accumulate and paying it after graduation.

Is the interest on student loans tax-deductible?
You can generally deduct up to $2,500 in student loan interest payments (in 2002) even if you do not itemize deductions. Qualifying loans include any debt incurred to pay higher education expenses for yourself, your spouse, or a dependent at the time you incurred the debt. The student must have been enrolled on at least a half-time basis when the loan was made.
You cannot take this deduction if you use the Married Filing Separately filing status, or if you are claimed as a dependent on someone else’s return.

What is Sallie Mae?
The Student Loan Marketing Association, or Sallie Mae, buys student loans that lenders have made, pools these loans, and then sells shares in the pools to investors. By selling their loans to Sallie Mae, lenders get a lump-sum which they can use to make new loans to other students. Sallie Mae is a publicly-traded company; its stock is traded on the New York Stock Exchange under the symbol SLM. You can learn more about the organization as well as college aid in general by visiting the Sallie Mae Web site.

Are scholarship-search services worth the money?
Several firms operate so-called scholarship-search services, which purport to help you find sources of college aid that you couldn’t find by yourself. Some financial experts, however, say the services they provide aren’t worth the fees that they charge. Some of these services charge up to $100 just to tell you about scholarships that either you will automatically be considered for or that you’re not even eligible for. Even the legitimate firms may tell you about small scholarships -- say, for $500 -- that require you to complete lengthy applications and essays.

How can I tell if a scholarship search service is a scam?
Some scholarship-search services are legitimate, helping to find sources of loans or grants that a student might have trouble locating alone. But other services are blatant scams, hoping to make money from your efforts to fund your college education. Here are two steps to take before using a scholarship service, provided by FinAid, the Financial Aid Information page: 1. Ask your friends if they know of anybody who used such a service and got an award. If nobody you know has used the service and got any money, perhaps the search firm isn’t as good as it claims. 2. Before using any scholarship search service, ask how many students actually won scholarships as a result of using their service, and how many didn’t. Insist on real numbers, not vague hedges.

Are there any special scholarships for minorities and women?
In addition to the various government college-aid programs available to all U.S. students, minority and women students are eligible for thousands of special programs that can help finance their higher education. The list of these programs is long, so ask the financial aid counselors at the school you have chosen about these special opportunities. Also check with minority and women’s groups in your area and the various professional organizations. Books on programs designed especially for minorities can be found in libraries and bookstores. One is "Money for College: A Guide to Financial Aid for African-American Students" (Penguin Books, New York). It lists about 1,000 sources of financial aid for minority students and includes general information about federal student aid. The Congressional Hispanic Caucus Institute may be especially useful for Hispanic students. The CHCI provides a free scholarship search of a database of 200,000 Hispanic-specific financial aid resources. Don’t forget to check the Internet, too. One of the best college-aid Web sites is FinAid, the Financial Aid Information Page. FinAid also has links to dozens of other valuable sources of information.

Is it true there’s a scholarship program that’s only open to left-handed people?
Yes, it’s true. There really is a scholarship program open only to students who are left-handed. But there’s only one, it’s relatively small, and it’s only good for attendance at a college that you have probably never heard of before. This question comes up frequently, because the popular press likes to use it as an example of unusual scholarships. The only scholarship for left-handed students is the Frederick and Mary F. Beckly Scholarship of up to $1,000. This scholarship is awarded to left-handed students who will be attending Juniata College. For more information, write to Office of Student Financial Planning, Juniata College, 1700 Moore Street, Huntingdon, PA 16652.

Are scholarships taxable?
Most scholarships and fellowships are tax-free, but there are some limitations. Scholarships and fellowships of a degree candidate are tax-free to the extent that the grant pays for tuition and course-related fees, books, supplies and equipment that are required for courses. Amounts for room, board, and incidental expenses are taxable. If you are not a candidate for a degree, your entire grant is taxable. The Internal Revenue Service’s definition of "degree candidate" is broad. You qualify if you are attending a primary or secondary school, college or university. Students at most trade and vocational schools are also considered degree candidates.

Will the government supply financial aid to students who want to study abroad?
Many of the government-linked grant and loan programs available to students who want to attend school in the U.S. are also available to Americans who would like to study abroad. In fact, if you are already receiving student aid while attending college here, you may be able to transfer the money to attend school in another country. Special rules apply to students who want financial help for study-abroad programs. For example, you must usually carry at least a half-time class load, and the credits you earn must be applicable toward your degree. Talk to your current school’s financial aid counselor to see what special requirements are involved and what kind of aid is available.

Are there any private sources of aid available to college students who want to study abroad?
Many of the government-linked grant and loan programs available to students who want to study at U.S. colleges can also be used by students who wish to study abroad. In addition, there are literally thousands of privately funded scholarships and loans available to American students who would like to study in a foreign country. Requirements of these privately funded programs vary. Some require that you attend the college full-time, while others require you to take only a half-load of classes. Others dictate that you go to a particular school, or study in a particular nation. Still others require that you spend at least some of your time abroad doing public service in addition to studying. One of the best online sources about aid for study-abroad programs -- and college aid in general -- is FinAid, the Financial Aid Information Page. FinAid also has links to several other useful Web sites, including the one operated by the American Institute for Foreign Study.

Why does saving in my child’s name hurt my ability to qualify for financial aid?
Many parents who want to start saving for a child’s college education are tempted to put the investment account in the child’s name rather than their own. By doing so, the folks think they will bolster the chances that their child will eventually qualify for college financial aid. In reality, though, saving in your child’s name or transferring your assets over to him (or her) will likely hurt your chances of getting financial help. That’s because the people who run the various financial aid programs know that most parents have a lot more expenses than their kids do. So, when they look at an aid application, they usually expect the parents to use only about 5.6% of their money to pay for tuition and related costs. The child, on the other hand, is usually expected to give up about 35% of his or her money to meet college costs. As a result, it’s usually better to save the money in your name, not your child’s.

Will the money my son has saved from his high school job hurt his chances of obtaining financial aid?
In many ways, the financial aid process actually encourages kids to start working and saving for college while they are still in high school. So, you don’t have to worry that your high-schooler’s job will scuttle his chances for college aid unless he makes an inordinate amount of money. In fact, if your child qualifies for financial aid, he or she is expected to contribute a certain amount to education costs from employment during the school year or summer breaks and from savings.

What if I make too much money for my children to receive financial aid?
Even if you think that you or your family earns too much money to qualify for college financial assistance, you should apply for it anyway. According to FinAid, the Financial Aid Information home page, "Don’t assume that you don’t qualify for financial aid. Virtually all U.S. citizens or eligible non-citizens enrolled at least half-time are now eligible for some form of financial aid, including the federal unsubsidized Stafford Loan and the federal Parent Loan for Undergraduate Students (PLUS). Even if you don’t qualify for a grant, you may still be eligible for other forms of financial assistance." For example, some loans and scholarships are available regardless of income. The size of your family also plays a role. In addition, a parent’s home equity or retirement plan are no longer considered when the federal government determines how much financial help a student can receive.

Can making my child financially independent help them get financial aid?
You can improve your chances of getting college financial aid -- but certainly not guarantee that you’ll get some -- if your child is deemed independent. That’s because an independent student’s eligibility for aid is based solely on his or her own income. For federal aid purposes, a student is generally classified as independent at age 24, or if they provide more than half of their own support. A student younger than that can still be considered independent if he or she has a child or other dependent; is a graduate or professional student; is a ward of the court or an orphan, or is a veteran of the armed forces. A married student may also be considered independent, but the spouse’s income will be considered when determining eligibility for college financial aid.

How can having a 401(k) help my child qualify for financial aid?
One commonly overlooked benefit of making the maximum annual contribution to a 401(k) retirement plan is that it can boost your child’s chances of getting financial aid when it’s time to go off to college. Increasing your 401(k) contributions to the maximum level might make it easier to qualify for financial aid because these balances are excluded from most college-aid calculations and reduce your taxable income at the same time. Earnings within such plans accumulate on a tax-deferred basis and may be borrowed under certain exacting standards for your children’s education. Interest that you pay back to your account is not tax-deductible, but does accrue to your account balance. You should make sure your plan allows borrowing if you consider this alternative. Before you take this approach you should check out your plan’s loan rules. Some plans don’t allow loans, and some plans have very restrictive provisions that may invalidate this idea.

What can I do if I’m turned down for financial aid for my child’s college education?
If there is a significant discrepancy between the amount of financial aid awarded and your need, perhaps you didn’t bring some special circumstances to the attention of the financial aid administrator. Make an appointment to review your financial situation with a counselor in the financial aid office, especially if your family circumstances have changed since the forms were filed. If circumstances warrant, you may be able to get an upward adjustment. For most families, however, the increase will be limited to loans, with the institutional grants remaining unchanged.

How can I use a home equity loan or line of credit to pay for college?
A home equity loan or equity line of credit is, in effect, a second mortgage. The equity in your home is collateral for a loan or a line of credit. A line of credit will generally carry a higher interest rate but offers more flexibility. If you want to fund college expenses a year at a time with the intention of paying the balance off during the year, the line of credit may be the best way to go. If, on the other hand, you want to take a loan out for the entire college expense or feel that you want the flexibility to pay over the years (and beyond) that your child is in college, the equity loan may be the best way to go. Regardless of the option you choose, both offer a mortgage deduction for income tax purposes, which reduces the effective cost of interest on the borrowed amount.

Do some colleges and universities offer interest-free monthly payment plans for the current year’s tuition and fees, books, and room and board?
Yes, more colleges and universities are using billing agencies to administer monthly payment plans for tuition, fees, books, and room and board. You generally pay a nominal annual fee (around $50) and then monthly payments prorated for projected annual expenses. This is attractive for parents who can meet monthly cash flow payments but do not have sufficient accumulated education savings. Check with the college’s Registrar’s Office to determine if such a plan is offered. Also, look through financial aid materials in the college’s application packets.

Can I borrow money from my children to help them pay for college?
One offbeat way to help finance your child’s education is to borrow money from your child to do it. Doing so could provide some valuable tax breaks. If your children have their own money which they inherited from a grandparent or earned on their own, you can borrow these funds directly from them at fair interest rates and then use the funds for their education. Any interest that you pay to your children may be deductible, subject to investment interest rule limitations, by you and taxable to the child at potentially lower income tax rates. In order for this technique to work, the obligation to repay the loan to your child must be legally binding and you and the child must have a written agreement or note.

Does it make sense to borrow against my life insurance policy to fund a college education?
If paying for your child’s college education threatens to put you in the poor house, consider borrowing against the cash value of any life insurance policy you hold. Before you borrow, though, think about your life insurance needs as well as your need for college cash. You might not want to borrow the maximum amount and then die, leaving your survivors with significantly less money to go on without you.

Does it make sense to refinance a mortgage to pay for college?
Don’t confuse refinancing with a home equity loan or equity line of credit. Refinancing is more involved. You are actually paying off your existing mortgage and replacing it with another mortgage. Refinancing is attractive if interest rates have fallen sufficiently to realize lower effective mortgage payments. The lower payments may free up monthly cash flow, which can be used to fund college expenses, or you can increase the amount of your mortgage to cover the expected cost of college. This allows you to finance college expenses with a tax-deductible loan, make monthly payments over a longer period of time and have a more disciplined payment structure. The drawbacks are that it does reduce the equity in your home, increases the risk of possible foreclosure and may cost more in interest charges if the term on the new mortgage is greater than the remaining term on the existing mortgage. For example, if you have 10 years left on your current mortgage and refinance for 30 years, your total interest costs over your lifetime will increase, even though your monthly payments may decrease. You also may have to pay substantial closing costs to refinance. There are often better options for financing college expenses than refinancing your home. Refinancing usually makes more sense than a home equity loan or second mortgage if the rate on your home loan is higher than the rate you could get today. By refinancing, you could draw out enough cash to pay for college, and most or all of the debt would be tax-deductible. The problem is that if you pull out enough to pay only the first year’s tuition, you may have to pay fees to refinance all over again next year. On the other hand, if you pull out enough for all four years of college, you’ll be paying interest on money that you won’t really need until the student’s sophomore, junior and senior years.

My daughter is going to be a freshman in college; would it be wise to pay for all four years up front?
If your child has already selected a college or university and is about to enroll, the school may give you the chance to pay for all four or five years of education in a lump sum. In exchange, the school will likely guarantee that you will be unaffected by tuition increases over the next few years; even if tuition goes up, you won’t be expected to pony up more cash because the tuition already will have been paid. This type of program can be a good deal, especially if you have enough cash to pay for your child’s full education all at once. However, you need to examine the plan’s fine print and also determine how serious your child is about completing school. Under some plans, the college gets to keep some or all of the money you pay even if your child decides to drop out or transfer to another school before earning a degree. This is the equivalent of a guaranteed investment that pays a tax-free return equal to whatever the rate of tuition increase turns out to be. It’s a gamble, in the sense that other investments may offer a greater return, but you won’t be scraping the barrel for tuition money when senior year rolls around.

Is ROTC an effective way to help fund college?
If you're interested in joining the military after going to college, it's hard to beat the financial aid program offered by the Reserve Officers' Training Corps. ROTC provides students with money for college while they are in school. In exchange, the student must make a commitment to join the armed services after graduating. Upon graduation, students become commissioned officers in the Navy, Army, Air Force or Marine Corps. ROTC scholarships pay for tuition, fees, and books for all four years of college. Smaller programs also are available for students who want to make lesser commitments.