How College Financial Aid Really Works

Mar 1, 2021
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For many families with college-bound children, how to pay for college can become one of their greatest financial challenges, both in practical terms (coming up with the money) and emotional terms (deciding on the “right” schools). Making it more difficult is a lack of clarity about how much it will cost to attend a particular school and some misperceptions about the amount and type of aid that will be available.

We dealt with a lot of this in the March newsletter (see Navigating the College Admissions Process), which drew on the findings of Jeffrey Selingo in his helpful book, Who Gets In and Why. But there were a couple of important points that we didn’t have the space to cover.

Assessing a family’s financial “needs”

Many schools give the impression that they will cover all of an accepted student’s expenses that their family can’t afford. But Selingo said that can be misleading. “There is a dirty secret in the shaping of a freshman class that few admissions deans like to talk about: money matters.” It’s important to understand the difference between a school that is “need aware” and one that is “need blind.”

At “need aware” schools, an applicant’s ability to pay is considered during the admissions process. An accepted student at such a school is more likely to receive the aid their family needs than an accepted student at a “need blind” school. That’s because “need aware” schools typically only accept students whose financial needs they are truly willing to cover. As Selingo explained, “They think it’s fairer to reject a student rather than accept them along with a $20,000 bill they can’t really pay.”

He told the story of one applicant that a school’s admissions officers deemed “impressive,” but because her family could only contribute a small fraction of the school’s tuition, they decided she was too expensive.

At a “need blind” school, while a student’s financial needs will not sway an admissions decision, an acceptance comes with no guarantee about how much aid will be offered. According to Selingo, most such schools provide “only a fraction of the money a federal financial aid formula or the institution’s own aid recipe determines a family can afford to pay for college.”

This is where a family’s expectations of what college will cost can run hard against the eventual reality. After filling out the FAFSA (Federal Application for Federal Student Aid) and finding out their EFC (Expected Family Contribution), many families are surprised to find out how much they are “expected” to pay. Many families are then further surprised to find out that the school won’t cover the full difference between the tuition and the family’s EFC. In many cases, students are “gapped” (offered less than that difference). According to Selingo, “The average amount students are gapped at a public college is $11,000; at private colleges, it’s more than $16,000.

Thanks to a bill signed by then-President Trump at the end of December, the EFC is being replaced by an SAI (Student Aid Index). While the implications aren’t clear yet, the change is believed to mean that poorer students will get more aid and wealthier students will get less. It also isn’t clear when this change will go into effect, but it is believed that it will first impact families who fill out the FAFSA in the fall of 2022.

How to prepare

What are the parents of college-bound children to do?

  • Decide on your family’s budget. How much are you willing and able to spend on college?

  • Work college savings into your budget, using a tax-advantaged account, such as a 529 plan, to save and invest for college

  • At a certain age (middle school isn’t too soon), have conversations with your kids about how much college costs and how much you are planning to cover

  • Understand the buyer/seller dichotomy that exists among schools, as discussed in the March newsletter article, and take that into account when helping your children decide which schools to apply to

  • Ask the schools your child is interested in whether they are “need aware” or “need blind”

  • If your children will need to borrow money, make sure they understand how various amounts will translate into a monthly payment once they need to begin making payments on their loans

  • Manage your own expectations about the costs of college, accepting the idea that the price tag will likely be higher than the estimate you came up with, even using the best possible information

If you’ve been down this path with your children, what’s been your experience with paying for college? How did the aid you received compare with your expectations? What financial advice do you have for parents of children who are yet to go to college?

Written by

Matt Bell

Matt Bell

Matt Bell is Sound Mind Investing's Managing Editor. He is the author of five biblical money management books and the teacher or co-teacher on three video-based small group resources. His latest book, Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management, was published by Focus on the Family in 2023. Matt has spoken at churches, universities, and conferences throughout the country and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

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