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Here you'll find some featured resources to help you pay for college. Our current featured article is on understanding how the financial aid process works. This is critical as now is the time to complete the Free Application for Federal Student Aid..

How Financial Aid Really Works and How You Can Get More of It

Financial aid can seem like a big, scary mystery. We've actually met people who had nightmares about it! One student's surreal experience involved a despotic financial aid officer sitting on top of an 800-foot high pile of cash. Below, a line of weary parents waited their turn. A lucky few received a small handful of dollars. But most got nothing and walked away with bowed heads. Fortunately, this was just a bad dream. Reality is far less dark and mysterious. Financial aid officers are not your arch enemies but your allies in helping you pay for college.

The financial aid system has evolved over many decades and is based on a set of well-established rules. If you understand these rules, you will not only feel more in control of the process but you will also insure that you receive the greatest amount of financial aid that you deserve.

This guide is designed to give you an overview of how financial aid works and to present the steps you can take to get your fair share. However, it is not a comprehensive guide, and for that we recommend picking up a good book such as 1001 Ways to Pay for College.

Know the golden rule of financial aid.

Before we get into the details of getting financial aid, you need to understand one important philosophical principle: College education is not an entitlement. In other words, unlike a high school education, the government does not guarantee anyone the right to an affordable college education. The government does believe that it is in the best interest of society to make college as accessible as possible. So it provides aid—but only after you have exhausted nearly all of your own resources. Financial aid is not designed to help you spend less money on college, but rather to help you afford to go to a college that you might not have been able to pay for on your own. You also have to keep in mind that since a college education is not an entitlement, there is no guarantee that even if you meet every qualification, the government or college will automatically come to your aid.

In practical terms, this means that while you should apply for financial aid, you should not view it as a sure thing that will take care of the bills you can't afford to pay. Think of yourself as a mountain climber who has a 90-foot rope. If you want to scale a 110-foot cliff, then financial aid might give you that extra 20 feet of rope to do so. But if you want to climb a 150-foot cliff, you will find that even with the extra 20 feet of rope from financial aid, you still need to bring more of your own rope. Another option is to consider climbing a lower cliff (e.g. a less expensive school).

Know what forms you need to complete and why.

Public and private colleges have adopted different formulas and procedures for determining how much money your family can afford to pay for college. Public schools (and some private ones) use what is known as Federal Methodology. This is the formula provided by the U.S. Department of Education to calculate expected family income as it relates to student financial aid.

To apply for federal aid, you need to complete a form called the Free Application for Federal Student Aid, commonly referred to by its acronym: FAFSA. Using the information you provide on the FAFSA, the government calculates how much money you can afford to pay for one year of college. The Federal Methodology formula includes things like your income and assets but does not consider assets such as retirement accounts and equity that you have built up in your home.

Some private colleges want to know about your retirement accounts and home equity and will use Institutional Methodology. By completing the College Board's PROFILE form in addition to the FAFSA, you would provide this additional information to the colleges that require it. While Institutional Methodology is somewhat stricter than Federal Methodology and will usually result in calculations that show less financial need, you really don't have a choice in the matter since you need to submit the financial aid applications the colleges require.

Regardless of the forms you complete, the goal of all financial aid calculations is to come up with a single number. This number is known as your Expected Family Contribution (EFC). It represents the amount of money that your family is expected to contribute for one year of your education. This number can range from $0 to infinity.

Understand how your Expected Family Contribution is determined.

At this point, you are probably wondering how in the heck the government uses a snapshot of your family's finances to determine how much you can spend on college. Like everything from taxes to Social Security benefits, the government uses a formula to calculate your Expected Family Contribution. Here is the general formula, (which can change from year to year), that is used for computing your EFC:

Parents' adjusted income x (up to 47 percent) +
Parents' assets x (up to 5.65 percent) +
Student's income x (up to 50 percent) +
Student's assets x (20 percent) = Expected Family Contribution

There are some factors that add a modicum of flexibility to the calculations, including family size and the number of children in college. These indicators are used to adjust the exact percentage assessed against your income and assets. Also, there are income and asset protection figures that prevent the government from tapping everything that you have.

If you want a really detailed calculation to forecast your Expected Family Contribution, then we recommend using an online EFC calculator. One good calculator can be found at this URL address: http://www.collegeanswer.com/paying/est_efc/efc_index.jsp. You can play with it and try different numbers to simulate various changes in your finances. If you want to do the calculations yourself on paper, you can download an EFC worksheet at http://www.ifap.ed.gov/IFAPWebApp/. Look under the heading "Worksheet, Schedules and Tables." Once you know your Expected Family Contribution, it's easy to determine your financial need. All you do is take the total cost of attending a specific college—including tuition, room and board, books and travel expenses—and subtract it from your Expected Family Contribution. The difference is your financial need. It's important to remember that individual schools, not you, determine the total cost of attending college. You can usually find a school's total cost of attendance on their web site.

Let's look at an example: Assume that your college costs $25,000 per year for tuition and room and board. Add the average expenses for books, travel and miscellaneous expenses, estimating this to be $5,000. This makes the total cost of attendance $30,000 per year. You have submitted both the FAFSA and PROFILE forms. This means that the college has received your Expected Family Contribution as determined by Federal and Institutional Methodology. For argument's sake, let's assume that the Federal Methodology formula placed your Expected Family Contribution at $15,000. According to Institutional Methodology, it is $16,000. (Remember that Institutional Methodology is usually stricter.) If the school only uses the Federal Methodology formula, it will take the $30,000 for the total cost of attendance and subtract the $15,000 that your family is expected to contribute. That leaves your family with a financial need of $15,000. If the school is a private college that uses Institutional Methodology, your financial need is $14,000 since $30,000 - $16,000 = $14,000.

It is this amount—your financial need—that the school must now help your family find a way to afford. They can give you money in the form of grants, student loans and work-study. Or it is possible that the school won't be able to find all of the money, leaving you with what is termed "unmet need." The exact composition of your financial aid package will depend on a variety of factors and will vary by college. This is one benefit of applying to a number of colleges so that you can compare different financial aid packages.

Parents should keep their children poor.

Now that you know how the EFC is used to determine your financial need and therefore what the school is likely to award, the next question is this: Can you do anything to lower your EFC? After all, the lower your EFC, the higher your financial need, which should also mean a larger financial aid package.

If you look at the calculation for Expected Family Contribution (see Step 3), you can see that any money in a child's name (i.e. savings accounts, stock accounts, etc.) will be assessed by 20 percent. But if that same money is in a parent's name, it will only be assessed by up to 5.65 percent. That means for every $100 in the student's name, you will be expected to spend $20 to pay for college. However, for every $100 in the parent's name, you will be expected to contribute only $5.65 to pay for college. That's a big difference.

So if relatives would like to give gifts of cash or stock to a student, you might want to ask if they are willing to either give it to the parent (to be used for the child's education) or wait until the student graduates from college. Or your generous relative could make the gift directly into a 529 Savings Plan since it is considered an asset of the parent.

Put most of your money into a college savings plan.

As you learned in the previous step, you want to keep money out of the student's name. However, short of having the money only in a parent's account, you can earmark that money for a student without being penalized by the financial aid formulas. The way to do this is by using a 529 savings plan.

Here is a chart of common savings accounts and how they are calculated into financial aid formulas:

• 529 Savings Plans (including pre-paid tuition plans) are an asset of the contributor, which is usually the parent.
• Coverdell Education Savings Accounts are an asset of the parents under the Federal and Institutional methodology.
• Custodial accounts are an asset of the student.
• Trust funds are an asset of the student.
• Savings bonds in the name of the student are an asset of the student.

Spend UGMA funds two years before high school graduation.

Let's say a family has some money in a custodial account for their college-bound child. It may be a good idea to spend this money while the child is still in high school instead of leaving it to be counted against financial need. If the family goes crazy and spends it on things they normally would not have bought, then this won't help. However, let's say that when the child turns 16 and gets his or her license, the family decides to buy a used car. Instead of using the parent's money, let the child use his or her custodial account. As long as they don't spend more than they normally would (buying a BMW instead of a Corolla, for example) then they will be in a better position to receive more financial aid later.

If you plan to do this, make sure you make your purchases before January 1 of the student's junior year. Keep in mind that financial aid formulas look at information that is one year behind and you will submit account information based on the previous year's tax returns. For the typical student who enters college in the fall, this period will cover January 1 of the junior year through December 31 of the senior year.

Time your stock sales.

When you sell a stock can have an impact on your financial aid. Let's say you have a stock that has appreciated by $10,000. If you sell the stock after January 1 of the student's junior year in high school or in the same year that the student will be starting college, the earnings are considered income. For parents it could be assessed at up to 47 percent and for students up to 50 percent. From the $10,000 gain, as much as $4,700 (parents) or $5,000 (students) may be plugged into the financial aid formula as potential income that could be applied to college costs.

But let's say that you sell the stock before January 1 of the student's junior year or in the calendar year before the student starts school. The proceeds will not be counted as income but will show up as an asset. As a parental asset, this money can only be assessed at up to 5.65 percent, which means only $565 is considered as available funds to pay for college. Even for students, the asset assessment rate is 20 percent, which is better than the income assessment rate of 50 percent.

Declare your independence, if you qualify.

In college, there are no curfews or parents telling kids what to do. So why shouldn't students declare themselves independent? Many students mistakenly believe that if they declare their independence from their parents, they will get more financial aid. Unfortunately, declaring independence for the purposes of financial aid is based on very strict guidelines. In most cases, you are considered dependent on your parents for support and their income and assets will be considered when determining your financial need. Under certain circumstances, you can be evaluated independently of your parents, and only you and your spouse's (if you have one) income and assets will be taken into account. You're considered independent if one of the following is true:

• You are 24 years or older by December 31 of the current year.
• You're married.
• You're enrolled in a graduate or professional degree program.
• You have legal dependents other than a spouse.
• You're an orphan or ward of the court.
• You're a veteran of the U.S. Armed Forces.

Don't miss the deadlines.

The deadlines for turning in your financial aid applications vary by college, but you want to turn in the FAFSA as soon as possible after January 1st of your child's senior year in high school. Why the rush? The reason is that colleges have a limited amount of financial aid.

Most colleges use what is known as a "priority" deadline. While the deadline varies by school, it is usually in February or March. This date represents the approximate time that the school expects to run out of money. If you get your application turned in by this deadline, you should be fine. However, if your application arrives late, or if it is incomplete and the time it will take to provide more information pushes you past this deadline, then you may not receive the financial aid you deserve simply because the college will run out of money.

Final Thoughts ...

The biggest mistake that most families make when it comes to financial aid is that they assume they won't qualify and therefore don't take the effort to apply. But you'll never know what you truly deserve unless you apply. You could find that even if you don't get a grant, you might be awarded a cushy campus job, special college scholarship or a low-interest student loan. One of these sources of money may be just what you need to make paying for college possible.

No one can predict the future. Today your parents may have a great job, but next year they may be laid off. Or perhaps an elderly grandparent may need to live with your family. The future is uncertain, which means if something should happen to your family's finances during the year, you will want to be able to approach the financial aid office to ask for some help. Your best chance of getting help will depend on whether or not you have applied for financial aid. Without having an FAFSA on record, the college has no idea how much of an impact your family has sustained. It makes it much easier for a financial aid officer to give you more money if you have already filled out the FAFSA regardless of whether or not you were given any aid. So think of applying for aid as added insurance against any unexpected changes in your family's future financial situation.

The bottom line is that it's dangerous to second-guess the financial aid office. Applying is free and won't take that much time. And most importantly, the rewards for making the effort can be well worth it.