This week’s blog is by Jack Wang, a noted expert in helping families with middle to high school age students navigate the complex financial aid system in order to (1) maximize aid, and (2) pay for college efficiently without wrecking family finances.
Jack has been quoted in publications such as Forbes, Yahoo Finance, GoBankingRates, and on college planning sites such as College Covered. Additionally, he is a frequent guest and contributor to podcasts such as Money Tree Investing. He can be reached at jack@innovativewealth.com.
Julie (note: not her real name) is a high-achieving student—like many others in her private high school. Her academic profile would typically be the envy of many students—high GPA, an SAT score of 1510, and a slew of AP classes with 4s and 5s on the exams. Add in tennis team captain and her artistic skills as a painter, and she is seemingly the ideal package for a college.
Like many of her friends, she was applying to a few Ivy League schools and a handful of near-Ivy schools such as Tufts, Villanova, Wellesley, and the like.
Her family owns a successful consulting business with a family income of almost $400,000. With that income and their savings, they are clearly in the “too rich for financial aid” category even at the most expensive schools.
Yet, Julie was awarded a $15,000 need-based grant from her top choice.
How did that happen?
First, one must understand how aid actually works. Or, as I like to tell families, “You have to know the rules to win the game!”
What Are the Types of College Financial Aid?
Financial aid typically falls into two categories—merit and financial need-based aid.
As the name suggests, merit is based on the student’s achievements: GPA, test scores, the essay, extracurriculars, and so on. Usually, these are scholarships. This category of financial aid can also include non-academic factors. For example, one college in Vermont will offer a $1,500 grant simply for visiting while another will offer $1,000 for filling out the FAFSA.
Financial need-based aid can consist of grants, loans, and work study, which is a job a student holds on campus. These types are offered if a family is eligible for need-based aid according to the eligibility formula:
- Cost of attendance (tuition, room and board, books, fees, etc.)
- Less: Merit aid
- Less: Expected Family Contribution (EFC, about to be renamed to Student Aid Index)
- Equals: Financial need eligibility
EFC is calculated using data from the FAFSA and/or the CSS Profile financial aid forms submitted by the family. The formula is driven primarily by income rather than assets.
One common misconception is that these two types of aid are completely separate. In reality, many financial aid programs blend both factors. Merit scholarships commonly have a need component, while need-based aid commonly has a merit component.
Where Are the Sources of Financial Aid for College?
The largest source of financial aid, by far, is the federal government. According to the College Board report Trends in Student Aid and College Pricing 2021, over $134 billion in aid was spent during the academic year 20/21. But that’s not quite the whole picture.
Of that total, almost $84 billion was in the form of loans, either to students (via Direct Loans) or parents via the PLUS Loan. Only $50 billion was in grants and work study.
However, $71 billion was from the colleges themselves in the form of scholarships and grants. Colleges, therefore, are the largest sources of financial aid. And a college does not need a large endowment to offer a lot in aid.
The key to remember, though: their money, their rules.
Another major source of aid often overlooked is the IRS. Many education-related tax benefits and strategies can help pay for college. After all, college costs are paid with after-tax dollars. For example, for an $80,000/yr college, the after-tax cost is:
- $80,000/yr at a 20% income tax bracket = $100,000/yr
- $80,000/yr at 30% = $114,285/yr
- $80,000/yr at 40% = $133,333/yr
How to Get the Most Financial Aid—Regardless of Income
To maximize aid, a family needs first to ask the right question. For almost all families, the question asked is:
Where can my student get in?
Think about it—what are the most common questions related to getting into college? What GPA is required? Do I have to submit test scores? How many extracurricular activities do I need? And so on. All of these questions are related to gaining admission.
But if getting the most aid for college matters, families should ask:
What colleges will give my student the most money?
The answer is remarkably simple, conceptually—it depends on how much a college wants your student.
It’s not just about getting in. Many kids (comparatively) get in, but not everyone gets financial aid. Two keys to understanding how aid works:
1. It is not about your student in and of themselves. It is how the student compares to other applicants.
Colleges have priorities. They could be looking for top academic credentials. Or wanting more students for a particular major. Or gender balance. Or geographic residence. Or something else.
The point is that the more your student helps the college achieve their goals, whatever they may be, the more aid your student will get.
Note that the more competitive the school, the harder it is to stand out. Having the requisite perfect grades, test scores, sports, and extracurriculars is a minimum level to even be considered for admissions, never mind aid.
2. Know the rules for aid at that school
According to FairTest, the National Center for Fair and Open Testing, over 1,800 colleges do not require test scores for admissions for the 21/22 application cycle. What a big stress relief!
According to ACT, the organization that administers the ACT exam, over 80% of colleges still use test scores in scholarship consideration. In their Survey of Higher Education Enrollment and Admissions Officers, published in February 2021, the importance of test scores in scholarship consideration remains high. At some schools, no test scores submitted mean no scholarships. Other schools will still consider some scholarships but not others.
Filling out financial aid forms such as the FAFSA and CSS Profile can also have an impact on merit scholarships. Schools such as University of Michigan, Fordham University, and Ithaca College have at various times made the submission of these forms a requirement.
Remember: their money, their rules.
After maximizing financial aid, there’s still the question about how to pay the remaining bill. This is where the IRS and tax strategies can make an impact. Remember that lowering the tax “cost” is another way to lower the cost of college—and last I checked, the IRS did not require any essays.
So how did Julie get aid even though she seemingly had no shot at need-based aid? Oh, and her top-choice college doesn’t give out merit scholarships. On the surface, this situation is clearly, “We’re stuck paying full price for college because we make too much to get aid.”
Well, it is impossible to know for sure, but odds were in her favor:
- Her academic profile (GPA, test scores, etc.) is above average compared to past applicants
- She is majoring in a program that the college is expanding
- The major tends to draw more males than females
- The college has fewer applicants from her geographic area
She received roughly a $25,000 need-based grant to reduce the $80,000 annual cost. The family is also using advanced tax and financial strategies to reduce the tax cost.
Result: The family was able to reduce the annual cost by roughly half.
You have to know the rules to win the game!
