Inside the Financial Aid Process: A Guide for Students and Parents

Gaining admission to the college(s) of your choice might weigh heavily on your mind at the moment. The odds are that the prospect of affording college looms even larger, especially with some price-tags ranging above $70,000 per year. If financial aid is critical to your ability to attend such a college—or any college for that matter—the summer is the time to get organized around the possibilities.

Defining Financial Aid

So, what is financial aid? It can be a lot of things, including scholarships, grants, student loans, parent loans, and campus work opportunities. Financial aid is made available to help make college attendance more affordable.

Most financial aid is reflective of demonstrated need or the differential between:

1. The cost of attendance at an institution
2. Your family’s ability to pay

Some assistance is offered on the basis of merit, aka recognition of some performance criteria established by the institution. Some is offered on the basis of merit.

Given the potential importance of financial aid in making college attendance possible for you, the following guidelines will help make sense of the financial aid application process you are about to encounter, including through the FAFSA (Free Application for Federal Student Aid).

Behind the College Price Tag

So why do colleges charge so much?

College expenses typically include tuition, room, board, and other fees.

Room and board amounts reflect market prices for items including food, supplies, maintenance, food preparation, dorm rooms, room furnishings, dining areas, heating and cooling, staffing and related programming. Prices vary according to the number of room occupants and the selected meal plans. Some colleges provide additional amenities that can increase the cost.

Tuition covers the cost of educational expenses including faculty compensation (salaries as well as support for professional development and research), instructional facilities, lab equipment, performance halls, athletic facilities, libraries, computing resources, and health services.

Other fees include social and lab (breakage) fees, transportation costs, and insurance.

While some institutions will adjust their total cost up or down for marketing purposes, most can show that the total cost of educating and supporting each enrolled student is actually greater than their price-tags. This is most often the case at state universities because they are underwritten by their state legislatures. In other words, a portion of your parents’ tax payment supports the cost of operation at public universities in your home state.

While private colleges and universities typically do not receive funding from their home state legislatures, they rely on draws from their endowments to underwrite a portion of the actual cost of attendance.

In general, the prices charged by colleges and universities actually reflect real expenses. If you cannot afford the full cost of a college, you will need to apply for need-based financial assistance (generally done through the FAFSA).

The 5 Sources of College Funding 

As you approach the financial aid process, it might be helpful to regard financial aid officers as brokers. It is their job to maximize the revenue per student. In doing so, they will be mindful of 5 sources of funding that can generate cash on your behalf as you attempt to cover the cost of attendance. 

1. Family: This probably doesn’t come as a surprise! It has been a long-held assumption in this country that one’s family should bear the primary responsibility for paying for college. Whatever amount your family can afford to pay, it will represent a cash receivable at the college.
   
   
2. Federal Government: If your family is not able to afford the full cost of college, the federal government will respond to your need for assistance with grants and loans. These funds will be sent, in your name, directly to your chosen college in amounts that can total as much as $10,000 per year. The federal government will also provide funds to support campus jobs you might wish to pursue in college. You can apply for federal student aid via the FAFSA.
   
   
3. State Government: Similar to the federal government, often times the student’s state of permanent residence will also respond to a demonstrated need for assistance with grants and loans. You can find the financial aid programs in your state here. When you fill out the FAFSA, you can also apply for state-level student aid.
   
   
4. Colleges: Once you're admitted, colleges can choose to offer assistance that addresses the difference between the total cost of attendance and the combined resources coming from the family and the federal or state governments. Quite often they do so in the form of a grant or scholarship.
   
   When this happens, a college is not giving you money—you’ll never see cash associated with a grant or scholarship. Rather, it is effectively agreeing to forgive you a payment in that amount; a forgiveness that will be covered by funds from the college’s endowment draw. A college might also offer to sponsor a range of borrowing opportunities for you and your parents which will result in more cash to the college. Make no mistake about it, though: this is money that you will pay back to the lending institutions.
   
   
5. Community-based organizations (CBOs), philanthropic foundations, and parents’ places of employment: While there seem to be many scholarship opportunities in the community—and it’s certainly understandable that you might want to secure one—most are highly competitive, making the likelihood of securing substantial scholarship funding something akin to winning the lottery! Check with your guidance counselor as the best sources of CBO scholarships are likely to be found in your own community.

After the funding from your family, each of the remaining sources is integral to providing financial support as you contemplate your college options. Ultimately, though, the path to college begins with support from your family or through your own means.

Become Familiar with the New FAFSA 

The FAFSA is a government document that references data from your parents’ IRS return to calculate your family's need and determine your eligibility for federal and state funds. In many cases, your FAFSA determines the amount of support you might receive from the colleges themselves.

For the 2024-2025 academic year, students and families will want to take a look at the new FAFSA, which will become available in December 2023. The updated FAFSA has a handful of major updates, according to Carnegie Higher Ed, including:

1. More need-based funding opportunities for some students
2. The introduction of the Student Aid Index (SAI) instead of the Expected Family Contribution (EFC)
3. Fewer questions, making it easier and faster to fill out the FAFSA

Your Expected Family Contribution (EFC) is Now the Student Aid Index (SAI)

The amount your family is expected to contribute was previously known as your Expected Family Contribution or EFC. Simply put, your EFC was the difference between your family’s income and assets, plus your family’s cost of living. It is a calculation to determine your need.

The new FAFSA utilizes the Student Aid Index, which serves the same purpose of the EFC, with some slightly different calculations. The 2021 Consolidated Appropriations Act led to these changes.

If you'd like to learn more about the SAI and how it determines need, this article can help.

Related: FAFSA & CSS Profile - A Straightforward Guide to Understanding Financial Aid

When should I fill out the FAFSA?

If you're a senior, your family should plan to complete the FAFSA as soon as possible before the deadline, using financial data from your IRS tax return two years prior to the year you start college. Students entering college in the Fall of 2024 will reference 2022 IRS tax returns.

Upon completing the FAFSA, a Student Aid Report (S.A.R.) showing your SAI will be sent to you and each of the colleges you've listed on the FAFSA.

The CSS Profile

In addition, many private institutions require submission of the College Scholarship Service (CSS) Profile to determine your eligibility for institutional funding. More granular in its assessment of family finances, the Profile is customizable by each participating college to reflect institution-specific requirements. The Profile should also be completed as soon as possible if you're applying to any of the schools that require it. A report will be sent to the colleges you've designated. You will not receive any information regarding the outcome of the need analysis derived from the Profile.

Some colleges also require the completion of their own financial aid forms. Make sure you are aware of the forms required for each college and submit them at the earliest possible date.

Understand the Concept of Need

Most financial aid is awarded on the basis of need. In other words, if your SAI falls short of the cost of attendance at a college, then you have demonstrated need. On the other hand, if it turns out your SAI is greater than the cost of attendance, you will have no need.

Theoretically, colleges will provide financial aid to meet the demonstrated needs of the students they admit. That said, you should be prepared for the likelihood that the different forms will reveal different assessments of your family’s ability to pay. For example, a need analysis completed using FAFSA data might show an SAI that is lower than that revealed by the Profile. In addition to accessing the FAFSA and, possibly, the Profile, financial aid officers are able to exercise professional judgment (taking into account special or unusual circumstances) in assessing SAI.

This could be confusing if you are considering private colleges as each might eventually reveal a different SAI—none of which match the SAI you saw on the SAR from your FAFSA submission!

Welcome to differential need analysis, a practice employed by many colleges, mostly private, that allows decision-makers to determine the methodology (based on the FAFSA or the Profile) they want to use in justifying an assessment of your need that suits them best. As a result, it is possible, if not likely, that each college to which you are accepted will offer a different determination of need for you!  

Don't Make Assumptions About Need

You need to be wary of online forecasters or of any service that suggests it can optimize your financial aid potential. While parameters for determining the amount of financial aid you are likely to receive might seem to be predictable, the actual processes of admitting students and awarding financial aid are heavily nuanced across institutions through differential need analysis. The amount and type of financial aid to be offered will most often be determined by the degree to which the college values you and seeks to leverage your enrollment.

In addition to the differential need analysis employed by many colleges, another practice called preferential packaging will be used to leverage the enrollments of students they want the most. In this case, colleges that admit you will put together financial aid awards including grants, loans, and work-study in amounts that reflect your desirability. The more you're valued, the greater the proportion of grant or scholarship (forgiveness of payment).

Conversely, it is possible that a college might award you a financial aid award that is light on grants or scholarships but heavy on student or parent loans (cash to the college!). In this case, the implicit messaging is that, while you were good enough to be admitted, you’ll need to find a way to pay more (cash) for the privilege of attending. 

As a result, online forecasters, including the net price calculators found on college websites, rarely provide a complete or accurate picture of your likely out-of-pocket expenses for a college should you be admitted.

The acquisition of financial aid, then, involves a bit of a shell game in which you are relatively blind to a range of subjective deliberations on the part of college decision-makers. As you move forward, do what you can to find transparency. Ask questions of the financial aid officers at the colleges of interest, submit required forms in a timely fashion, and make sure you are targeting colleges where you will be valued for what you have to offer.