Paying for College

To determine whether your child is eligible to receive federal financial aid for college, the U.S. Department of Education (DOE) uses a formula called the expected family contribution (EFC). The formula considers the financial resources of the student's parents, as well as those of the student. Federal aid programs for college include:

Grants. A grant is a gift. It does not require repayment. In general, the government gives grants to only those students it deems most in need of financial assistance. The two main types of grants include Pell grants and Federal Supplemental Educational Opportunity Grants (FSEOGs).

Subsidized loans. Subsidized loans are those student loans whose interest is paid by the federal government until the loan-repayment period begins. A subsidy is also like free money, since qualified recipients have to repay the loan principal but can avoid hundreds or thousands of dollars in interest expense. Stafford loans may or may not be subsidized. All Perkins loans, however, are subsidized student loans. The Perkins loan program was allowed to expire in 2015 in an effort to simplify the student loan system. It was then reinstated through September 30, 2017 for new borrowers. Those who are receiving Perkins loans will be allowed to continue to receive the loans through March 31, 2018.

Work-Study. Work-Study is administered by the university or college, which reserves some on-campus paid jobs for recipients. Work-Study lets students earn money to offset some of their school-related expenses. To the extent that the student is able to pay some of his or her cost with an on-campus job, he or she may have to borrow less.

For purposes of counting assets in the EFC formula, the DOE considers money in UGMA/UTMA accounts to be the student's assets. Assets in education savings accounts and Section 529 plans are considered assets of the parents.

To apply to the subsidized programs described above, the DOE requires a student to complete a Free Application for Federal Student Aid (FAFSA). To be eligible to receive aid from one of these programs, a student must meet the following requirements:

Demonstrate financial need (see below).
Have graduated from high school or have earned a G.E.D.
Be enrolled as an undergraduate in an eligible program of study.
Maintain a level of satisfactory academic progress in a degree-oriented program.
Certify that you are borrowing to pay for educational purposes.
Not be in default on any other student loans nor owe a refund of prior loans or grants.
Must not have been previously incarcerated.
Have a Social Security number.
Be either a U.S. citizen or eligible non-citizen.
Have registered with the Selective Service, if required.

Financial aid applicants fall into one of three categories.

Dependent students. For students who are claimed as a dependent on someone else's income tax return, the EFC formula is based on assets and income of parents and student.

Independent student with no dependent(s) other than a spouse. The expected contribution is based on the married couple's combined assets and income.

Independent student with dependent(s) other than a spouse. The expected contribution is based on the married couple's combined assets and income.

You may wish to refer to the worksheet used by financial-aid officials at the DOE's Information for Financial Aid Professional website to calculate your EFC for the 2016-17 financial aid year.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

Next, we'll take a look at using tax credits to help pay for college.