Haber on Financial Aid

Degree of Freedom News -
October 14, 2014

Apologies for the month-long hiatus between newsletters.  But as some of you may know, I recently started a new gig as the Inaugural Visiting Fellow at HarvardX which is giving me the chance to actually contribute to the growth and development of massive open online courses (MOOCs), rather than just benefit from and write about them.

And for my second bit of time-consumption news (i.e., a second excuse for procrastination), my book on MOOCs is back from the printer.  The publisher, MIT Press, tells me that MOOCS: The Essential Guide will start to show up on store shelves (and be available from the Amazon warehouse) towards the end of October.  All good news, other than the time preparing for that release has taken away from continuing the story of how to get into and pay for a traditional college education (at least until MOOCs or some other free option sweeps the entire higher ed system away – something I’m not anticipating happening by the time my own kids hit college age).

So let us continue…

Where We Left Off

In a previous newsletter, I took a look at what the total cost of college was likely to be for my two kids (currently 15 and 12 – so add or subtract if they’re standing in for your own children) to determine the range of $$$s that would ultimately be needed to send them off to a four-year residential degree program (the most likely choice for them).  This exercise also determined when those bills would need to be paid (in our case, they start three years from now and end seven years after that).

These numbers are pretty big, even if the boys end up attending their in-state public university.  But understanding what these bills will look like and when they will come due is the first step to preparing to pay them in ways that don’t end up harming other family interests (such as retirement) or saddling our kids with debt.

While I’m about to start a description of what it’s like inside the financial aid rabbit hole, the first and best option for paying for college is to start saving for it as early as possible since (as one writer I read over the summer put it) those who understand compound interest are likely to earn it just as those who don’t understand the concept are likely to pay it.  And in our case, while we haven’t been saving since before our children were born, we have made it a point to sock money away as it became available into savings accounts specifically set aside for anticipated big-ticket tuition bills that would one day come due.

In a subsequent newsletter, I laid out a set of poor metaphors that can lead to errors during the college selection and application process, and one better metaphor (that of the “big-ticket purchase”) that students and parents should embrace BEFORE exploring schools and financial-aid options.   For just as knowing numbers and dates will help prepare you financially and psychologically  for what is to come, treating higher education as a major consumer purchase – similar to buying a house or car – facilitates the creation of a hierarchy of options, each of which should be informed by both educational and economic reality.
 

The Financial Aid System

Keeping all that in mind, the financial aid system that has developed in the US over the decades tends to reward three categories of people:

* The needy
* The gifted
* Those who understand the ins and outs of the complex process itself
 
Now I’m not going to get into the many controversies surrounding how this system works or doesn’t work (including its wackier loopholes: my favorite being the one that gives financial advantages to 18-year-olds who marry perfect strangers to create a new low-income family for the duration of their college years).  For any system meant to standardize something as complicated as college financials across millions of families and thousands of diverse institutions is destined to create anomalies and absurdities.  And, for all its faults, the system does fulfill one of its primary goals: making it possible for high-achieving/low-income students to attend a school that matches their ambition and ability level.

Regarding that second category (“the gifted”), these are students who are likely to receive merit scholarships, regardless of their financial situation.  Some of these are awarded for general academic achievement while others are handed to students who demonstrate excellence in a specific area (such as excelling in math or being a stupendous violin player).  And while it’s flattering to be considered worthy of something called a “merit scholarship,” you should treat such offers as what they are: a discount off the list price that (like the price break an auto dealer offers to get you to buy today) reflects the level of interest a school has in your child.

Moving onto that third bullet point, the reason knowing the system is so important is that the process is complex, onerous and often counter-intuitive which causes many people to opt out of it entirely, especially if they think their income doesn’t qualify them for any kind of tuition assistance.

But given that a majority of students receive some kind of financial aid (just as most airline passengers have discovered or negotiated their own ticket price which has little to do with what the guy sitting next to them paid), it’s a mistake to assume up front that the whole system is irrelevant.  In some cases, filling out the FAFSA (which I’ll get to in a minute) is the way to get your child onto the radar of an institution’s Financial Aid Officer (FAO) who might consider your son or daughter for types of aid/discounting (needs-based or merit-based) you aren’t aware of.  Which is why I’d recommend familiarizing yourself with the system in its entirety (as I’m doing now) before you have to engage with it for real as part of your child’s actual application process.
 

The Queue

Getting into the nuts and bolts of the process, the first thing to keep in mind is the notion that many players (the federal government, state governments, banks and other lenders, schools and – ultimately – parents and students) form a kind of a queue with each player waiting to see what the person or institution in front of them commits to before offering up any cash (whether in the form of checks or discounts) of their own.

That FAFSA I just mentioned stands for the Free Application for Federal Student Aid and it’s one of two major sets of forms (the other being the CSS/Financial Aid PROFILE Form) that most schools use as the starting point for determining financial aid.  While some schools have alternative forms, and many ask parents to provide additional (or duplicate) information beyond what’s in the FAFSA and PROFILE, you should start the process by bracing to disclose most of your family’s financial information when you fill out and submit these forms.

Now filling out the FAFSA is not that different than filling out tax forms (in fact, the two sets of forms largely ask the same questions).  And once these forms are completed and submitted, the independent agencies processing them used their own methodologies (the federal methodology in the case of the FAFSA) to calculate an important value called the Expected Family Contribution (or EFC).  This is the number that will serve as the aid community’s starting point for what you are expected to pay.  And, if you subtract the EFC from the list price of a college, it also determines what everyone else will have to cough up if your kid is to attend a particular school.

All these forms need to be filled out by January 1st of the year when your kid will be enrolling as a freshman later in the Fall and most of them can be obtained and submitted online.  As an applicant, you will receive notice of what the formulas these various systems use claim is your EFC, a number that will also be used by schools to determine levels of aid they have to produce if they want your child.

In theory, the EFC represents the total a family is expected to pay, regardless of the cost of the school.  So if someone’s EFC is $10,000, that’s the number both a $15,000-per-year and a $50,000-per-year school will use as a starting point.  Which means the $15,000 school will have to figure out how to make up a $5,000 difference (their $15,000 total cost minus your $10,000 family contribution) if they want your kid to attend, while that $50,000-per-year school will have to make up a $35,000 difference.

But, in theory, we should all be flying to work in jetpacks by now.  Which translates to the fact that some schools (particularly expensive ones that often ask for more financial information than what you are asked to disclose on the FAFSA) might determine that your family contribution can be higher.  Or they may simply not offer you enough to make up the difference between your EFC and their total cost, leaving you with something called “unmet need,” a gap that must be closed by a family finding more money or taking out more loans.

You should also prepare for the possibility (if not the likelihood) that the EFC you’re delivered after filling out countless forms is way more than you can realistically pay.  Which is why this number needs to be subjected to some financial reality checking before proceeding to select a college that expects you to produce at least this amount not just one year but for every year your kid attends their school.

On the bright side, an EFC that makes no sense when compared to a family’s annual income might be reasonable if alternative sources for funding that EFC (like grandparents willing to contribute to their grandchildren’s education) are available.

But if there is no mechanism that would allow you to cover that EFC (never mind any unmet need you might discover later in the process) without putting other financial needs at risk (or going hopelessly into debt), it might be time to think about other options you can afford.