The costs for college are staggering. Most families can’t just write that after-tax check for education costs. With any luck, you started saving for college when your kids were born. But even if you did, you may still have to seek help from the government. You are not alone. According to Nellie Mae, approximately 70% of college graduates borrowed money to pay for college.¹

Financial aid may be a good start. Take a deep breath because this process can be tedious and frustrating, not to mention hard to understand.

Let’s start with the question of whether you will qualify for financial aid. If you can figure out early on in the process that you won’t qualify, don’t bother applying. The lending concept is that parents are considered responsible for their children’s education costs. However, if you are separated or divorced, the FAFSA (Free Application for Federal Student Aid) will ask for information from either the parent with whom the child lives for most of the year for which you are applying or from the parent who has given the most financial support. Here’s the catch. If you are the responsible parent and you’ve remarried, you have to also supply your new spouse’s financial information.

Now, suppose Junior has waited to go to college? This may be good news. If your child is older than 24, they are considered to be independent and their parent’s income doesn’t count in figuring how much aid they can afford. Here’s the bad news -- although your kids may already be out on their own before age 24, it doesn’t seem to matter for financial aid purposes. Most colleges don’t consider your children to be independent until that magic age of 24.

One big question about financial aid has always been “Will it hurt your chances of being admitted to the college if you level with them about needing financial aid?” Check with the individual college first. If they have what is called, “Aid Blind Admissions,” your need for aid won’t hinder the admissions process. There are also colleges that will guarantee enough aid to your student so they can attend, if admitted.

Most financial aid loans are made to the students, not the parents. Therefore, when it comes time to repay these loans, it’s the student’s financial and legal responsibility, not yours. It will also be a black mark on their credit report if the loans are not paid on time and in full. So, technically, your child is the one who should fill-out the FAFSA form. They can apply either in hard copy or online. Even though your child is the legal borrower, it’s your financial information including tax returns that must to be supplied.

The forms will have to be completed and submitted by January 1 of the year for which you want the aid.

After you complete the FAFSA form, the DOE (Department of Education) will send you a Student Aid Report or SAR that states your “Expected Family Contribution” or EFC. The college will use that data to decide if and how much aid you may be eligible for.

The amount your family is expected to contribute remains constant, regardless of the cost of the school. For example, let’s say your child was accepted at a state school that costs $10,000 a year and a private college that costs $25,000 a year. Let’s say that your EFC is $10,000. That $10,000 that you have to give will cover the whole state school cost, but there would be $15,000 left per year on the private college costs.

The formulas consider a number of factors, such as; family’s income during the calendar year before applying for aid, your family’s assets, your child’s earnings, investments and savings and also the number of children you may have and how many may be going to college at the same time.

This is a good time to mention custodial accounts like UGMA or UTMA accounts. Uniform Gift to Minor Act (UGMA) and Uniform Transfer to Minor Act (UTMA) may have seemed like a great way to begin savings plans when your kids were young. They may have been because any earnings they generate are taxed at your child’s tax rate when they reach a certain age. At that time, their rate will probably be lower than yours will.

Here’s the bad news. If your child has a custodial account and does apply for financial aid, they will be penalized “more” for having that asset than if the same amount was in a savings account held in your name alone. The moral of the story is -- if you think you may qualify for financial aid some day, keep the savings account in your name.

Another thing to consider when you are figuring the aid you’re eligible for is that a college won’t consider any gifts that your child has received from family or friends. Except if Grandma and Grandpa have created a trust for your child’s education, the IRS will consider the income from that trust as income to you because they consider education costs your responsibility. The way around this is to have your parents or friends make a gift directly to the college your child is attending. That is not considered income to you or a gift to your child.

¹ Web site: http://www.nelliemae.com/library/nasls_2002.pdf, as of 2/6/03.

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