College Financial Aid General Questions

Source: http://thechoice.blogs.nytimes.com
Part 1: Answers to Readers’ Questions on Financial Aid
By MARK KANTROWITZ APRIL 23, 2012 5:49 AMSeptember 7, 2012 3:20 pm
GUIDANCE OFFICE
Financial Aid Offers: Q. and A.
75 ThumbnailMark Kantrowitz, an expert on paying for college and the founder of FinAid.org, is seeking reader-submitted questions about financial aid offers.
Ask a Question »
All Guidance Office Posts
As families finalize their college choices before the May 1 deadline, finding the best fit for their students and their budgets, we’ve once again opened our virtual Guidance Office for some advice.

Mark Kantrowitz, the financial aid expert and publisher of FastWeb.com and FinAid.org, is spending a week with The Choice to answer your questions about scholarships, loans and financial aid offers from colleges.

Mr. Kantrowitz is the author of “Secrets to Winning a Scholarship,” published in 2011, and has helped several readers of The Choice navigate the Free Application for Federal Student Aid during his Fafsa Q. and A. series in January.

To submit a question to Mr. Kantrowitz, please use the comment box in our original post or the one below. His answers are scheduled to continue throughout the week.

Questions and answers have been edited, including for space and style. — Tanya Caldwell

Q.
What I’ve been reading about possible changes in federal aid — the elimination of Pell Grants, the doubling of Stafford loan interest rates, etc. — has me up worrying at night. Is there a way for parents to interpret current financial aid award letters with future changes in mind?

—Sleepless in NY

A.
Just as net price calculators provide estimates that may not be predictive of the financial aid award letter, financial aid award letters may differ from the final bursar’s bill. This is especially true at public colleges, where state legislatures may cut appropriations midyear. Few colleges have the financial resources to replace shortfalls in federal and state financial aid and appropriations.

Even if the financial aid award letter is accurate, it provides college cost and financial aid information for just one year. College costs during a student’s senior year in college are likely to be at least one-fifth higher than during the freshman year in college.

This decade will be marked by severe declines in college affordability. The prospects for future cuts in higher education are high, with a funding shortfall of at least $10 billion a year in the Pell Grant program in 2013-14 and subsequent years. State budgets will continue to feel pressure from lower income tax revenue due to sluggish improvements in unemployment rates for the next two to three years, forcing additional above-average increases in public college tuition rates.

There are many proposals on the table, and the main difference is in the severity of the cuts. Few legislators are proposing increases in student aid funding. In his State of the Union address, President Obama called on Congress to make the American Opportunity Tax Credit permanent and to delay the doubling of the interest rate on undergraduate subsidized Stafford loans by a year. The maximum Pell Grant will increase by only $85 in 2013-14, from $5,550 to $5,635, after two years of no increases. These proposals will be financed in part by increasing the interest rate on the Perkins loan program, eliminating the subsidized interest benefit, and increasing Perkins loan volume a year to $8.5 billion from $1 billion.

Since at least 2005, Congress has used efficiency improvements and savings in the student aid programs to reduce the budget deficit. Given the spending cuts and triggers mandated by the Budget Control Act of 2011, this will continue through 2020. The most likely targets for spending cuts include the elimination of subsidized interest on subsidized Stafford loans to undergraduate students, more cuts to the Pell Grant program, and the elimination of the Federal Supplemental Educational Opportunity Grant and federal work-study programs.

Q.
Why does the Fafsa ask for parents to declare the value of retirement accounts while claiming that these are not counted against the expected family contribution?

—latexan

A.
The Free Application for Federal Student Aid considers several factors, including family income and assets, when calculating the expected family contribution (E.F.C.).

The Fafsa does not ask applicants to report the value of qualified retirement accounts as an asset. However, the form does require applicants to report the current year’s voluntary contributions to retirement plans as income.

The Fafsa also shelters a portion of other investments based on the age of the oldest parent. The asset protection allowance is the present cost of an annuity that would, at retirement, supplement Social Security retirement benefits to yield a moderate family income.

The philosophy behind need analysis involves assessing a portion of the family’s discretionary income, which is what is left from total income after subtracting an allowance for basic living expenses and mandatory expenses like taxes. To the extent that the amount of retirement plan contributions are under the employee’s discretionary control, they are considered to be part of total income. Since the Fafsa starts with the adjusted gross income (A.G.I.) as reported on the federal income tax return, it must add untaxed income, like retirement plan contributions, to arrive at total income.

The CSS/Financial Aid PROFILE form, on the other hand, does require families to report retirement plan assets. It compares the figures against an index based on the income and age of the parents.

Q.
Why does the Fafsa encourage adding parental information as part of the equation when a student is seeking a degree in a medical field?

—Juli Woods

A.
Students who are enrolled in medical school, law school or graduate school are automatically considered to be independent students, so parental information is not required on the Fafsa.

Supplying parental information will not affect the Expected Family Contribution, but it will make the data available to the colleges for awarding their own financial aid. In fact, many medical and law schools require parental information for awarding their own institutional aid, like grants and tuition waivers. Some medical schools also use the parental information for awarding federal Perkins loans, which are intended for students with exceptional financial need. Federal student aid for medical school students consists mostly of the unsubsidized Stafford and Grad PLUS loans.

Since most medical school students demonstrate financial need and the college’s need-based grants are limited (about 9 percent of total aid, including loans), many medical schools ask for parental information to help differentiate among the students.

Q.
Can you provide some guidance for Commended National Merit scholars? Since the Ivies and elite schools don’t offer anything for National Merit Scholarship Program, should you list two schools that are your safety schools? I’m guessing that elite schools don’t care that you don’t list them. I’m really having a hard time seeing the value in the program, other than the title.

—Kiley Athanasiou

A.
There are two main benefits to recognition in the National Merit Scholarship competition. One benefit is the addition of a line on the student’s résumé, which may help the student get into college. The other benefit is scholarship money to help pay for college.

Commended students and semifinalists are among the top 50,000 high scorers on the PSAT/NMSQT out of about 1.5 million applicants. Only the 15,000 semifinalists who advance to finalist status can compete for more than 8,000 National Merit Scholarships.

Students who are recognized by a Letter of Commendation do not receive National Merit Scholarships, but may be candidates for 1,300 special scholarships awarded by corporations and businesses. They may also be able to qualify for academic scholarships awarded by less competitive colleges to students with high test scores.

Since the student can list his or her National Merit status on the application for admission, there isn’t any benefit to picking elite colleges as the two colleges that will receive the referral from the National Merit Scholarship Corporation. Instead, pick two colleges that offer academic scholarships.

As students finalize their college choices before the May 1 deadline, we’ve once again opened our virtual Guidance Office to help families find the best fit for their budgets.

Mark Kantrowitz, a financial aid expert and publisher of FastWeb.com and FinAid.org, is spending a week with The Choice to answer your questions about scholarships, loans and financial aid offers from colleges.

Mr. Kantrowitz is the author of “Secrets to Winning a Scholarship,” published in 2011, and has helped several readers of The Choice navigate the Free Application for Federal Student Aid during his Fafsa Q. and A. series in January.

To submit a question to Mr. Kantrowitz, please use the comment box in our original post or the one below. His answers, which began Monday, are scheduled to continue throughout the week.

Questions and answers have been edited, including for space and style. — Tanya Caldwell

Q.
If one is admitted as an early decision student, can the final financial offer that comes this month, after the preliminary estimate we received in December, be appealed or changed by a significant amount? If not, how does one go about asking for an in-depth explanation of how the award was calculated for my family? Who should call the financial aid office — the parent or the student?

—Jennifer Zhang

A.
Students who are admitted early decision may appeal the final financial aid offer, just as students admitted during regular admissions. Colleges use the same formulas and policies for packaging financial aid for both types of students.

The process for handling appeals for more financial aid is also the same. Ask the college financial aid administrator for a professional judgment review and provide the financial aid administrator with a copy of documentation of any unusual financial circumstances. Unusual circumstances include anything that changed from last year, or anything that distinguishes the family’s financial circumstances from other families. Examples include job loss, salary reduction, death of a wage-earner, high unreimbursed medical or dental expenses, private K-12 tuition for siblings and high dependent care expenses (e.g., for a special needs child or elderly parent).

Families may appeal for more financial aid at any time, whether before receipt of the financial aid award letter, shortly afterward or even in the middle of the academic year. All early decision colleges will release the student from the obligation to attend if the family genuinely cannot afford the college costs even with the financial aid package.

Q.
We have enough in savings set aside for my son to finish college after transferring to a four-year college. Nonetheless, I have been filling out the Fafsa just in case I am laid off or there is some other event of impact.

For this year, even though the Fafsa was filled out, and even after we have already received financial aid notifications from all the schools in which my son was accepted (just loans, as expected), I got an e-mail asking that I include the income figures from the taxes filed for last year. Is that really necessary?

—Banty

A.
An applicant’s Fafsa may be selected for verification after receipt of the financial aid award letter. Applicants must complete the verification process before financial aid funds, including student loans, can be disbursed.

The U.S. Department of Education is transitioning to a more targeted verification process in which specific questions on the Fafsa will be selected for verification based on a risk model. There is no limit on the number of applications that can be selected for verification.

Using the I.R.S. data retrieval tool reduces the chances of the applicant’s Fafsa being selected for verification. If the I.R.S. data retrieval tool is used to complete or update the Fafsa, any questions that are based on unmodified I.R.S. data will not be selected for verification. This will save the applicant (and the college financial aid office) time and hassle.

Q.
By the end of our daughter’s first year of college, we will have used close to half of the funds set aside in her 529 plan, and will need to begin accessing other funds currently invested in mutual funds and stocks. When we liquidate some of those investments, we’ll incur capital gains, which we’re afraid will then be counted as income and increase our expected family contribution for the following year. Is there any way to communicate to the college that the reason we’re liquidating these assets is simply to pay tuition?

—SM

A.
Capital gains are included in adjusted gross income (A.G.I.) and hence are treated as income on the Fafsa. This will increase the E.F.C. and affect eligibility for need-based financial aid.

One could ask the college for a professional judgment review, arguing that the capital gains are a one-time event that is not reflective of ability to pay during the award year. However, most colleges will not make adjustments for capital gains, regardless of whether they are incurred to pay college bills or for other purposes, because of the discretionary nature of capital gains. This is why it is important to avoid realizing capital gains starting the tax year before the child enrolls in college.

There are a few possible workarounds. One is to balance the capital gains with capital losses. This will also minimize the amount of taxes paid on the capital gains. Another workaround is to borrow from the federal student loan programs while the student is in school, wait until after the Fafsa is filed for the student’s senior year in college, and sell the stocks and mutual funds to pay down the debt.

Part 3: Answers to Readers’ Questions on Financial Aid
By MARK KANTROWITZ APRIL 25, 2012 5:52 AMSeptember 7, 2012 3:20 pm
GUIDANCE OFFICE
Financial Aid Offers: Q. and A.
75 ThumbnailMark Kantrowitz, an expert on paying for college and the founder of FinAid.org, is seeking reader-submitted questions about financial aid offers.
Ask a Question »
All Guidance Office Posts
As families finalize their college choices before the May 1 deadline, finding the best fit for their students and their budgets, we’ve once again opened our virtual Guidance Office for some advice.

Mark Kantrowitz, the financial aid expert and publisher of FastWeb.com and FinAid.org, is spending a week with The Choice to answer your questions about scholarships, loans and financial aid offers from colleges.

Mr. Kantrowitz is the author of “Secrets to Winning a Scholarship,” published in 2011, and has helped several readers of The Choice navigate the Free Application for Federal Student Aid during his Fafsa Q. and A. series in January.

To submit a question to Mr. Kantrowitz, please use the comment box in our original post or the one below. His answers are scheduled to continue throughout the week.

Questions and answers have been edited, including for space and style. — Tanya Caldwell

Q.
I have read about schools front-loading financial aid — that is, offering aid during the first year to get students in, then offering less aid in subsequent years after the student is committed to attend. Is this common? How can we find out which schools do this? My daughter’s first-choice school was generous but fair, and we really hope that level of commitment would be maintained all four years if our financial circumstances stay the same.

— Mother of 3

A.
There are no national statistics concerning the number of colleges that practice the front-loading of grants.

However, enough colleges participate in this practice that it increases the average net price of returning students as compared with first-year students by about $1,400, according to an analysis of the National Postsecondary Student Aid Study. More selective colleges are less likely to practice front-loading of grants than less selective colleges.

The National Association of College and University Business Officers reports that the discount rate for first-year students at private nonprofit colleges is about 5 percent higher than the discount rate for all undergraduate students. The discount rate is the percentage of a college’s tuition revenue that is returned to students in the form of financial aid.

There isn’t a list that details which colleges practice the front-loading of grants. The only way to find out is to ask the college. Some colleges are open about the practice, while others are not. You may also try asking a few upperclassmen at the college whether their grants decreased and by how much.

Q.
Does the E.F.C. have any relationship with the amount of money a student is able to borrow for a loan? To contribute our E.F.C., we would have to take out a loan.

Also, is it wise to take out a Direct PLUS Loan for Parents, or is it better to have the loans taken out in the student’s name? Because of job loss, we are operating on one parental income and may not qualify for a parent loan.

— j.straughn

A.
Eligibility for subsidized loans, like the Perkins loan and the subsidized Stafford loan, depends on financial need. Financial need is the difference between the total cost of attendance and the expected family contribution, or E.F.C. A higher cost of attendance may enable even students with a high E.F.C. to qualify for subsidized Stafford loans.

Eligibility for unsubsidized loans, like the unsubsidized Stafford and Parent PLUS loans, does not depend on the E.F.C. The unsubsidized Stafford loan has annual limits that vary by year in school, from $5,500 to $7,500 for dependent students and from $9,500 to $12,500 for independent students (or dependent students whose parents were denied a parent PLUS loan). The PLUS loan has an annual limit equal to the cost of attendance minus other aid received.

The PLUS loan does not consider debt-to-income ratios or the borrower’s credit scores. Only delinquencies, defaults, bankruptcy discharges and other derogatory events in the credit history may affect eligibility for the PLUS loan. The Stafford and Perkins loans do not depend on the credit history at all.

The Stafford loan has a lower interest rate and lower fees than the PLUS loan, so it is in a family’s best financial interest to exhaust eligibility for the Stafford loan before turning to the PLUS loan.

Q.
We have enough money to pay for the first two years of college; after that we’ll need to sell stock and other assets to cover multiple kids attending. Is it better to apply with “no need” as a means of getting accepted, then possibly apply for aid later? When they say everyone should fill out the Fafsa even if they don’t need financial aid right away, isn’t that limiting one’s chances for admission?

— elizab

A.
Most colleges do not consider financial need as part of the college admissions process. The main exceptions are for international students and students admitted off the waiting list. If a “no need” student is admitted off the waiting list, some colleges will not allow the student to apply for institutional financial aid in subsequent years unless there has been a significant change in the family’s financial circumstances. So, if a student needs financial aid to afford a college, don’t try to game the system. It may backfire.

Q.
I have been offered the possibility of taking on an extra responsibility at work, for which I can either be paid extra or take time off from other duties. My son will be entering college this fall, so the extra money is tempting. On the other hand, I worry that it will simply erase the small need-based grant he received, meaning we may not be any better off. What is the best thing to do?

— Debbie

A.
Increases in income may cause the loss of need-based grants, especially if the family’s adjusted gross income is close to certain income thresholds in the federal need analysis methodology (e.g., $23,000 and $50,000 in income). However, in most cases, the extra income exceeds the reduction in eligibility for need-based aid, even after taxes.

Estimate your expected family contribution with an E.F.C. calculator. You may also use this calculator to estimate the impact of the change in income on the family E.F.C. The difference in aid will be roughly the same as the change in E.F.C. You may also play what-if games with the college’s net price calculator, but be careful since the net price calculator may not be entirely accurate.

Q.
Which is the better option: to take the offered government subsidized loan or pull the equivalent amount out of a home equity line of credit?

— Raya Munroz

A.
The subsidized Stafford and Perkins loans have fixed interest rates, while a home equity line of credit (Heloc) typically has a variable interest rate. While the Heloc’s interest rate may be lower than the fixed rate on the federal loans right now, that may not last. Consider that variable interest rates decreased by about 5 to 6 percentage points at the start of the credit crisis and could increase by a similar amount during the economic recovery.

The federal government pays the interest on subsidized loans while the student is in school and, in some cases, during the grace period after graduation. Repayment on a Heloc begins immediately after disbursement, and interest will be charged while the student is in school. The subsidized interest benefit on the federal loans is the equivalent of a 1 to 5 percentage-point reduction in the interest rate, depending on the term of the loan and the length of the in-school deferment period.

Federal student loans offer flexible repayment terms, like the economic hardship deferment, forbearance, extended repayment and income-based repayment. Federal student loans also offer public service loan forgiveness. Helocs offer none of these benefits.

There are also differences in the risks. Borrowers who default on a Heloc can lose their home, while federal education loans are unsecured. However, the federal government has very strong powers to compel repayment of defaulted education loans. Student loans are also almost impossible to discharge in bankruptcy.

Q.
When colleges award merit scholarships and they are not used by the applicant (i.e., they go to another school) what happens to these scholarships? Would it make sense to write to your college of choice asking that you be considered for one of the unused merit scholarships, assuming you meet the requirements for eligibility? I am also curious to learn whether colleges ever award more money after the decision date of May 1.

— Cathy Nowak

A.
Most colleges use academic scholarships as a recruiting tool. Often, they will award more scholarships than they have money available and rely on predicted enrollment yields to break even. There is no unclaimed money available to students who didn’t satisfy the selection criteria.

While it doesn’t hurt to ask for more money, so long as one is polite about it, chances of success are much greater if there’s a reason to justify the increase, like a change in the family’s financial circumstances or if there is an unusual circumstance like high dependent-care expenses for a child with special needs.

Some colleges that are need-blind during the regular admissions cycle become need-sensitive when admitting students from the waiting list. The college may not have enough remaining financial aid money in its budget to be generous to students admitted after the May 1 common reply date. (Most colleges have contingency funds to accommodate families who have a mid-year change in financial circumstances, but they do not tap into them when admitting wait-listed students.)