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Financial aid and college tuition go hand in hand

The high cost of college has led to a revolution in financial aid. When I was a student at Northwestern University in the 1970s, I remember that the only people who applied for financial aid were the truly needy ones — low-income families with several kids to educate. My family was fairly well off, so we did not go to the trouble of filling out financial-aid forms when we were likely to be turned down.

All that has changed today. Because college is so expensive, all but the very wealthy apply for financial aid. It pays to do so, because even students from middle-class families usually qualify for some type of aid, whether it be need-based grants or low-interest loans.

Upon acceptance to college, students receive an award letter that outlines the total costs and the amount of grants and/or loans the student qualifies for. In determining the amount of aid, the college looks at the Expected Family Contribution, or EFC. The EFC takes into account any assets owned by the student as well as the income of the parents, the assets of the parents (but not retirement plans or home equity), and the number of children in the family.

All these numbers are reported by the student and the family at the beginning of each calendar year on a form called the Free Application for Federal Student Aid, or FAFSA. Individual schools may also have their own financial-aid forms, but the FAFSA is what allows the student to qualify for federal and state grants and loans. It is important to fill out and submit the FAFSA on time — the sooner the better, because some aid is dispensed on a first-come, first-served basis. Deadline dates can be found on FAFSA's website. Deadlines for individuals schools may be sooner.

The trick in applying for aid is arranging one's financial affairs to reduce the expected family contribution. There is nothing dishonest or unethical about this as long as certain common guidelines are followed. For example, any assets in the student's name, such as savings accounts or Uniform Gift to Minors Act accounts, are given more weight in the EFC formula, so it may be wise to spend down those assets on computers or other items needed by the child so they do not need to be reported on the FAFSA. Parents sometimes reduce their "countable" assets by stashing money into qualified retirement plans — something they should probably be doing anyway.

What role do grandparents play in all this? Just be aware of the rules for financial aid and don't do anything that might reduce the family's eligibility for more aid. For example, if you want to give your grandchildren money for college, consider opening a 529 college savings plan (more on this in a subsequent article) rather than giving it directly to the child. Once the child has entered college, you can make payments directly to the school; this will help the family meet their EFC and has the advantage of not cutting into your annual $12,000 tax-free gift allowance.

Financial aid is not just for the less fortunate. As college costs have risen faster than the rate of inflation over the past three decades, nearly everyone can use a little help paying for the high cost of college today.

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