There are a lot of myths surrounding financial aid – which is not surprising because the information about it is can be confusing, so let’s start with the basics. Financial aid is money distributed primarily by the federal government and colleges in the form of student loans, grants, scholarships, and work-study jobs. Loans and work-study must be repaid; grants and scholarships do not.

There are two main categories of financial aid: Need-based and merit-based. Need-based, which is the most common, depends on your child’s “financial need”. Merit-based is awarded according to your child’s academic, athletic, musical, or artistic merit.

With that in mind, here are five useful facts about the need-based variety:

Fact #1: There is more than one way to determine “financial need”

Many people are familiar with the federal government application known as FAFSA, which uses a formula known as the “federal methodology”. Generally speaking, parent and child income and assets are included in the formula that drives the expected family contribution (or EFC). To calculate “financial need”, one must subtract the EFC from the cost at a particular college.

But FAFSA isn’t the only way to determine “financial need”; many colleges have their own way. While similar to the “federal methodology”, the “institutional methodology” often takes a deeper dive into your financial situation in an effort to discern true need. For example, the “institutional methodology” frequently considers retirement assets, while the FAFSA / “federal methodology” does not.

Fact #2: Parental income is a larger factor driving “financial need” than parental assets

Parent’s income can be assessed at rates as high as 47%, making it a major factor driving the “financial need” calculation. In contrast, parent’s includable assets are assessed only between 2.64% and 5.64%. So it is common for families with healthy incomes but very little in savings to have a very low “financial need”. From a practical standpoint, unless you anticipate that your cash flow during your child’s college years will cover his or her college expenses, it’s worth saving for the future.

Fact #3: ”Financial need” does always equate to “met need”

It is very common for colleges to meet only a portion of the calculated “financial need”, which means that you will be “gapped.” In this situation, you will need to make up the “gap” in addition to paying the expected family contribution. We suggest comparing different school’s abilities to meet student’s financial needs, which requires some research.

Fact #4: It’s not a “set it and forget it” process

Families of students seeking financial assistance will need to complete the financial aid application process annually. Unfortunately, the system does not operate like the admissions process in which the student runs the gauntlet once and then never again. As a result, we recommend that families have a good filing system for financial documents in order to make the annual process as painless as possible.

Fact #5: Your student may need to complete a FAFSA form even if you don’t apply for financial aid

As odd as it may seem, some colleges and universities require parents to complete the FAFSA form for all scholarships, even those that are merit based. So if your child is applying for a scholarship, be sure to check the college’s web site to see if it is required – and call the school directly if the web site language isn’t clear.

For more information about financial aid and how it fits into your family’s overall financial picture, please contact our office. We would be happy to refer you to qualified professionals.