Financial Aid Basics for Parents and Students

The cost of college is arguably the most stressful aspect of the college search for students' families, and it's not easy to calculate accurate costs. There's the Sticker Price, NetCost, Cost of Attendance, multiple types of Federal Loans, multiple types of Private Loans, grants, scholarships, institutional aid, work study, SAI, FAFSA, Net Price Calculator, and that's not even the half of it! It’s a common joke that students and their parents need a PhD just to understand financial aid!

To make matters worse, there are a few current complications that add to the difficulty:

• The issues with the new FAFSA rollout left colleges without the reliable data they need to make financial aid offers in an informed and timely manner.

• It also completely disrupted 1-3 years' worth of financial aid data that some online tools and consultants use to predict college costs.

• Recent executive decisions have created a high degree of uncertainty regarding financial aid.

• Emerging trends, such as direct admissions, test-optional, high school grade inflation, and more are adding more complexity and nuance to college admissions.

This Chapter will help simplify much of this, as well as help you better understand the process and what it all means. More importantly, it will identify ways you can calculate a much more accurate "Cost of College" for each school so you can compare offers, see the bottom-line for each, and make data-informed decisions! 

First, it’s important to understand the basic sources and types of financial aid.

 There are 3 sources of aid:

1. State and Federal Government (Federal Aid or Government Aid)

2. Colleges themselves (Institutional Aid)

3. Private Sources (Private Aid)

There are 4 types of aid (within each source): 

• Scholarships are funds given without the need for repayment, but the eligibility criteria can range from broad to extremely specific. These include:

• Merit Scholarships are awarded based on academic achievement

• Need-Based Scholarships are awarded based on need

• Specialty Scholarships are based on specific criteria, such as race, major, etc.

• Athletic Scholarships are awarded to student-athletes by private entities or colleges

• Grants are funds that are usually based on need and do not need to be repaid. Examples include:

• Federal Pell Grant is Need based aid with limits set by the U.S. Gov't.

• Federal Supplemental Educational Opportunity Grant is Need based aid

• State Grants are administered by states and may be either need based or merit

• Institutional Grants are offered by individual institutions and may involve varied criteria

• Private Grants are like Institutional Grants, except they are offered by private entities

• Loans are funds borrowed from lenders and must be repaid with interest. Loan rates & details differ widely between lenders.

• Federal Loans are funded directly by the US government (repayment is serviced by contracted companies)

• Benefits are funds provided by the government, an employer, or an entity as a perk, e.g., employee tuition assistance, GI Bill, etc.

NOTE: Most colleges recognize 2 types of aid Gift Aid (Scholarships and Grants) and Self-Help Aid (Loans and Work Study).  This works for colleges, but I think it contributes to the confusion parents and students experience.

• Work-Study is really more of a College variable.  It's meaningless to parents and students because it's no different than income from a job, and it's not guaranteed, so it doesn't really lower the cost of college.

• It ignores Benefits from private sources, such as employers. I suspect colleges would count that as "Self-Help", but that's not exactly accurate.

• So I break them down into a simpler and more explicit model.

Below is a chart that shows the different sources and types, with a few examples of each.

Types and Sources of Financial Aid

Here's a little more on Work Study, but again, I encourage families not to count on it too much, since it's not guaranteed and is better accounted for as job-related income.

Federal Work-Study

The Federal Work-Study Program is a program where the federal government subsidizes a portion of the student's salary in relation to employment that supports the school. In effect, it provides part-time jobs for students with financial need, allowing them to earn money to help cover expenses. These jobs are often on campus and can provide valuable work experience.

• Not guaranteed – Funding is limited and varies by school, as do the hours a student may work from week to week.

• Doesn’t reduce tuition directly – Earnings are paid like a regular paycheck straight to the student. This is why it's better accounted for as income.

Student Loans (Borrowed Aid)

Student loans help families cover college costs but must be repaid, usually with interest. Loans should be a last resort, and families should carefully consider how much debt to take on.

There are two main types:

• Federal Loans – Offered by the government with fixed interest rates and borrower protections.

• Private Loans – Offered by banks, credit unions, and other lenders, often with higher interest rates.

Types of Federal Loans

1. Direct Subsidized Loans – Need-based; the government pays interest while the student is in school.

2. Direct Unsubsidized Loans – Not need-based; interest accrues immediately.

3. PLUS Loans – Available to parents and graduate students; require a credit check.

Cogi InSight: Avoid borrowing more than your expected first-year salary upon graduation. If you don’t know your future salary, assume a starting range of $40,000–$50,000 when estimating a reasonable borrowing limit.

Where Does Financial Aid Come From?

There are 4 basic sources of Financial Aid.

1. Federal/State Financial Aid

• Federal Financial Aid

• The largest source of financial aid in the U.S. comes from the federal government through the FAFSA (Free Application for Federal Student Aid). This form determines eligibility for:

• Federal Grants (Pell, FSEOG)

• Federal Loans (Subsidized, Unsubsidized, PLUS)

• Work-Study Programs

• (Given it's pervasive use, it's also used by States and Colleges to help them determine their own financial aid amounts.)

• Key Date to Remember: The FAFSA opens on October 1st each year. Some aid is first-come, first-served, so apply early!

• State Financial Aid

• State Financial Aid varies from state to state but is virtually entirely made up of scholarships and grants and is almost always limited to in-state resident students.

• Nearly all of them are based on the FAFSA, but some use their own forms and may have different deadlines, so check your local state resources to be sure.

2. College/Institutional Aid

Many colleges offer institutional scholarships and grants based on merit or need and utilize the FAFSA. Some schools require the CSS Profile, a separate financial aid application used by private colleges. Although it's very rare, some schools have very limited loan programs.

3. Private Aid

• Businesses, nonprofits, and religious organizations offer outside scholarships and grants.

• Employer tuition assistance may be available through parents’ workplaces.

• Military and ROTC programs provide financial aid in exchange for service commitments.

Keep in mind: Private aid will often be considered income by schools, and it could very well reduce the amount of institutional aid you are offered.  It's also possible private aid could be taxable as income tax in the future.

Understanding the Financial Aid Process

Navigating the financial aid process can feel overwhelming but breaking it into clear steps can make it easier to understand. Here’s the general process:

Step 1: Determine Your Eligibility

Start by completing the Free Application for Federal Student Aid (FAFSA) and any additional forms required by specific colleges, such as the CSS Profile or internal forms. These forms are essential to begin the financial aid process.

Cogi InSight: Eligibility is not based SOLELY on your income.  For Federal Financial Aid it is, but for Institutional Aid, it's based on your income in relation to the Cost of Attendance at a given school. So don't disregard the FAFSA just because you expect your income is too high; doing so would likely make you ineligible for Merit Aid and Need-based Aid at expensive schools.

Once you complete Step 1, individual schools complete Steps 2, 3, and 4.

Step 2: Calculate SAI & Need

After you submit the FAFSA, you’ll receive a Student Aid Index (SAI). This number represents what the federal government believes your family should be able to contribute toward college costs each year. It assumes significant financial sacrifices and is often higher than what families can easily afford.

The school uses the SAI to calculate a student's "Financial Need" (or simply "Need")

• The calculation is the school’s Cost of Attendance (COA) minus the SAI

• Remember: Your “Need” is calculated based on government formulas—not your actual ability or willingness to pay.

Using this information, the school identifies 2 things:

1. The federal aid you qualify for, and

2. How much additional aid it is willing to offer in exchange for enrollment (based on their evaluation of the student’s application)

Step 3: Determine Aid Package

Once you’re accepted, the school will build your financial aid package by considering your SAI, Need, and their enrollment priorities. These priorities can include factors like:

• Higher GPA and test scores

• Extracurricular achievements

• Diversity goals (e.g., by major, gender, or geographic region)

How closely the applicant aligns with a school’s priorities, the greater their chances of receiving additional aid.

Step 4: Send Out Award Letters

Schools will send accepted students Financial Aid Award Letters, which outline the aid the school is offering. However, these letters can be confusing or even misleading. (The next section will explain this more)

After families receive their Financial Aid Award Letters, they have one optional step to take.

Step 5: Clarify & Negotiate

While not officially part of the process, this is an important step for many families. After reviewing the award letter, reach out to the school’s financial aid office to:

• Clarify: Ask for explanations of unclear terms, renewal conditions, or costs, etc.

• Negotiate/Appeal: If your financial situation has changed or if you feel your aid package doesn’t fully reflect your need, politely request a reevaluation.

Schools are often willing to adjust aid packages if your request is respectful and backed by valid

Understanding Financial Aid Offers

If you're accepted into a school, you'll receive a Financial Aid Offer, which details:

• Types of aid offered (grants, scholarships, loans, work-study)

• Cost of Attendance (COA)

• Expected Family Contribution (EFC or SAI)

• Remaining balance after aid is applied

Key Considerations When Comparing Offers

• Even though the letters technically include all this information - it's often very confusing. There are no regulations requiring colleges to include this information in a clear or consistent manner. A few are really good, most are mediocre, and some are arguably misleading.

• Look at the net cost, not just the total aid package. A school offering $10,000 in grants and $20,000 in loans may be less affordable than one offering $15,000 in grants and only $5,000 in loans.

• Consider loan repayment. Interest rates, terms, fees, and repayment options should factor into your decision.

• Negotiate if needed. Families can appeal for more aid, especially if their financial situation has changed.

Cogi InSight: To be honest, even calculating the Net Cost from Offer Letters is not entirely accurate. There can be vast differences in student expenses, and they often leave out loan fees, interest payments, etc.  So a better approach is to utilize student and parent budgets to calculate the "true Net Cost" that is more accurate.  Here's a tool Cogi developed just for this purpose; it will help you get the most accurate Net Cost you can get so you can make effective comparisons.

Looking Ahead: Making Smart Financial Aid Decisions

Understanding financial aid is one key to making college affordable and avoiding excessive debt. By prioritizing grants, scholarships, and low-cost options, families can minimize the amount they borrow and set students up for long-term success.

Key Takeaways:

• Complete the FAFSA early to maximize aid eligibility.

• Prioritize Grants and Scholarships (grants & scholarships) before borrowing.

• Limit student debt to a reasonable amount based on expected salary.

• Compare financial aid offers carefully to understand the true cost.

If you need personalized guidance on financial aid, scholarships, or choosing an affordable college, Cogi can help! Reach out today to get expert advice on maximizing aid and making smart college decisions.