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An Overview of College Funding Thumbnail

An Overview of College Funding

Here is an overview of the things you need to think about regarding college funding including understanding the Cost of Attendance, your Expected Family Contribution, various types of financial aid and the different rules for Dependent vs. Independent students.

Dependent Students


Cost of Attendance (COA) - If you are attending college at least half-time, your COA is the estimate of

  • tuition and fees;
  • the cost of room and board (or living expenses for students who do not contract with the school for room and board);
  • the cost of books, supplies, transportation, loan fees, and miscellaneous expenses (including a reasonable amount for the documented cost of a personal computer);
  • an allowance for child care or other dependent care;
  • costs related to a disability; and/or
  • reasonable costs for eligible study-abroad programs.

Expected Family Contribution (EFC) - Your EFC is an index number that college financial aid staff use to determine how much financial aid you would receive if you were to attend their school. The information you report on your FAFSA form is used to calculate your EFC.  In general, it includes 12% of parental assets (not including retirement accounts, home equity or the value of a small business) and 20% of student assets. 529 Plan assets owned by the parents are considered parental assets.

Parents are expected to contribute up to 47% of their net income to the cost of college every year. If there are multiple children in college at the same time, it is up to 47% for all of them combined, not for each.

To calculate net income, take Adjusted Gross Income from the parents’ 1040 tax return form. Add in retirement plan and Health Savings Account contributions; child support and other income received. Subtract federal, state, and FICA taxes. Then subtract an “income protection allowance,” which varies depending on how many people are in the household and how many of them are in college (see table for 2019–20).

Expected Family Contribution

Source: https://ifap.ed.gov/efcformulaguide/attachments/1920EFCFormulaGuide.pdf

What you are left with is your “net available income.” Multiply it by 47% to get the amount from income you are expected to spend on college next year. For example, if the amount is $40,000, then the aid formulas will anticipate that you can spend $18,800 from income.

Finally, the formula includes the student’s income and 20% of the student’s assets. For income, subtract taxes paid, then $6,600; then multiply anything remaining by 20%. 

Note:  About 200 colleges and universities ask students to file another financial disclosure using the College Scholarship Service (CSS) Profile (in addition to the FAFSA). These are mostly selective schools that have their own aid money to give. The CSS Profile is not used to determine your eligibility for federal aid, only for access to the college’s aid dollars. If the school uses the CSS Profile, it is going to ask for additional information about your and your parents’ income and assets including retirement plans, home equity and small business ownership.

Colleges determine whether you have financial need by using this formula:


Cost of Attendance (COA) − Expected Family Contribution (EFC) = Financial Need

You cannot receive more need-based aid than the amount of your financial need. For instance, if your COA is $16,000 and your EFC is $12,000, your financial need is $4,000, so you are not eligible for more than $4,000 in need-based aid.

The following are the need-based federal student aid programs:

  • Federal Pell Grant
  • Federal Supplemental Educational Opportunity Grant (FSEOG)
  • Direct Subsidized Loan
  • Federal Work-Study

Colleges determines how much non-need-based aid you can get by using this formula:

Cost of Attendance (COA) − Financial Aid Awarded So Far* = Eligibility for Non-need-based Aid

*includes aid from all sources, such as the school, private scholarships, etc.

Non-need-based aid is financial aid that is not based on your EFC. What matters is your COA and how much other assistance you have been awarded so far. For instance, if your COA is $16,000 and you have been awarded a total of $4,000 in need-based aid and private scholarships, you can get up to $12,000 in non-need-based aid.

The following are the non-need-based federal student aid programs:

  • Direct Unsubsidized Loan
  • Federal PLUS Loan
  • Teacher Education Access for College and Higher Education (TEACH) Grant

Repayment of Student Loans

Once you graduate, drop below half-time enrollment, or leave school, your federal student loan goes into repayment. However, if you have a Direct Subsidized, Direct Unsubsidized, or Federal Family Education Loan, you have a six-month grace period before you are required to start making regular payments. 

You will have a nine-month grace period if you have got a Perkins Loan. If you have a PLUS loan, you will go into repayment as soon as the loan is fully paid out. But if you are a graduate and professional student PLUS borrower, you will be placed on an automatic deferment while in school and for six months after graduating, leaving school, or dropping below half-time enrollment.

When your loan enters repayment, your servicer will automatically place you on the 10-year Standard Repayment Plan. You can request a different repayment plan (such as Income Based) at any time.

This grace period gives you time to get financially settled and to select your repayment plan. Note that for most loans, interest accrues during your grace period. You can choose to pay the interest that accrues during your grace period. This prevents that interest from being added to the principal balance.

Income Based Repayment Plan

Your monthly payments will be either 10 or 15 percent (depending on when you received your first loans) of your discretionary income (the difference between your annual income and 150 percent of the poverty guideline for your family size and state of residence).

Payments are recalculated each year and are based on your updated income and family size. If you are married, your spouse's income or loan debt will be considered only if you file a joint tax return.  For example, if you are single with no dependents and earn $50,000 per year, you would be required to pay no more than about $250 per month ($3,000 per year) in loan repayments.

Any outstanding balance on your loan will be forgiven if you have not repaid your loan in full after 20 years or 25 years, depending on when you received your first loans.  You may have to pay income tax on any amount that is forgiven.

Eligible Loans

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • PLUS loans made to students
  • Consolidation Loans (Direct or FFEL) that do not include Direct or FFEL PLUS loans made to parents

Public Service Loan Forgiveness

If you are employed by a government or not-for-profit organization, you may be able to receive loan forgiveness under the Public Service Loan Forgiveness (PSLF) Program.

PSLF forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer, and importantly, you don't have to pay income tax on any amount that is forgiven.


Independent Students

Independent Students are those whose parental information is NOT included.  For the 2021-2022 Award Year, it applies to students born before January 1, 1998, students in a Masters’ or Doctoral degree program, emancipated minors and other similar categories.

If you are working towards a degree that is considered graduate or professional level, you are automatically considered independent, regardless of other factors like your age or if you are living with your parents.

This means, for most schools, you will fill out your FAFSA with only your financial information, not your parents’ information. Some graduate programs (especially law and medical schools) still require some financial information from your parents, so be sure to check the policies of the schools you are applying to.

Another important difference for graduate students completing the FAFSA is that they are not eligible for subsidized loans. Subsidized loans do not start accumulating interest charges until you are no longer a full-time student. However, the loans you take out as a graduate student will be unsubsidized, which means they will begin accumulating interest charges immediately.

There are two main federal loans you can get as a graduate student: Stafford Loans and Grad PLUS Loans. Below is some key information on each of them.  

Stafford Loans (also known as Direct Unsubsidized Loans)

  • Can borrow up to $20,500 a year ($40,500 for med school)
  • 1.062% fee
  • Fixed interest rate of 4.3% for the 2020/2021 school year

 Grad PLUS Loans

  • Can borrow amount equal to your school’s cost of attendance (tuition and fees, room and board, books, supplies, transportation, etc.) minus any other financial aid received
  • 4.248% fee
  • Fixed interest rate of 5.3% for the 2020/2021 school year

Most graduate students max out their Stafford Loans before taking out any PLUS loans since the Stafford loans have lower interest rates and fees. However, be aware that, with Stafford and PLUS loans, you can cover the entire cost of attendance of grad school with federal loans. So, even if you don’t have any money saved to pay for your graduate degree, you can cover the entire cost with federal loans (which will obviously need to eventually be paid back, with interest). You may also be eligible for types of aid besides federal loans, such as school-based aid, work study packages, and/or scholarships.