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Understanding How College Funding Works

College financial aid pays for the difference between what a school costs to attend and the amount a family will pay from their own money. College financial aid can be a mixture of scholarships, grants, fellowships, federal work-study jobs, tuition reductions or discounts, in addition to student and parent loans.

Types of Funding Available  

Self-Help Aid – Self-help aid comes in the form of student loans, parent loans, Federal Work Study Programs, and campus employment. The money from self-help aid can be earned through working or it can be borrowed and paid back. There are two ways to pay for college, you can pay with your own money or with someone else’s money. 

Gift Aid – Colleges may use other names for gift aid they offer to students, but it is all just referring to a discount off what the school is charging. Gift aid does not need to be paid back, and it can include scholarships, tuition discounts, tuition waivers, grants, and endowment awards. 

Sources of Funding 

College Funding – Most of the gift aid offered comes from colleges. Colleges also give out federal and state financial aid. The government allocates federal financial aid funds to the colleges and then they are responsible for the distribution of the federal funds to the students. Additional grants and scholarships are offered by colleges to encourage students to attend their school and are offered to students based on merit or financial need.

Federal & State Government Funding – Federally sponsored grant programs include PELL and FSEOG. They are need-based aid programs designed for lower income families. Some states also offer grant programs, and some also require a student to have a minimum grade point average, also known as GPA to be eligible.

Private Sector Funding – Only a small percentage of the gift aid awarded yearly comes from private sector scholarships, however they may be worth the effort as the money is given and does not need to be repaid. Private sector scholarships can come from various sources including corporations, nonprofits, research institutions, religious or fraternal organizations, and national societies. 

Need-Based Aid & Merit-Based Aid  

Need-Based Aid – The Federal Government and colleges decide “need” by factoring in the total cost of attendance, minus what they estimate the family can pay towards school expenses. A federally mandated formula is used to make this calculation, which mainly uses the family’s income and assets. The Federal Methodology (FM) formula uses information from the completed Free Application for Federal Student Aid (FAFSA) to figure the Expected Family Contribution (EFC). To figure out a student’s need, the EFC is subtracted from the total cost of attendance (COA – EFC = Need). The EFC will remain the same across institutions and the only change will be each school’s cost of attendance, so if a school is more expensive this will lead to a higher need for the student. 

Merit-Based Aid – When it comes to merit-based programs, institutions will typically not consider EFC. Several categories like academic, athletic, artistic, etc., are included in merit-based aid and are given to students who have a special characteristic, skill, talent, or ability. The term scholarship is commonly used when distributing merit-based awards. Merit-based awards are reduced from a school’s total cost of attendance. 

Recap – Federal need-based aid is distributed to colleges, and the colleges must then give the funds accordingly. Colleges often use their own merit-based aid to discount the price of tuition to attract students they wish to enroll. The idea that families can make too much money to be considered is not always true. Depending on the family’s income and assets, some families may qualify for financial aid based on need only, some based on merit only, and some a combination of the two. 

FAFSA (Free Application for Federal Student Aid) 

The FAFSA is a required financial aid application for all students to fill out who are seeking financial aid for college, and it is administered by the federal government. Every year on October 1st, the FAFSA opens to students. Once a high school senior student completes their first FAFSA, they will need to complete the FAFSA annually every year.

Reporting Household Information – In most cases, high school seniors and college students who are working towards their first bachelor’s degree are considered a dependent student, but verifying the students dependency status is a good first step. The information reported on a dependent student’s FAFSA is from the student’s current household. The current household may include a student’s natural parents or a combination of a stepparent and a natural parent. Both the student and the parent’s personal and financial data will be reported on the FAFSA.  

The Base Year – Any answers related to income presented on the FAFSA come from the base year, which is a two year look back. For high school seniors, the base year starts on January 1st of their high school sophomore year and then ends on December 31st of their junior year. An example would be 2021 as the base year for the 2023-2024 college school year. 

Creating the FSA ID – Creating an FSA ID for both the student and one of the parents whose information will be on the FAFSA is a crucial first step. Along with being used to sign for the original FAFSA, the FSA ID may also be used if any updates are needed to be made on the FAFSA. 

Completing the FAFSA – Filing the FAFSA as soon as possible once the filing window opens on October 1st, is always the best idea. The earlier a student files, the more likely they are to be at the top of the list, which can mean the student might be eligible for more funding. It is a requirement to report base year income tax return figures and asset figures as they are on the day the FAFSA is filed. You can complete the FAFSA online

Asset Positioning – How the parent and student assets are positioned and then reported on the FAFSA can have a significant impact on the amount and type of funding the student becomes eligible to receive. Understanding how assets can affect the outcome of financial aid eligibility is particularly important. 

CSS Profile (College Scholarship Service Profile)  

Some colleges use an Institutional Methodology (IM) formula to figure a family’s expected contribution. The College Board manages the CSS Profile, which is the way the IM formula is used. The CSS Profile is utilized in addition to the FAFSA. 

The most costly and selective schools are usually the ones that will use the CSS Profile.

The CSS Profile is a more in-depth variation of the FAFSA, but it uses the same parameters for household information, base year, and the earliest dates to file as the FAFSA. The differences with the CSS Profile are that it investigates additional family assets, which includes a family’s home equity and businesses. 

The Whole Funding Process 

Much of the funding process this far has included the family income, assets, and how much they can contribute to the student’s education, so the term Expected Family Contribution (EFC) can be slightly confusing to families. The EFC that the federal and institution formulas produce sounds like it means what the family is expected to contribute each year, but it is not actually that, it is the minimum, based on financial need, that the family will be expected to contribute. 

Financial Aid eligibility is an important part of the college funding process, but it isn’t the whole picture. A family needs to design a detailed college funding plan that helps minimize out-of-pocket expenses, maximize aid eligibility and identifies the funds that will be used to pay for college.  

Deciphering Award Letters 

Once the required admission and funding applications have been completed and the student is accepted for admission, the college’s admission and financial aid offices will review the file and make their decision. The school will send out a formal offer to the student which most often comes as an award letter. 

The award letter will usually show the schools total cost of attendance (COA) along with the offer for funding available from the institution and the federal and state governments. The gift aid and self-help aid will be included in the award letter. Any private sector awards the student may have received are not typically included in the original award letter, so it is the student’s responsibility to make sure the school is made aware of these. The student will also want to confirm that the private sector award is not deducted from the gift aid that the college has already awarded to them. 

Sometimes, the award letter may be appealed. Appealing the award letter is a request for more funding and there are two circumstances where this is the right course of action: 

  1. The offered gift aid is less than the institution would traditionally offer a student for similar achievements. 
  2. Special circumstances arise for the family that the institution has not been made aware of. This can include a large shift in the family’s financial situation, the family size increases, a parent retires or loses a job, unusually large family expenses, and/or the test scores or class ranking of the student has improved since the first application was completed and submitted. 

Special Circumstances Explained 

College funding applications are typically reviewed by an institution’s Financial Aid Officer (FAO). These applications sometimes give little room for explaining and the FAO will not be privy to whether information was completely explained or not, especially with things such as credit card debt, exorbitant medical expenses, etc. The FAO will also not be aware of any changes in a family’s financial situation and/or lifestyle since the time the first application was submitted. Any previously unreported information is called a “special circumstance” and could have an impact on the amount and type of funding a student will be offered. Reporting all applicable special circumstances to each institution’s FAO is imperative.  


Taking the time to learn all about college financial aid is one of the best ways to start the college funding process. The cost of college can be overwhelming when figuring out how to fund a higher education, but financial aid can help make school more affordable. It is important to consider all the financial aid options available to you, this way you can decide how much you need to borrow and what works best for your family situation. 

At Westface College Planning, we can help you plan for and navigate the process of paying for college. Schedule a consultation to learn more.

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