Financial Aid – What You Need to Know

What Goes into the Cost of College? Or, Financial Aid 101.

Most people are aware of the high price of college. We hear in the news that some of the best-known private colleges cost over $80,000 per year. According to the College Board 2022 Trends in College Pricing, the average cost for one year at college during the 2022-2023 academic year was:

  • $27,940 for an in-state student at a public college;
  • $45,240 for an out-of-state student at a public college;
  • $57,570 for a private college.


Who are “you”? Throughout this section, “you” refers to both students and their parents. Colleges and the government are the source of most financial gift aid (money that does not need to be paid back), and they view paying for college as a shared responsibility of the student and his or her parents. So whenever we say “you” in this site, it means both the student and the parents. With all these numbers it’s no wonder that people find it confusing to understand the cost of college. Many throw up their hands and despair of figuring it out. And historically colleges haven’t helped – often families don’t know the cost until they get their aid letter or bill, when it’s too late to find colleges with a lower net price.

The reality is that families can understand the cost of college. And the better you understand the cost, the better able you’ll be to control and manage it. In turn, that makes a successful college experience more likely.


Financial Aid

Colleges provide three types of financial aid:

  1. Gift aid – money that does not need to be earned or paid back
  2. Work/study – a job, so students can earn money as they go to college
  3. Loans – financing to allow students and/or parents to repay costs later

As a general rule, students want to maximize the amount of gift aid they get. Is it always the case that students should choose the college that offers the most gift aid? No. There are differences among colleges, and one may be worth more to you than another. But it is always the case that students are better off knowing what gift aid they’re likely to receive, so they can make an apples-to-apples comparison.

What you need to know


What will the college offer as scholarships and financial aid?

What’s the breakdown of gift aid, work/study, and loans?

Sticker Price vs. Net price

The fact is that many people pay far less than the published cost – the sticker price – of college. Like airlines where two passengers’ fares can be vastly different, colleges adjust their price from student to student. They do it by tailoring the amount of financial gift aid they offer to each student.

The price you actually pay is called the net price – the sticker price minus gift aid. Colleges call their gift aid “grants” or “scholarships.” Grants are usually based on the student’s financial need, while scholarships are usually based on the student’s academic strength.

Only by estimating the net price of the colleges you’re considering can you make a direct comparison of the cost of different colleges.

What you need to know

What is the college’s sticker price?

How much gift aid will the college offer?

Estimate the net price for each college so you can make direct cost comparisons.


The Business of College Determines Your Gift Aid

Although most four-year colleges are public or non-profit, they operate like businesses in some important ways. They need to generate revenue, and they need to make sure that expenses are less than revenue. Colleges understand that their net price is a key factor in their economic well-being. When they offer grants and scholarships, they are adjusting the price they charge for their product – in other words, they are discounting their price.

Colleges understand this well. When they talk with students and families they talk about grants and scholarships. When they talk among themselves or to their accountants, they talk about their discount rates. Understanding how they discount helps you understand what you’ll pay for college.

You’ll need to fill out the FAFSA (Free Application for Federal Student Aid) to apply for need-based aid. You’ll often need to complete the CSS Profile as well. Be truthful – colleges review them carefully to verify accuracy. It’s important to understand the factors that determine your EFC (Expected Family Contribution). A lower EFC means greater eligibility for need-based aid. Colleges discount their price to create incentives that will attract the students they most want to enroll. Highly selective colleges can fill all their openings with students who pay the full sticker price. They tend to offer only need-based aid, to attract a more economically diverse student body.

Less-selective colleges can’t fill their spots with full-paying students. They have multiple goals, but important among those goals is attracting students who will help them meet their revenue targets (even if they pay less than the full price) and who will help them improve their ranking compared to other colleges. They often offer merit-based aid because they want to attract high-achieving students. They offer the most aid to the highest-achieving students – for example those with the highest SAT scores – and progressively less aid to students with lower scores.

College admissions offices must balance a variety of objectives. Common priorities are access for needy students, class diversity, intellectual curiosity, and athletic or artistic talent. Whatever their other objectives, almost all colleges pay attention to “net tuition revenue,” the amount they collect after subtracting college-funded gift aid from the sticker price. They employ numerous strategies to achieve their revenue goals. A common approach is to discount tuition to desirable students – usually by offering merit aid. Students in the top 20-25% of the applicant pool are more likely to receive merit aid.

The key is to understand how colleges decide who gets a large discount, and who gets no discount. Each college may use a different set of factors to determine how it awards aid, and at a given college, each student’s unique characteristics determine how much aid he or she will be offered. Once you understand how the college discounts, you can put yourself in the best position to receive need- and/or merit-based aid.

Students also want to study hard to maximize the chance of qualifying for merit scholarships. Good grades and high test scores help not only your admissions chances, they also help you qualify for financial aid!

What you need to know

Does the college offer need-based aid, merit-based aid, both, or neither?

What is your EFC? You should know both your FAFSA and Profile EFC – these are used to determine how much need-based aid you’ll be offered.

What is your merit aid profile? Common factors are GPA, test scores (SAT and/or ACT), and class rank. More subjective factors such as artistic, athletic, musical, or writing talent may also be considered.

The Net Price Is the Bottom Line – What Now?

The net price is the bottom line – it’s the amount you need to pay for a year of college. You need to pay the entire net price, and you’ll pay it out of your earnings. There are three sources of money to pay the net price.

1. Prior earnings – otherwise known as savings.
2. Present earnings – money you can “pay as you go” from parents’ jobs, summer work, and work/study.
3. Future earnings – student and parent loans: money you borrow now and have to repay – with interest – in the future.

One source of savings that most financial advisors recommend should not be used for college expenses is retirement savings (such as an IRA or 401(k)). The three largest expenses most parents face in life are a home, college for their children, and their retirement. While you can be earning an income while saving for a home and college, your income will likely be limited when you retire. Therefore it’s important to put a high priority on maintaining your retirement nest egg. In addition, using retirement savings to pay for college can have costly tax and need-based financial aid consequences! Prior earnings (savings) – This is the amount you’ve saved for college. In most cases this is the best way to pay the net price because it requires the least current and future sacrifice. Funds you receive from grandparents, other relatives, or inheritances count as prior earnings; it’s just that they were earned by someone else. If college is close – a year or two away – you don’t have much time to add to savings. Even so, save as much as you can – in most cases, each dollar saved means one less dollar borrowed!

Current earnings – This is the next best source of money to pay for college. It may involve sacrifice, but it won’t incur interest cost. Most colleges offer payment plans that allow you to spread the cost of tuition over eight or ten months, so you can make college payments as you earn your income. You can choose how much to pay in a payment plan, and pay the rest using savings or loans.

Look at your credit card statements to see if there are opportunities to cut back on spending. Parents with $250 per month of restaurant charges can eat at home, freeing up $3,000 per year to pay for college. If you don’t have a budget, make one. Keep track of your spending and look for opportunities to cut back so you can use the money to pay for college. Is it time to get rid of your landline? Do you still need cable, or can you use new technology to watch your favorite shows?

Both parents and students can look for opportunities to pay from current earnings. Students can earn a few thousand per year in a summer job, and can get a work/study or part-time job during the school year.

Future earnings (loans) – College is a long-term investment in which the return in the form of higher earning potential will take place over a lifetime. It’s appropriate to include loans in your college financing plan, but try to minimize the amount you borrow.

What about other/outside scholarships? Outside scholarships are scholarships from sources other than the college you’re attending and the federal and state government. Lots of websites and articles about managing the cost of college recommend looking for outside scholarships. By all means, if you can get one of these scholarships, apply for it. But be realistic. Most outside scholarships amount to a few hundred dollars, and rarely exceed a couple of thousand dollars. Never turn your nose up at them, but keep in mind they will cover only a small part of the cost in most cases. They need to be reported to your college, and they may change the amount of aid you can receive – sometimes reducing the college’s aid! Every college sets its own policies about how it treats outside scholarships. Be wary of any service that asks for a fee to help you find scholarships.

Loans are the most expensive way to pay for college because in addition to the cost of college you’ll have to pay interest on the amount borrowed. Federal student loans are the first option to consider. They offer some important benefits compared to private loans or federal parent education loans: they offer more flexible repayment options, may have lower interest rates, and some are subsidized so interest doesn’t accrue until graduation. Some can be forgiven after a period of timely repayment if you take a public service job after college.


The government sets limits on the total amount that can be borrowed using federal student loans. If you need to borrow more, other loan programs are available. The government’s PLUS loan for parents has benefits that include a fixed interest rate, but it has a fairly high origination fee. Private lenders like banks and credit unions may offer loans too; they usually require a more thorough underwriting process and a co-signer.

No one should go into a loan with the idea they won’t pay it back. But we all know that unforeseen things can happen. Keep in mind that it is extremely difficult to wipe out student loans in bankruptcy. That’s true whether it’s a private or government loan. Except for very limited circumstances, until it’s paid in full a student loan is forever.

What you need to know

What family savings are available to pay for college?

How much can the student earn to pay for college?

Are there expenses parents can eliminate or defer to maximize the amount of the cost covered by current earnings?

What loan options are available to students and parents?

How much debt will you need to take on?

What will the monthly payment be?

How much do you need to earn to cover the payment?

College Is a Multi-Year Proposition

Most information about college cost is presented based on a single year of college. That can be helpful in making comparisons, but don’t forget that you’ll be going to college for several years. You’re not doing yourself a favor if you struggle and scrape to go the first year, only to realize you can’t afford to continue.

The surest way to save on college cost is to finish on time! Most aid programs are not renewable beyond eight semesters (four years). Nationally only 54% of students complete their degree in six years according to the National Clearinghouse. Making a plan to complete college in four years can save you tens of thousands of dollars! Make a multi-year plan. Find out if the aid offered will be continued at a similar level for the full length of the program. Be sure you can complete the program in the standard amount of time by working with your college academic advisor – meet early in your college career, and regularly thereafter. 

Be EFC savvy to maximize your eligibility for need-based aid after the first year. Project your EFC over all four years of college. Changes in family circumstances such as having more than one child in college can have a dramatic impact on the EFC, and thus your eligibility for need-based aid. If you might qualify for need-based aid after the first year, make a plan to pay first from funds that have the biggest impact on EFC. For example, pay with student assets that increase EFC by 20% before using parent assets that increase EFC by 5.64%. That way you may be eligible for more need-based aid in subsequent years.

Pay attention to your loans. Because the interest rates and terms of education loans vary from year to year, you’ll likely end your college career with multiple loans. Pay attention to all of them; many people forget about one or more and end up defaulting, with costly penalties. Having a multi-year plan will allow you to predict your loan payments at graduation, and may influence the type of work or college major you pursue.

What you need to know

What is the cost of a degree?

Who is your academic adviser and what resources are available to help you complete your degree in four years?

What will your EFC be in the second, third, and fourth years of college?

Are there steps you can take to increase your eligibility for aid in the latter years of college?

Remember, College Is Worth It!

A college education provides all kinds of benefits. It’s an opportunity to grow and mature. There is intrinsic value in the knowledge and critical thinking skills a college education teaches. The social network people develop in college and the alumni networks at many colleges are lifelong resources. But all those are intangible, so let’s talk about the money.

In study after study, the earnings of college graduates consistently outpace the earnings of those who end their education with a high school diploma. The College Board in its 2013 report “Education Pays” analyzed US Census Bureau data. They found that the median income in 2011 for people whose final education level was a four-year bachelor’s degree was $56,500. For those whose highest level was high school the median income was $35,400.

So do all you can legitimately do to minimize the cost of college. Be smart about how you pay for college. Use the cheapest sources of funds to pay for college. But above all, be confident in your choices, enjoy the college experience, and let your dreams guide your ambition!

I find that the harder I work, the more luck I seem to have. ~Thomas Jefferson

All our dreams can come true if we have the courage to pursue them. ~Walt Disney

You must expect great things of yourself before you can do them. ~Michael Jordan

What you need to know

What career resources are available at college?

How many loans do you have, and when do you need to begin repaying them?

Could you qualify for “Income Based Repayment,” (which limits required payments based on your discretionary income) and does it make sense for you?

Are your loans eligible for forgiveness under certain circumstances?


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