Applying for Financial Aid: When It Isn't Worth Your Time

Should you even bother?

For many high-school seniors, this week isn't just the beginning of the academic year. It's also the start of the college-application season, and that means filling out financial-aid forms.

But for many families with hefty incomes or sizable wealth, applying for aid will be a wasted effort. Here's a look at who likely won't qualify.

Facing rejection
You can get a handle on your aid eligibility by heading to www.collegeboard.com and playing with the College Board's Expected Family Contribution, or EFC, calculator.

The key concept: If your EFC is below a college's total annual cost, you will get help from the college or the federal government in bridging the gap. We're talking here about aid based on financial need. If your daughter is a basketball-playing piano prodigy with 2400 SATs, she might receive a merit award, even if you're rolling in dough.

So will you receive needs-based aid? Imagine you don't own your home, have no savings and just one child. With $90,000 in pretax income, your EFC would be around $13,000 a year, which is the average cost for an in-state student at a public institution.

In other words, if your kid went to a college costing $13,000 a year, you would probably get little or no aid. This EFC is based on the "institutional methodology" used by many colleges.

If your income is $150,000, your EFC would be above $30,000, which is the average cost for a private four-year college. Got $210,000? Your EFC might be $48,000, which means you likely won't get aid, even if your kid goes to one of the country's most expensive private colleges.

If you have two children in college at the same time, your odds of getting some aid are far better. Your EFC would be around $13,000 per child at $120,000 in income, roughly $30,000 per child at $220,000 and it wouldn't hit $48,000 until your income got above $300,000.

Remember, however, we are talking about income alone. What if you have, say, $500,000 in investments sitting in a regular taxable account?

If you had one child in college and your income was $130,000, your EFC might be $47,000, which means you are unlikely to get aid, no matter where your child goes to college. Similarly, at $250,000 in income and with two children in college, your EFC would be some $47,000 per child. Again, you would likely be out of luck.

If your EFC is just $10,000 or $20,000 above a college's cost, "you should probably apply the first year," says Myra Smith, the College Board's executive director of financial-aid services. "You should give it a shot. But you should also come to grips with the fact that, even if you get financial aid, you'll still have to pay a lot."

Moreover, the aid you receive may not be grant money. "At many schools, the first aid you will get is a subsidized Stafford loan," notes Sandy Baum, an economics professor at Skidmore College in Saratoga Springs, N.Y.

Applying anyway
With the College Board's calculator, you can get results using not only the institutional methodology, but also the government's federal methodology.

The federal formula ignores home equity, while colleges often take it into account, though they may cap the amount considered. Both formulas ignore retirement accounts, so don't include these sums when listing your investments in the College Board calculator. Some colleges, however, may consider 401(k)s and their ilk when doling out aid.

Even if you have no chance of receiving aid, you should fill out the federal-aid form if you want to be eligible for the government's unsubsidized Stafford loan program. Similarly, if you don't expect aid now but think you will be eligible when your second child applies in two years, you may want to file the aid forms. Some colleges also require students seeking merit aid to file first for needs-based aid.

In addition, apply for aid if you have extenuating circumstances. If you have high medical costs, if your income will be lower in the years ahead, or if you're incurring hefty expenses looking after elderly parents, you may receive aid, even if the formulas suggest otherwise.