Many parents have just completed the daunting task of filing out college application forms and are breathing a well-deserved sigh of relief. I know, in my home, that sigh was very loud. I have been advising clients for years on college financial matters, but until you actually have gone through the process yourself, you don’t have any idea what it entails.

You are now waiting for the acceptance letters to come in from the various colleges/universities. So what do you do once you decide on the school of choice for your college-bound son or daughter? The next step is completing the FAFSA application. FAFSA stands for “Free Application for Federal Student Aid”. The free application is required every Jan. 1 if you are seeking financial aid from the college/university (the first FAFSA you will be completing is the one due Jan. 1 of your college-bound student’s senior year). Go to www.FAFSA.com

Oftentimes this aid takes the form of direct financial aid from the school or loans from the school, state or federal government, or a combination of all three. The FAFSA is very important for in many cases, you simply can’t do without the aid. Unfortunately, most of the federal aid has dried up and most available aid from the federal/state governments comes in the form of loans.

Colleges awarding aid do so in the form of scholarships, grants, loans and work-study programs. The amount of aid you qualify for depends on a very complicated formula which can be simplified into the following calculus version:

Financial Need = Cost of Attendance (“COA”) minus Expected Family Contribution (“EFC”).

COA is the yearly cost of attending the college/university and includes tuition, room and board, books, supplies, transportation, loan fees, and other miscellaneous expenses, including lab fees, computers and computer supplies. The data for the EFC calculation comes from the information you include on the FAFSA form. EFC is determined by looking at the income and assets of the parents (Parent Contribution) and student (Student Contribution).

Parent Contribution

The parent contribution requires an overly complicated calculation, which is known as “Adjusted Available Income” (“AAI”). The higher your AAI, the less aid you will qualify for. AAI is a combination of available income of the parents (“AI”) plus assets of the parents. AI of the parents includes the following:

• Parents adjusted gross income from their prior year tax returns plus
• Parents contributions to 401(k) and similar tax-deferred plans plus
• Parents Keogh or SEP contributions plus
• Parents tax-exempt income plus
• Parents untaxed withdrawals from traditional and Roth IRAs plus
• Parents pension income received plus
• Parents untaxed income, such as excluded gains on sale of principal residence minus
• Certain allowances that may be deducted from all of the above. This category includes subtraction allowances for payments made by the parents for federal income tax, social security tax, state and local taxes, an "income protection allowance" and an "employment expense allowance."

When you add all of the above income items and subtract the allowances you get your AI. You add to your AI your assets, or more accurately your “assessable assets.” The assessable asset calculation for the parents only has to be included if the parents adjusted gross income is $50,000 or more. This is an important point since not having to include assets translates into more aid. If you live in New Jersey, you are likely making more than $50,000 and will be penalized by having to add your assets to this mixed up formula, thus decreasing your aid. If you are not confused yet you are likely a candidate for MENSA.

So let’s condense this Parent Contribution formula into a simple formula earthlings can understand:

Certain income of parents minus Certain income allowances + Certain assets of parents minus Certain asset allowances by the government = (AAI)

Then go to table at http://www.ifap.ed.gov/efcinformation/attachments/0708EFCFormulaGuide1120.pdf to find your Parent Contribution amount.

Student Contribution

The Student Contribution formula is very much similar to the Parent Contribution above. The main difference is that the amount of income and assets the student is expected to use for their contribution amount is a higher percentage than that of their parents. There is a separate table for the Student’s Contribution that must be used in arriving at the Student Contribution amount.

When you add the Parents’ Contribution to the Student Contribution, the total is called the Expected Family Contribution (“EFC”). You then take the Cost of Attendance (“COA”) and subtract the EFC to arrive at Financial Need.

Financial aid:

• Pell Grants
• Academic Competitiveness Grants
• SMART Grants
• Stafford Loans
• Federal Supplemental Educational Opportunity Grants (campus-based grant)
• Federal Perkins Loans (campus-based grant)
• Federal Work Study (campus-based grant)

For more detailed information I would suggest you take a look at the following web site: www.ifap.ed.gov.