The Basics

College by the numbers.

Forget the formulas. Here's a behind-the-scenes look at how schools really determine financial aid.
By Kristin Davis, Kiplinger's Personal Finance

You spend hours poring over every plus and minus in the college-aid formulas. You painstakingly feed your vital statistics into an online financial-aid calculator. But when you finally file your aid applications, one college gives your child a fat grant, another offers a pittance, and a third tells you you're on your own. What gives?

While formulas and calculators are useful for estimating how much you'll be expected to contribute to college costs, ultimately it's the very human hand of a financial-aid officer that cranks those numbers into hard cash. The final arbiter in what colleges call "packaging aid" is a person like Joe Paul Case, who has been director of financial aid at Amherst College since 1981. Last spring Case let Kiplinger's look over his shoulder as he and his staff examined the finances of students and their families and made decisions on how much each family would pay to send a child to Amherst. We also observed as Case fielded appeals from disappointed parents.

About 58% of the 1,000 freshmen admitted to Amherst last spring applied for financial aid. When we visited in April, Case and two aid officers had processed about 500 applications. Of those, 71% received an aid package with a grant, 5% got a package with self-help only (loans or work-study), and 24% were determined to have no need. Average grant: $20,930.

What surprised us most -- and may shock many parents -- was just how intimately Case and his colleagues scrutinize your finances, and how much leeway they have to deviate from the formulas.

Judgment calls
After finishing Yale divinity school in 1970, Case was offered a job as director of the financial-aid office at his alma mater, Oklahoma City University, where he had worked during his undergraduate years. That led to a stint helping to shape financial-aid policies at the College Scholarship Service (part of the College Board), and then to his job at Amherst.

Ordained as a Methodist minister, Case never found his way to the pulpit. But he's passionate about his mission as a financial-aid officer. He likens his role in disbursing Amherst's $15.8-million financial-aid budget to '70s-era ideals of "social ethics" and "distributive justice." "Dollars should go to the needy," he says, "to right past ills and to find and educate the very brightest." He laments the fact that many colleges divert need-based aid to merit scholarships to attract top students. At Amherst, where every student has star quality, there are no merit awards.

Along with a preacher's zeal, Case demonstrates a knack for numbers. From a stack on his desk, he pulls out the folder of one family, and scans a report from the College Scholarship Service providing details from the family's FAFSA and Profile aid applications, plus the parents' latest income-tax return. Then he opens a Lotus spreadsheet file into which all the key numbers have already been dumped. Commercial software will perform this function, "but I created this system, and it works," says Case.

The family in question earns about $87,000 a year and has about $275,000 in assets (outside of retirement accounts, which don't count under the aid rules). Federal and College Scholarship Service aid formulas calculate that the family can afford to pay about $24,500 toward Amherst's $38,000 total cost in 2001-02. (That total cost is higher than the budget for some students because it covers travel expenses from California.)

But Case isn't wedded to those numbers. Like all his fellow aid officers, he has the right to use his professional judgment to deviate from the formulas and make his own assessment of the family's need.

In this case, the student's father is self-employed and reports $171,000 in gross income on Schedule C of his 2000 tax return. (Amherst requests complete tax returns from every aid applicant.) Right away, Case homes in on tax deductions for automobile expenses and depreciation, disallowing half of them for aid purposes and adding back $9,000 to the family's income. To justify this adjustment, Case explains that the father's business "subsidizes expenses that the non-self-employed bear themselves."

Seeing $2,200 in interest and dividends on last year's tax return, Case assumes about $41,000 in assets generating those returns, instead of the $12,000 in assets reported by the family. He adds the difference to the family's resources, and also boosts their $33,000 in reported home equity to $75,000, basing his action on the house's purchase price, the year in which it was purchased and a national index of real estate appreciation. With those adjustments, the family contribution jumps to about $35,000, which means the family would qualify for very little aid.

When Case steps back to assess whether the result seems fair, he concludes that "$35,000 for this family is not reasonable, but $24,000 seems thin." So he tries another measure of the parents' wherewithal: 20% of income plus 5% of net worth, excluding home equity. That's his own rule of thumb, and it lands at $27,000--a fair number, Case decides. Added to the student's expected contribution of about $1,600, that leaves a shortfall of $9,370.

At this point, creating the aid package becomes fairly routine. The first $3,500 of the family's need is met with student loans. Next, the student gets a work-study job worth $1,450. Amherst meets all remaining need with a need-based scholarship--which means this family essentially gets a discount of $4,420 from the sticker price.

Reviewing file after file, Case makes similar adjustments and assembles aid offers. Some of his adjustments work in a family's favor. One family reported that the student's mother would be returning to graduate school half time, so Case subtracted $7,000 from the family's income to reflect the added tuition expense. The family had also asked Case to consider that the mother would be earning less next year. While Case used last year's income to compute the family's need, he said he would adjust the fall-semester award in January if the family documented lower earnings.

Sometimes Case sees truly startling finances. One family, for instance, reported a monthly income of $4,500 -- and monthly expenses of more than $12,000. "We'll probably figure in an additional $8,000 of untaxed income per month," he says. "If they're living in this style, you have to assume the money is coming from somewhere."

When sizing up a candidate for financial aid, Case tries to "right past ills and find and educate the very brightest."

Wiggle room
While Case is relatively hard-nosed when he assembles aid packages, he's willing to take a second look if parents appeal the award. For instance, in the file of the self-employed family from California, he noted: "Used rule of thumb, could consider FM [federal methodology] on appeal." About 15% of families appeal, says Case, and about two-thirds of them get an improved aid package. Average boost: about $2,000.

Those who fare best are families who give Case a concrete reason to make a change, such as new financial information that hasn't been considered. For instance, Case might be persuaded to reduce a family's earnings and increase its aid if the family had to pay nursing-home expenses for an elderly grandparent, funeral expenses or legal fees for a divorce -- but "not $12,000 for a wedding or $9,000 for a bar mitzvah."

One family enclosed a copy of a $16,030 aid offer from Princeton University and asked Amherst to reconsider its $8,930 package. Most of the difference was accounted for by the way in which the two schools treated the student's $16,500 in assets. Princeton asks families to contribute about 5% of assets, regardless of whose name they're in, while Amherst uses the standard formula that extracts 35% from a student's assets each year. Case was willing to recompute Amherst's award to treat the money as a parental asset if the parents could document that they were the ones who put the money away for their child, rather than a grandparent or Aunt Tillie (a dated copy of the original custodial-account document would suffice). Case says it wasn't so much a question of matching Princeton as of "re-examining the case."

In another appeal, a family earning about $60,000 a year asked Amherst to match a better offer from Harvard University. Case made a small adjustment to lower the student's assets by excluding musical instruments that the student, a musician, had reported as business assets. But Case improved the award mainly by using the wiggle room he'd left himself in the initial offer. That figure was a compromise between the federal formula and the stricter institutional formula. Case was willing to use the federal methodology for the parental contribution, which translated to an extra $4,500 grant.

Squeaky wheels
Pitting one institution's aid package against another's is routine these days, although Case bristles when the media talk about the "negotiation process," and a bargaining mind-set isn't always successful. The real key to improving an aid package is to help the aid director find a solid financial reason to free up additional funds. And the only way to do that is to speak up, even if it's just to ask how your need was determined.

That's how you'd find out that an aid director is assuming you have an extra $20,000 lying around because of interest and dividends reported on last year's tax return. You could explain that you've spent that money on, say, an older sibling's tuition. Such a conversation might reveal that the value of your home has been overestimated because real-estate appreciation in your area hasn't kept up with national averages, or allow you to make the case that money in your child's name should be treated as a parental asset because you put it away.

Sometimes an appeal will catch an error. In one case, a financial-aid officer misread $60,000 as $80,000 on a faxed Form 1040. After the correction, the family qualified for an additional $3,000.

"The people who are writing to us are the squeaky wheels," says Case. And if silent wheels are overlooked, "that's the unfairness in the process."

Not every appeal is successful, especially if Case initially determined that a family had not proved need. One such family asked Amherst to match a $12,000 merit award from George Washington University. Case turned down the request.

Another unsuccessful appeal came from a divorced mother, who claimed that the family couldn't provide information on the father's finances because his whereabouts were unknown. "We have his address on the application for admission," says Case. Amherst will let a noncustodial parent off the hook if it's a very old divorce, if there's corroboration of an abusive relationship, or if the parent has truly lost contact. Otherwise, a student can't get aid without complete information from both parents.

Some of the toughest cases are those in which a family is carrying a considerable load of consumer debt, which financial-aid formulas don't recognize. "Families want to send us an income and expense statement," says Case, "but you go through it and you see how much they're paying for credit-card debt, for the lawn service and the pool service. Those are difficult conversations for us to have with parents."