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So, How Does College Financial Aid Work Anyway?

In the 1938 film “Holiday,” Cary Grant’s character explains to his girlfriend’s father that he paid his own way through Harvard working part time as a janitor. Good thing they’re not planning to remake that movie today! For the current school year, tuition, room & board will run you just over $80,000! No way are you paying for that on a part time janitor’s salary. Or a full time janitor’s salary for that matter. Given that the median household income in America is around $60,000, not many families could afford that kind of money.

So, how on earth does Harvard get away with charging $80K a year?

Well, you can thank the government for that. Or rather, you can thank yourself since as a tax payer, you’re funding this.

I wrote yesterday about Harvard having the perfect business model. Tuition has risen since old Cary’s fictional janitor could pay his way through and yet they’re still literally turning away business. According to Harvard’s own website, 50% of their students receive “scholarship aid,” 20% pay nothing at all, and 100% of their students CAN graduate debt free. No information is provided as to what percentage of students DO graduate debt free.

If you’ve ever applied for college financial aid, it’s a labyrinthine process that few people understand. Just like credit scores and the college playoff formula, a bunch of numbers are thrown in and somehow an answer comes out as to who pays how much. If you want to have fun, you can go to their website and put your own information into their calculator: https://college.harvard.edu/financial-aid/net-price-calculator

But the process is the same at any school you apply to. The government website breaks it all down for you here: https://studentaid.ed.gov/sa/fafsa/next-steps/how-calculated

So, what does all of that actually MEAN?

First of all, here’s something most people don’t realize: schools like Harvard no longer offer “scholarships.” All financial aid is based on financial need. That means unlike state schools and smaller private schools that will offer a scholarship based on athletic skill, academics or other talents (such as art of music), the Ivy League schools decide who they are going to admit first and THEN figure out how they’re going to pay for it. So, when you read in your local paper about some kid getting a “full scholarship” to some elite school, that’s probably not accurate.

But if your kid just got into Harvard, they’re going to make you fill out lots of forms (Oh, so many forms.) You can mock the concept of “privilege” all you want to, but this can be daunting for any family. Even more so for lower income families without experience in these matters. In his fabulous book “Hillbilly Elegy,” JD Vance describes how he and his grandmother became overwhelmed at the process and he decided to join the marines.

First, they want to know what your family income is. They also want to know your assets. Rich families who have been attending these schools for generations have learned the fine art of putting them in the grandparents’ names. The rest of us end up forking over our life savings. I remember filling out these forms. I did have a small amount of money saved and my Dad made me list is because “we have to be honest.” When my aid packet came back, the school required me to pay 100% of it. My dad was crushed. I was glad I’d blown most of it on a Camaro.

Another thing few people realize about financial aid is the difference between a “dependent student” and an “independent student.” Basically, if you claimed your kid as a dependent on your taxes, he’s “dependent.” For the next TWO YEARS. Why does that matter? Well, you could be Bill Gates with a billion dollars in assets but if you haven’t declared your kid on your taxes for 2 years, he’s an independent student. That means they government won’t be looking at YOUR income and assets, they’ll be looking at HIS income and assets. Which is probably zero if he’s a 17 year old senior. You think you were smart getting that $1500 tax credit? Did you see the part here about Harvard costing $80K a year?

Conversely, if you get mad at your student because they didn’t make good grades or you don’t like her major (or boyfriend) and cut him/her off financially, the student can’t qualify as an independent for two years after you quit claiming them as a dependent. On a personal note, this is how I ended up thousands of dollars in debt 30 years ago. No, my father didn’t cut me off. But he made the bad personal decision to die while I was a junior in college. I was attending our state university where, if my memory serves right, tuition was maybe $2000 a year. But they wouldn’t let me borrow enough to finish my last year because my father earned to much money. “But he’s dead!” I told them. “I can pretty much guarantee his income for this year will be zero.” Didn’t matter.

So, after all the numbers are poured in: how much money do you have, how many kids do you have and how much is this college you got accepted to going to charge, etc., the financial aid people come back with a number of what THEY think you can afford to pay. It’s likely to be substantially less than $80,000 (unless you ARE Bill Gates. Then you can afford to pay Harvard in full.) The average family contribution is around $18,000. So Harvard has to figure out where the rest of that money is going to come from. Their first stop: the Pell Grant program.

The Pell Grant program is a grant to students based on financial need. In other words, it’s money from the tax payers to your college that you won’t have to pay back. Be sure to thank them for it. Notice this is the first option for your college. Heaven forbid they tap into THEIR endowment first. Their second option will be seeing if you qualify for a student loan. Only after taking cash from the taxpayers and setting you on the road to crushing student loan debt does the college tap into its own resources. Then if needed they figure out a package based on grants, work study, etc.

This is how Harvard can charge $80,000 a year. It will probably be more next year. That’s why I wrote yesterday that Harvard has the perfect business model. No matter how much they charge, some people can afford it, the others can borrow it and they’ll still be turning away 95% of their applicants. Everybody wins.

Except the tax payers. But I’ll cover that next time.

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