College Aid 101

If your children are destined for college, one thing is certain: You can expect to write some large checks to pay tuition, room, board, and other expenses. Although inflation is relatively dormant in most areas of the economy, it’s running wild on university campuses. According to the College Board, the cost of higher education is up roughly 5% from a year ago. In the 2009—2010 academic year, the average cost of a year at a private university was more than $35,000.

In an ideal world, you’ll start saving for college while your little one is still in diapers and simply tap your education fund to pay the tuition bills as they come due. The reality, though, is that even the most diligent savers may find it hard to amass six-figure amounts for higher education, especially if they’re also socking money away for retirement. In that case, financial aid–grants, low-interest loans, and work opportunities–may need to fill the gap. Families in this situation are in good company. Nearly two-thirds of all college students receive some form of financial assistance, according to the National Center for Education Statistics.

Saving the most money for your youngster’s higher education, while also remaining eligible for the best financial aid package is a tricky balancing act. To maximize financial aid, you’ll need to minimize what’s known as your “expected family contribution” or EFC. Suppose you fill out the Free Application for Federal Student Aid (FAFSA), which determines that your EFC is $20,000 in your child’s freshman year. If you’re sending your child to a state school where the total cost is $18,000, you won’t qualify for any need-based aid. However, if your child is accepted at a school where the total cost is $42,000 and your EFC is $20,000, you may get as much as $22,000 worth of financial aid. “The lower your EFC, the more financial aid your student might receive,” says Joe Hurley, founder of