In the U.S., most domestic (U.S. citizen) college students receive at least some financial aid to cover their expenses such as tuition, housing and school supplies. According to BestColleges.com, all U.S. students received about $235 billion in grants, tax credits, loans, and work-study benefits in the year of 2020 - 2021. The average full-time undergraduate received nearly $15,000. Besides 529 Plan, Merit-Based Aid and Need-Based Aid are commonly considered and utilized.

Merit-Based and Need-Based Aid

Need-based Aid, as its name suggests, is for students who may have financial difficulties for college/universities, and is the most common type of financial aid awarded to U.S. college students. Need-based Aid can come from institutional grants and scholarships, state and federal grants, federal work-study, or federal loans.

For instance, most state governments provide need-based aid through grants, tuition waivers, and federal work-study programs. On the federal level, you can also consider the Federal Supplemental Educational Opportunity Grant, which provides students with at most $4,000 a year to cover tuition and other expenses.

As for Merit-based Aid, students need to get their financial aid based on their academic and/or extracurricular achievements, rather than the financial needs. Scholarships are the most common and typical example of merit-based aid. That is to say, the financial aid provider (it can be nonprofit organizations, private businesses, or colleges/universities) will evaluate students' grades/academic performances and extracurricular activities. They usually will have a certain requirement of the student's GPA and extracurricular achievements, which can be pretty selective.

According to U.S. News & World Report, the average merit-based award in 2019 - 2020 was $11,287. About 22% of all U.S. college students received this type of aid in 2019-2020.

Four Factors Affecting College Funds

There are 4 factors affecting the college fund:

1. Student Money : usually reflected by the child's bank account or W-2 income.

2. Parents Income : usually "measured" by parents' AGI (adjusted gross income). For instance, for UC, AGI less than $120,000 usually can get funds (the number may vary every year, so please keep yourself updated with a professional financial advisor). For private schools, AGI can be even higher.

3. Parents Saving + Investment

4. Investment Property Equity : your home equity does not count. Corporation (start a business) may work.

Maximize the Financial Aid

One important (and also the first step in most cases) in financial aid is FAFSA (abbreviation of Free Application for Federal Student Aid). It is the program for all U.S. citizens and certain eligible non-citizens to determine the eligibility of the student's federal and state financial aid, and must be renewed annually.

Colleges and universities also use FAFSA to award institutional financial aids. Therefore, it is noteworthy that, since financial aid is awarded on a first-come, first-served basis, you may want to submit your FAFSA as early as possible (the submission window begins on October 1st of senior year).

Mathematically, Need Based Financial Aid = Cost of Attendance (COA) – EFC, where EFC stands for "Expected Family Contribution" and can be calculated using the following formula:

EFC = Parents' income x 15%-25% + Parents' asset x ~6% + Child's income x 50% + Child's asset x 20%

Theoretically, you have multiple strategies to maximize the child's financial aids. For instance, parents may use business deduction (own a company and hire people); Non-qualified deferred compensation may also be a common strategy considered by some families.

For these strategies, one thing in common is that you should plan ahead and take action years before your child goes to college. For instance, you may not want to save money under your child's name, and reducing the includable asset may help to increase your child's college funding. The so-called " includable asset" includes: bank saving, CD, stock, mutual fund, 529 Plan, investment real estate equity and so on.

Instead, you may want to consider putting money in " excludable asset", such as retirement account, annuities, IUL, VUL, or start a business and use business expense to lower parents' income.

If you would like to learn more specifically about how to maximize your child's college funding, it is highly recommended that you find a professional financial advisor to help you.

Student Loan

Aside from financial aids, student loan may also work out for students and their many families. It is a common type of self-help aid, which means the student needs to pay back in the future.

The lenders can be federal, state or private organizations. Take federal loans for instance, there are four major federal loans:

- Federal Perkins Loans (School loans)

- Federal Stafford Loans (Subsidized /Unsubsidized)

- Parent Federal PLUS Loans (Direct/FFEL)

- Consolidation Loans (Direct/FFEL)

The bright side of the student loan is that it usually comes with a friendly, lower interest rate, and the interest is tax deductible (like mortgage interest). Considering that a child usually has no mortgage or dependent to deduct taxes when he/she just starts working, student loan might also be an option as the tax-deductible vehicle for him/her.

Meanwhile, a student loan can help to build the child's sense of responsibility as well as the credit score – although parents can always pay off the loan in case child runs into financial difficulties, the child will at least have to try and be more independent and motivated to work.

Besides, with this low interest loan, both the child and parents can invest money in other higher return strategy, which will pay off better than paying child's tuition during college years (financially speaking).