College Funding Sources & Their Impact on Financial Aid

Figuring out how to pay for college can be overwhelming, especially because there are so many college funding sources available. From federal and private loans to different types of savings accounts and investments, it can be difficult to know which option is best. Also, how will your choices affect the amount of financial aid you could receive? Here’s what to know.

Available College Funding Sources

You may find out about college funding sources available to you while you apply to school, while some options require you to plan in advance. An important step to take while determining what college funding sources are available is to complete the Free Application for Federal Student Aid (FAFSA). With data collected from the FAFSA, the federal government and your school’s financial aid office determine how much aid you are eligible to receive. There are other options available to supplement what is not covered by federal or school aid.

The FAFSA is available October 1 for the following academic year and needs to be completed yearly. Once the application is processed, you will receive a Student Aid Report (SAR), and then a financial aid offer letter from the colleges you listed on the FAFSA. This will show you aid you are eligible for. .

Federal Aid

Federal aid comes in the form of grants, which do not need to be repaid, and loans, which do need to be repaid. Federal Pell Grants are usually awarded to undergraduate students with exceptional financial need. There are other grants you are applying for with the FAFSA as well, both federal and state-based. The need component varies with these from grant to grant. Some federal loans are need-based and do not accrue interest while the student is in college at least part-time. Interest will accrue for students in college for non-need-based loans.

College-Based Funding

College-based funds are distributed by the college and administered by the financial aid office of the school. When a college sends you an acceptance letter, they may include a financial aid offer. The school’s financial aid office looks at data from the FAFSA to determine how much you are eligible to receive, but they may require additional financial aid information during the application process.

The Federal Work-Study Program provides part-time jobs for students with financial need, allowing them to earn money to pay for educational expenses. Schools participating in the program administer the funds. A Federal Supplemental Educational Opportunity Grant (FSEOG) is a grant for undergraduate students with exceptional financial need. The FSEOG program is administered directly by the financial aid office at each participating school, but not all schools participate.

Private or Alternative Loans

In addition to federal financial aid, students can also qualify for private or alternative loans. These are available through banks, credit unions, or state-based nonprofit education programs. NC Assist is an alternative loan offered by College Foundation, Inc., a nonprofit corporation that serves North Carolina students.

Family Income

The family’s income is not the only determining factor in how much financial aid you receive. The financial aid office at your school will determine your financial aid eligibility based on your Expected Family Contribution (EFC), which is used to determine need-based aid eligibility. Additionally, schools will look at your academic year, your enrollment status, and the cost of attendance. Your EFC is calculated by determining your family’s taxed and untaxed income, certain assets, and benefits. Keep in mind that many scholarships are not based on family income.

Investing in Education

You don’t need to wait until it is time to complete the FAFSA to start preparing to pay for college. There are various options available to save for a college education. Different types of investments will have an impact on a student’s financial aid eligibility.

Retirement assets such as a 401k, pensions, and Roth IRAs are not included in the EFC. Assets that aren’t in retirement accounts, such as money in checking or savings accounts, investment real estate funds, and 529 college savings accounts, do get included in the EFC formulas. These affect your EFC differently, and for the 529 Account, it can be very minimal.

Save With an NC 529 College Savings Account

It is never too early to start saving for college with an NC 529 Account. Start putting money in an NC 529 Account as early as possible to reap the full benefits. Since the money grows tax-free, you will reach your savings goal faster and have more time to let your investments grow.

The money in your NC 529 Account will be considered as schools look at your financial aid eligibility. However, money in an NC 529 Account gets more favorable aid treatment than other types of investments and assets.

If the account is in the child or student’s name, it will have a larger financial aid impact than if the account is in a parent’s name. An NC 529 Account in the student’s name is considered as asset of the student. Because students are expected to contribute more of their assets to their education, this could mean they could receive less financial aid.

With the changes coming for the new FAFSA which is currently expected to be available in December 2023, grandparent-owned 529 accounts will not affect financial aid under the FAFSA.  This is an improvement for students who benefit from grandparent-owned accounts. Previously, distributions from grandparent-owned 529 accounts were considered gifts or cash support to the student, and treated as untaxed income by the FAFSA for financial aid purposes. As a result, many grandparents tried to time the distributions to avoid reducing eligibility for financial aid, even by small amount. The new shortened FAFSA for 2024-2025 removes this requirement and makes 529 accounts owned by nonparents an even better way to support students. 

Custodial Accounts

If you choose to put college savings for your child in a custodial account, you can do so at any time. A custodial account is considered the asset of the child, and the funds legally become the property of the child when they reach the legal age of majority. This can vary state by state.

Funds in a custodial account have a bigger impact on aid eligibility than savings in an NC 529 Account. Money can be used for other purposes besides education, but it does not have tax-free growth.

Calculate the Cost

CFNC.org offers several financial aid calculators to help determine how much you may need to prepare to spend for a college education. For parents of young children, the NC 529 College Savings Calculator is a great tool if you want to start saving early because it helps you predict how much college will cost.

Anyone can start saving for college now by opening an NC 529 Account on CFNC.org. Click here to start saving today!