02/14/2013 06:13 pm ET Updated Apr 16, 2013

Financial Aid for the Savvy Consumer

If you are one of the millions of parents with a high school junior or senior, figuring out how to pay for college is probably top of mind. With college tuition increasing by more than twice the rate of inflation, most families are counting on some form of financial aid to make a degree a reality. The financial aid process can feel like an arduous undertaking, replete with a myriad of peculiar acronyms and mysterious calculations that only a gifted actuary can unravel. Try not to get discouraged, because there are resources to guide you through the process. Most families tend to overestimate college costs, and with a little preparation and persistence you and your child will find a school that's within your financial reach. Here are some tips for getting started.

Fill out the FASFA

The first step in navigating the financial aid process is to help your student fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA is the key to federal, state and institutional need-based aid, which are often awarded on a first-come first-served basis so it is important to apply as soon as possible. Need-based aid is most simply described as financial support for some or all of the difference between what college costs and a calculation of what you and your family are expected to contribute towards college costs.

The application is available starting January 1st of each year for determination of need for the following academic year. Many state and campus programs have early deadlines, so be sure to check the websites of the schools you are applying to attend. Check here to find state program deadlines. To fill out the application you will need specific financial and other documents, a list of which can be found on the FAFSA website.

I encourage families to submit a FAFSA even if you believe your child won't qualify for need-based aid. Some institutions require a FAFSA for any student aid, including campus-based scholarships. And, the federal government allows for midyear updates to the FAFSA should either parent lose their job or suffer a financial hardship.

Understand the basics

The basic purpose of the FAFSA is to determine eligibility for federal aid by calculating how much a family can afford to pay for college each year, known as the Expected Family Contribution or EFC. The EFC formula factors in income, assets, benefits, family size and the number of children in college. Colleges use the EFC to determine how much need-based financial aid you may be eligible to receive by subtracting the EFC from a college's Cost of Attendance (COA), which includes tuition, fees, room and board (or living expenses if commuting to school), books and other miscellaneous expenses.

Cost of Attendance
- Effective Family Contribution
= Financial Need

A college will then attempt to meet that financial need with a combination of federal, state, and institutional grants and loans. Eligibility for federal Pell grants, college aid that is not paid back, is reserved for students with high need. In the 2013-14 academic year, for example, students with an EFC of $0 to $4,995 were eligible for a Pell grant. Even if your child doesn't qualify for Pell, they still may be eligible for other need-based grants provided by your state or prospective colleges, but loans will likely be part of the package.

Set realistic expectations

Don't expect a free ride. Very few students attending a four-year college receive enough grants and scholarships to cover all costs. Even the highest achieving and most meritorious students are unable to attend college for free. A recent study by Sallie Mae estimated that on average, grants and scholarships account for approximately 29 percent of the COA, with the balance paid through parent income and savings (28 percent), student borrowing (18 percent), student income and savings (12 percent) parent borrowing and other sources (13 percent).

That breakdown emphasizes why saving for college is so important. Many families mistakenly think that savings will hurt their chances of qualifying for need-based aid, but that's not the case. The federal government does not consider all of your assets as available to help pay for college. For example, the federal need analysis excludes your retirement plan funds, home equity and equity in a small business with fewer than 100 employees. Other assets you own, including college savings, are protected in part or in full by an Education Savings and Asset Protection Allowance, which is included within the federal need analysis. The Allowance increases as the age of the parents increases.

Compare offers

While public colleges are more reasonably priced, don't rule out private colleges as an affordable option. Many institutions provide need- as well as merit-based scholarships, along with tuition discounts to attract students. Tuition discounts from the COA are analogous to the difference between the sticker price of a car and the price paid by the owner. Most private colleges require supplement information such as the CSS Profile and may treat assets such as home equity differently for the awarding of institutional grants and scholarships, so be sure to check with the colleges you are applying to for more information on their application process.

To make it easier to compare financial aid offers, about 500 colleges and universities across the country have agreed to provide a Financial Aid Shopping Sheet for the 2013-14 academic year, which provides information about grants, scholarships, and loans in a standardized format. If there is a particular college that your child is interested in, don't assume the financial aid offer is final. In some cases, adjustments can be made based on changes in financial circumstances or other factors, but you have to be proactive in asking.

Also, look for other scholarship opportunities by using free resources such as Fastweb. But be careful not to fall for scholarship scams -- never pay for scholarship search assistance and no organization or service can guarantee your child a scholarship.

Focus on affordability

Once the offers are in, focus on what your family and your child can reasonably afford. Ask yourselves: How much are we willing and able to provide in financial support? Do we have enough savings and current income to continue this commitment for four years (or two in the case of a community college)? How much in student loans will be required to complete four years and what will those monthly payments be? Will my child be able to reasonably afford those payments based on his/her career choice? How will the possibility of a fifth year of attendance impact our calculations? Use the answers to these questions to guide your final selection. Also, consider saving money by starting at a community college and then transferring to their dream school after a year a two.

Just like any other major financial decision, finding money for college and picking an affordable option requires a savvy consumer, but there are many free resources (too many to list here) that can help you along the way. With a little time and reflection, your family will find the right choice -- one that will provide a wealth of opportunities without breaking the bank.