Figuring out Financial Aid

APPLYING

There are three basic applications that you may have to submit in order to receive financial aid from most law schools:

• Free Application for Federal Student Aid (FAFSA) (http://www.fafsa.ed.gov/)
  
• Need Access (http://www.needaccess.org/) or CSS Profile (https://profileonline.collegeboard.com/)
  
• School specific online or paper forms

Financial aid to law students comes from three major sources:

• School Endowments
  
• The Federal Government
  
• Private or Commercial Third Parties

And it comes in two general forms:

• Grants
  
• Loans

Keep in mind the difference between processes or applications used to apply for financial aid and sources or forms of aid. CSS Profile and Need Access are just vehicles for transmitting data to the schools, much like LSAC's electronic application service. Profile is a service of the College Board (the ACT / SAT people), and Need Access is run by The Access Group. Neither of these data collection processes has any direct involvement in giving you actual money (*). FAFSA is the federal government's vehicle for collecting and reporting to schools the data needed to authorize you for receiving federally guaranteed Stafford and GradPLUS loans. If you want loans, then you have to submit the FAFSA form. If you want need based grants from schools, then you have to submit Need Access / Profile, and maybe a supplemental form, depending on what each school requires.

Note when filling out the Need Access / Profile forms: Make your selection of schools to receive your report FIRST, before you start filling the form out. The questions presented depend on which schools you select, and some schools have very specific questions that do not appear unless Need Access knows that you are sending a report to those schools.

You may find any combination of required applications, sources of aid, and forms of offer at any given school. In order to complete each of these applications, you will need copies of your most recent federal and state tax returns, along with recent statements from all retirement, investment, and bank accounts, and financial statements from any businesses that you own.

You should complete and file your tax returns as early as possible, because all of these applications ask for data from many specific lines on the IRS forms. You must file the FAFSA and any other required forms by your school's "priority deadline," usually a date in February or March, in order to receive full consideration for available aid at most schools. So you generally can not wait until the usual last minute deadline of April 15 to get your taxes done, if you will be applying for financial aid in the current cycle.

The FAFSA asks only for information from your most recently filed tax return and current values of your assets. The Need Access / Profile applications require that you project assets and income for the upcoming calendar and academic years, as well as report present and prior year numbers. In general, if your school requires Need Access / Profile forms, then you should start with those first. The FAFSA will be very easy to complete once you have these harder forms done.

Keep the following general rules in mind:

• If you plan to pay cash out of pocket for all of your law school expenses, then you should not need to bother with any of this. When you get your tuition bill, just pull out your checkbook and sign on the dotted line.
  
• If you want to apply for Federal Stafford and GradPLUS loans only, and will use these borrowed funds and personal savings to pay all your expenses, then you only need to file the FAFSA and any school required supplemental form.
  
• If you want to apply for need-based aid in the form of grants and certain loans, then you will in most cases need to file the FAFSA and a school specific form, and at many schools will need to complete the Need Access or Profile applications as well.

(*) The Access Group does have a subsidiary that makes student loans, but submitting the Need Access form through them is not related to getting loans from them.

LOANS

Anyone who is a U.S. citizen and does not have drug convictions or prior defaults on student loans may borrow up to $20,500 per year through the Unsubsidized Stafford Loan program, regardless of "need." If you have demonstrated need based on the federal government's formulas, as applied to the data you provide via the FAFSA, then you may borrow up to $8,500 out of the total of $20,500 as a Subsidized Stafford Loan. For Subsidized loans, the feds will pay the interest on the loan as long as you remain in school.

The determination of need for the Subsidized Stafford Loan is based only on data you provide on the FAFSA, using the Federal Formula and based on a number which results from it called your Estimated Family Contribution (EFC). The FinAid web site (http://www.finaid.org/) has a calculator which you can use to estimate your EFC, but using it is approximately as much bother as just completing the FAFSA. When you submit the FAFSA, both you and the schools that you designate will receive a Student Aid Report (SAR) which will state your EFC and summarize your eligibility for federal need based aid.

For Unsubsidized loans, interest accrues from the day the loan is issued, and is added to the total loan balance when your first payment comes due. If you prefer and can afford it, then you can pay the interest on Unsubsidized loans while you are in school to avoid it accruing to your balance.

Most students today can cover the entire cost of attendance (the full student budget amount) with Stafford loans and GradPLUS loans. GradPLUS loans have similar terms as those through the Stafford program, but require a minimal credit check. Both Stafford and GradPLUS loans can be issued either by private lenders or through the federal Direct Lending program, but all have the same fixed interest rate and repayment options. Students can borrow up to a grand total of $138,500 through the Stafford loan program, including all amounts taken for both graduate and undergraduate education. There is no annual or cumulative limit on GradPLUS borrowing, other than the rule that total borrowing for each year may not exceed the student budget assigned by your school

In the past many students took out private commercial loans as well, because the limits on Stafford and GradPLUS borrowing would not allow them to cover their full cost of attendance. Private commercial loan terms depend entirely on your personal credit record, are never subsidized, and can be taken in any amount up to the full cost of attendance. Some schools have programs with certain commercial lenders, and others run their own private loan program using endowed funds.

Anyone attending law school in 2008 or later, and relying on loans for funding, and who plans to rely on the new Federal LRAP program for loan repayment, should prefer to take ONLY Stafford and GradPLUS loans. ONLY THESE LOANS are eligible for the new Income Based Repayment (IBR) and 10 or 25 year Loan Forgiveness programs enacted under the College Cost Reduction and Access Act (CCRAA) of 2007.

Be careful to research the history and borrower comments on any lender you choose for private or Stafford / GradPLUS loans. Schools have "preferred lender" programs, but you can in fact get these loans from any lender which offers them. Of the several major lenders, the non-profit Total Higher Education (T.H.E.) seems to get good reviews consistently, and seems to have less complaints of exploitive and hostile behavior toward borrowers. Check your school's financial aid handbook or web site for comments or reviews on lenders who deal often with students where you plan to attend.

GRANTS

Many schools offer merit scholarships, which are used to attract students that the school would like to have attend. These generally do not require the filing of any forms, and schools often offer them along with an acceptance or at some point afterwards. Some schools do require that you check a box on their application or file a supplemental form in order to be considered for merit scholarships. And most merit grants come with conditions that you maintain good standing or a certain class rank in order to renew them.

Most schools also offer need-based grants from their own endowment funds. To determine your eligibility for these grants, schools use their own individual and proprietary Institutional Formula, based on a combination of data you provide via FAFSA, Need Access / Profile, and any school specific forms. Most schools publish few details on the exact formulas used to compute grant awards, and the formulas also can change from year to year as endowment funds and enrollments grow or shrink. Some schools recompute grant eligibility each year that you are enrolled, but some offer you a "guaranteed package" that remains the same for all three years of your attendance, unless you have some extreme change in circumstances and petition for an adjustment.

Unlike the FAFSA, which only collects data on your past year and present finances, the Need Access and Profile applications allow you to project income, assets, and expenses for the year ahead. Often students feel lost and annoyed when trying to make these projections, given that many will be leaving jobs, moving, or facing huge and unknown expenses in order to attend law school. But most schools that have money to award decent grants are trying to help you by asking for projected data, since this allows you to show how your situation will change as a result of starting school. How much schools consider these projected values can vary. But these applications at least give you a chance to report major financial challenges that you will face and which would not be obvious from past and present data reported on the FAFSA.

It's also worth noting here that private schools in particular are responding to recent public hearings and political pressure related to their financial situations by greatly expanding the amount of grant aid awarded to all students. Yale and Harvard are the two that have been in the news, due to their astronomical endowments, but other schools will no doubt follow their example. Harvard has already revised and simplified some conspicuous policies like their independence test in ways that make it likely for more students to receive larger need-based awards. And these schools have noted in public statements that their expansion of grant aid will apply to middle and upper middle class students, not just to the poorest and those with the highest assessed need.

The line between merit and need-based grants has blurred in the past decade at most schools. The amount you receive in school funded grants (both merit and need-based) will depend mainly on how much endowment income the school has to throw around and how much they want you to attend. Many people loathe filling out the Need Access or Profile forms, but they are not as bad as they seem once you get into them. Even if you think that you have "too much" income or assets to qualify for any need-based grants, you may want to submit the required applications anyway. With the gigantic cost of attendance at most law schools today, you may be surprised. Even if a school only awards you $1,000 a year in grant funds, that will more than pay for your time spent in filling out the form.

ASSETS

The FAFSA asks only for the value of your Cash, Current Investments, and Businesses or Investment Farms. You exclude from these numbers all retirement accounts, the value of a home you use as a primary residence, and the value of a farm on which you live as well as work. You include all other stocks, bonds, mutual funds, trust funds, CDs, 529 plan funds, business assets, inventory, machinery, land, etc. (see FAFSA directions for full details).

The Federal Formula uses only assets reported on FAFSA to compute Subsidized loan eligibility. But you generally require an extremely low EFC to qualify for either of this program. Any income or assets in excess of around $30,000 will generally disqualify you from most federal need based aid programs.

The Need Access / Profile applications ask for the value of all assets you own, regardless of purpose or form. You must include the equity in your home and retirement assets, as well as all other forms of investments or assets, in boxes provided. School specific forms may also ask you to report assets not covered by the FAFSA. In the case of married students, all of these forms require you to report all assets owned by both the student applicant and spouse, regardless of origin or in whose name the assets are held.

Schools vary widely in their treatment of different assets. Harvard's policy is simplicity itself:

Students should expect to contribute all of their personal assets toward their educational expenses over the course of their three year legal education. A student's contribution each year will include one third of any assets reported on financial aid application forms.

When you fill out your financial aid forms prior to 1L enrollment, they add up every dime that you have and divide by three -- that's your Expected Student Contribution (ESC). This includes cash, stocks, bonds, retirement accounts, home equity, and anything else of value owned by either you or your spouse.

PARENTS

Often older and married applicants are surprised and annoyed to find that some schools demand that they provide data on their parents' assets and income as well as their own resources. The policies on reporting and use of parental assets in Institutional Formulas varies by school. As a graduate or professional student ALL persons attending law school are considered independent for purposes of FAFSA and the Federal Formula, and you will NOT have to report parental data on the federal forms.

Many schools do require that you provide parental data on Need Access / Profile or supplemental forms, and may or may not use this data in their Institutional Formula for assigning endowment based grant aid. They may use this data to compute an Expected Parent Contribution, which will be deducted from the total cost of attendance the same as your ESC, in order to determine your "unmet need." You may still decide to take federal or private loans to cover any amount up to the total student budget, including any amount the school implies as EPC, but many schools will consider this "discretionary" rather than "need based" borrowing, regardless of whether your parents actually can or do provide money to pay for your education.

Some schools follow the federal rules and never require parental data. Others allow students who are married, or have children, or who are over thirty years old to file a simple petition and ask for exemption from reporting parental data. Some schools require that a student demonstrate independence by having student and parent sign affidavits that the student has received no financial support for a certain number of years. Some will require copies of the parents' tax returns from prior years to confirm that the parent has not claimed the student as a dependent. Some schools simply require, unless the parents are dead, that ALL students supply parental data if applying for need based aid, regardless of age, marital status, financial or tax dependency status, or any other circumstance or assetion of independence.

If you can not or do not want to provide parental data because of problems with your parents, then keep in mind that you can ALWAYS qualify for federal student loans by filing only the FAFSA. Many schools also allow you to apply for merit aid without providing any financial data, and only require more detail if you wish to apply for need based aid funded by their own endowments.

Below appears a summary of the policies of T14 schools on whether students must provide their parents' asset and income data when applying for need based institutional grants and loans:

Berkeley: Waived if student is at least 30 years old on December 31, or if student meets criteria of "five year independence test."
http://www.law.berkeley.edu/students/financial_aid/need-based-grants.html
http://www.law.berkeley.edu/students/financial_aid/

Chicago: ???

Columbia: Waived only in "extreme cases," by written appeal with supporting documentation.
http://www.law.columbia.edu/current_student/financial_aid/Eligibility

Cornell: Petition for waiver considered on case-by-case basis; seems based on a "six year independence test."
http://www.lawschool.cornell.edu/admissions/tuition/financial_faq.cfm

Duke: Need Access not required. Parental data required on supplemental form if applying for need based aid, regardless of age or marital status.
http://www.law.duke.edu/admis/financial/scholarships

Georgetown: "We do not consider any applicant as 'independent' regardless of age or marital status."
http://www.law.georgetown.edu/finaid/publications/documents/Guidebook2007-08Spring.pdf
(p. 21)

Harvard: Waived if student is at least 29 years old before September 1.
http://www.law.harvard.edu/students/sfs/finaid/policy/resources/pc.php#consideration

Michigan: Waived if parents have not claimed student as a dependent on tax forms for past six years.
http://www.law.umich.edu/prospectivestudents/admissions/financial/Pages/finaid-faq.aspx

Northwestern: Parents' data never required.
http://www.law.northwestern.edu/admissions/tuitionaid/aid/forms.html

NYU: Parental data always required for need-based aid.
(See comments below)

Pennsylvania: Waived if student is at least 31 years old on December 31.
http://www.law.upenn.edu/prospective/jd/financing.html

Stanford: Seems waived if student passes a "six year independence test."
http://www.law.stanford.edu/program/tuition/jd/doc/2007/07-08_FinAid_Handbook.pdf
http://www.law.stanford.edu/program/tuition/jd/doc/2007/Fin_Aid_Supplement_07_08.pdf

Virginia: Need Access not required. Supplemental form just has a box for "Expected Contribution from Parents."
http://www.law.virginia.edu/lawweb/lawweb2.nsf/pages/Financial+Aid
http://www.law.virginia.edu/pdf/admissions/0607finaid2.pdf

Yale: Waived if student is at least 29 years old on September 1.
http://www.law.yale.edu/documents/pdf/Financial_Aid/07Instructionsforgrantsloans.pdf

Parental data applies only to biological parents, and generally you have to give data on both parents if they are still alive, regardless of who you now or last lived with. There are some questions that ask when they divorced (if they did), who last provided support and when, who you last lived with and when, and how much support you got or expect from each parent. You will have to provide the same disclosures and data for both biological parents, unless you pass the rules for a school's test of "independence."

If you absolutely can not get data for a parent due to estrangement, then you should include a statement explaining your situation in the "supplemental information" or "special circumstances" note at the end of the Need Access / Profile or supplemental application that you are required to fil. You should also call or email your school and ask them if they need any other sort of statement from you. Some schools state in all of their public materials that parental data is required no matter what, but they also allow you to note special circumstances on their supplement forms or on Need Access, if you can not get parental data for some reason. The school may or may not want other documents from you to verify your situation, so be sure to call each one and ask what to do.

TAXES

The definitive resource on tax benefits and credits that can help ease the pain of paying for law school is IRS Publication 970: Tax Benefits for Education (HTML | PDF). Everyone should consider this required reading who has to think about how they will pay for their legal education any farther than, "Where did I leave my Platinum Card?"

With the lower income and huge expenses most people will have during law school, many will qualify for a credit or deduction against any earned income such as the Lifetime Learning Credit (good for $2,000 right off the top of your tax bill if you pay $10,000 or more in tuition per year). This is the most generous of the various credits offered and the one for which the widest range of filers will qualify. It's also worth keeping in mind that you may be able to take the Student Loan Interest Deduction if you choose to pay the interest on your Unsubsidized Stafford, GradPLUS, or Private student loans while attending school.

As mentioned above, some schools will consider your retirement assets as part of your expected student contribution. Your own financial situation must dictate whether it makes sense to spend retirement assets to fund law school or not. Most students should probably avoid spending assets in tax sheltered accounts if possible. Annual contribution limits to most types of retirement accounts are small, despite recent increases, and you can not replace funds contributed in past years once they are withdrawn. If you plan to spend retirement funds, then be aware that the IRS does allow an Education Exception to Additional Tax on Early IRA Distributions.

As long as you pay qualified school expenses greater than the amount of your withdrawals from retirement funds within a given year, then you can take the money out of any IRA without paying the usual early withdrawal penalty. You will have to pay regular income tax on the money withdrawn, except for money taken out of Roth IRA accounts. But you may pay taxes on the withdrawals at lower marginal rates than you did when you earned the money while working full-time. If you take funds out of a retirement account before your first year of enrollment in law school, then you will have to pay a 10% penalty as well as regular income tax. So it makes more sense to wait until at least January 1 of the year for which you are admitted. The exception only applies to IRAs and not to funds left in 401k accounts. If you plan to quit a job and use 401k assets to fund your legal education, then you may need to roll them over to an IRA.

LRAP

It doesn't take much math to figure out that $100,000 in debt and $40k in salary equals major pain. If you want to go into public interest work, then dealing with the cost of law school will be your biggest problem, and you need to deal with it now, before you commit to a school. If you do not have a solid plan for how you will handle the debt vs. income problem going in, then the chances that you will go into public interest work when you graduate are next to zero. You simply will not be able to afford to work for a low salary. And even if they have no interest in the public interest, many new lawyers will wind up working at low paying jobs in the private sector, because of the tough job market. But they will still have the same $1,000+ loan payments to make every month.

Many schools now advertise that they have a Loan Repayment Assistance Program (LRAP) to help their graduates deal with the crushing debt load that their students will assume in order to pay for school. But you need to ask some probing questions and get some hard numbers from any school which you plan to depend on for LRAP funding. You need to know a lot more than the nominal benefit formulas that most put forth. Make sure you ask how many people applied, how many qualified for the full program benefit based on their income, how many were paid the full program benefit for which they were eligible, and how much that benefit was for them in dollar terms.

Another big issue can be whether schools cover all loans, or only need-based ones as determined by some institutional formula. Look carefully at LRAP guidelines for your school to see if your ESC or EPC is subtracted from "eligible" borrowing when computing LRAP benefits. Also look carefully at what assets are included and excluded in the eligibility formula. Often the formulas sound great, until you find out that they expect you to sell your house, exhaust every dime of your personal savings, and pony up your entire 401k balance before they will kick anything in, or that the school only paid out 10% of their scheduled benefit last year due to lack of funds.

Only a handful of schools -- mainly in the Top 14 -- seem to have large enough endowments to fully fund useful LRAP programs today. Some of the top programs out there are those offered by Berkeley, Georgetown, and Virginia. Georgetown's is a model of rationality and full disclosure in the extensive guides and worksheets they put forth on their criteria and benefit formulas. Virginia's is dead simple, generous enough to be useful, and notable for its complete lack of asset based tests. Berkeley's is one of the best -- simple, generous, with no asset tests and with a high income ceiling.

Penn, Duke, Cornell, and Northwestern seem to have decent formulas, but they leave a lot of open questions on the details, at least in the pages on their web site. Yale, Harvard, Stanford, and Michigan have generous schedules, with the big catch that they only cover need-based loans. Given their merciless definitions of need, this could set you up for an ugly surprise after graduation if you do not have a clear understanding of how your assessed need relates to their LRAP payouts.

Also consider that the new Federal LRAP program created by the 2007 College Cost Reduction and Access Act could make school LRAPs largely obsolete. It provides for an Income Based Repayment option which limits your payments to 15% of any gross income you earn in excess of 150% of the federal poverty level. And if you work in public interest, government service, or for any 501(c)(3), then they will write off your entire remaining balance after ten years (120 payments).

Even if you don't go into public service, you still get the same IBR formula if you have a low income, and you get full forgiveness after twenty-five years. The formula also gives you decent benefits even with a relatively high income, cutting your payments from $1,800 to $1,000 on $150k debt, even if you have a gross household income as high as $100k, for instance. It phases out around $160k in gross income. If you have to live on $36k, then you'll be paying less than $300 per month -- about 1/6 of the standard payment.

The nicest feature of the Federal LRAP, especially for those with things like mortgages, kids, and retirement to deal with, is that IBR payment schedules are based only on current taxable income after you graduate and begin repayment -- no asset contributions, no past or future income formulas, and no need-based evaluations of loans taken. This program applies to all federally guaranteed student loan debt, not just loans taken for law school. Those who graduate before July 1, 2009 may be able to consolidate outstanding Stafford and GradPLUS debt into a federal Direct Loan to get the same benefits as new graduates will starting in 2009.

There are two issues with Federal LRAP to keep in mind: 1) Under current tax rules, the full amount of any loan balance forgiven would be treated and taxed as regular income in the year of forgiveness; and 2) You may face either a substantial "Marriage Penalty," or be forced to choose "Married Filing Separately" status in order to have IBR payments based only on your income rather than the total of your and your spouse's joint income.

Congress will doubtless make the forgiveness benefit non-taxable within the very near future -- well before anyone would have to face the problem of paying a $150k tax bill on a $36k salary. The marriage penalty may prove a more persistent problem. Filing separate returns may greatly reduce your loan payments under IBR, but will also disqualify either spouse from claiming dozens of other common and substantial deductions (including -- no small irony -- the deduction for student loan interest).

For more details and updates on the CCRAA and IBR:

http://ibrinfo.org/
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1014622
http://www.finaid.org/loans/ibr.phtml