A practical guide to understanding aid, covering funding gaps, and planning for college costs.

By SAGE Scholars — October 6, 2025

For many families, the cost of college represents a major long-term investment. While many rely on financial aid to make college more affordable, what's often overlooked is the crucial role of college funding, the part of the cost that families must cover themselves.

Knowing the difference between financial aid and college funding helps you plan more strategically, reduce surprises, and make informed choices about where and how to apply.

1. Understanding Cost of Attendance and SAI

Every college has a published Cost of Attendance (COA), which includes:

• Tuition and fees
• Room and board
• Books and supplies
• Personal expenses
• Transportation

To determine how much a family is expected to contribute, the federal government uses the FAFSA (Free Application for Federal Student Aid) to calculate what was once called the Expected Family Contribution (EFC). Starting with the FAFSA Simplification Act, this is now called the Student Aid Index (SAI).

SAI is not the amount your family will pay. Instead, it's a figure colleges use to determine eligibility for need-based aid.
COA - SAI = Financial Need.

Example:
Cost of Attendance (COA): $55,000
Student Aid Index (SAI): $15,000
Financial Need: $40,000

This example shows a theoretical financial need of $40,000. However, not all colleges will meet this full need and the type of aid you receive can vary.

2. Types of Financial Aid

Financial aid comes from multiple sources federal, state, institutional (college), and private. It falls into two broad categories: gift aid and self-help aid.

Gift Aid (Doesn't Need to Be Repaid)

• Grants - Typically need-based (e.g., Pell Grants, state grants, institutional grants).
• Scholarships - Can be need- or merit-based. Merit scholarships reward academic, athletic, artistic, or leadership achievements. Many colleges offer substantial institutional merit aid.
• Tuition Rewards- - Guaranteed scholarships earned through participation in the SAGE Scholars program at hundreds of private colleges nationwide.

Self-Help Aid (Requires Work or Repayment)

• Federal Work-Study - A part-time job program to help students earn money while in school.
• Loans - Borrowed funds that must be repaid, often with interest. This includes Federal Direct Subsidized and Unsubsidized Loans, Parent PLUS Loans, and state or private student loans.

3. How Colleges Actually Meet Financial Need

Colleges differ widely in how they award financial aid. Some promise to meet 100% of demonstrated need, while others may "gap" students, offering less than their full calculated need.

Additionally, many colleges use their own institutional methodology to determine need, which can differ from the federal FAFSA calculation. Some may consider factors like home equity, retirement accounts, or business ownership differently.

• Not all aid packages are created equal.
• The same family can receive very different offers from different colleges.
• The mix of grants, scholarships, loans, and work-study matters as much as the total dollar amount.

4. College Funding: Covering the Gap

Even with generous financial aid, families are often responsible for a portion of the cost. This is known as the funding gap, what's left after aid is applied. Families typically cover this gap through a mix of three strategies:

1. Tax Strategies

• Using 529 college savings plans
• Taking advantage of American Opportunity and Lifetime Learning tax credits
• Leveraging tax-efficient withdrawal strategies (e.g., from Roth IRAs)

2. Cash Flow

• Allocating part of current income to college expenses
• Adjusting household budgets temporarily during the college years
• Redirecting funds (e.g., daycare costs ending as a student goes to college)

3. Asset Management

• Drawing from savings or investments (e.g., 529 plans, custodial accounts)
• Strategically deciding whether to use home equity, retirement accounts, or other assets
• Considering long-term impacts on family financial health

5. Real-World Example: The Smith Family

The Smiths have a household income of $95,000 and one child heading to college. Their top-choice college costs $55,000 per year. After submitting the FAFSA, their SAI is $20,000.

The college offers $25,000 in need-based grants and $5,000 in merit scholarships, plus $5,000 in subsidized loans and $2,000 in work-study. This leaves an $18,000 funding gap.

The Smiths plan to cover this gap by using $8,000 from their 529 plan, contributing $5,000 per year from income, and drawing $5,000 from savings with careful tax planning.

6. Modern Financial Planning Strategies

• 529 Plans - FAFSA now excludes some grandparent-owned 529s from income reporting (as of 2024-25).
• Roth IRAs - Can support both retirement and education costs, though withdrawals may affect aid.
• Home Equity - Some institutional aid formulas include it; others don't. Check how your colleges treat it.
• Early FAFSA Filing & Net Price Calculators - Estimate costs early to avoid surprises.
• Multi-Year Planning - Plan for all four years, accounting for tuition increases.

7. Next Steps: A Family Funding Checklist

• Estimate your SAI early using FAFSA and net price calculators.
• Run sample aid scenarios for your top colleges.
• Create a multi-year family budget for college expenses.
• Review tax strategies and savings with a financial advisor.
• Understand how assets (home equity, retirement, 529s) are treated by different aid formulas.
• Start earning and tracking Tuition Rewards Points early.
• Revisit your plan annually as circumstances change.

Final Thoughts

Understanding the difference between financial aid and college funding empowers families to take control of the college planning process. Financial aid can make college more affordable, but funding strategies make it achievable.

By combining informed planning, smart financial strategies, and programs like Tuition Rewards, families can confidently navigate the cost of college and focus on finding the right academic and personal fit.