How Does Financial Aid Work? (Must-Know Answers to 4 Major FAQs)

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Note: This is the second post in the Financial Aid Fundamentals series. Here we go over four commonly asked questions about the financial aid process, including how to apply for financial aid and how financial aid is calculated.

In the first post in this series, we defined financial aid. We learned the five sources of financial aid and the common types of financial aid.

But you probably still have questions, right? Questions like: How much financial aid can you get? Who decides that? And, most importantly, how do you get your money???

We know what financial aid is. What we want to know now is how does financial aid work?

That’s the topic of this post. Here, we’ll answer four common questions about the financial aid process:

  • How do you apply for financial aid?
  • How much financial aid can you get?
  • What is financial aid disbursement?
  • Do you have to pay back financial aid?

There is some math involved here. Please don’t freak out on me. Just follow along and I promise it will all make sense in the end.

But for now, let’s begin at…well, the beginning.

If you want financial aid for college, the first step is to fill out the FAFSA.

What Is the FAFSA?

FAFSA is the Free Application for Federal Student Aid. All students who want federal financial aid for college must file the FAFSA.

The FAFSA is also used to determine if students are eligible for​ state financial aid and for financial aid given by their university.

​What Questions Does the FAFSA Ask?

The FAFSA asks for personal information like birthdays and marital status. This information is used to determine if the applicant is a dependent or an independent student.

Dependent students are usually those who are under 24 years old, unmarried and who are still claimed as dependents on their parents’ income taxes. Independent students are usually those who are married, have children, are in graduate school or are active members of the military or military veterans.

Student status is one factor used to determine how much financial aid you can get. The other important factor is income. For dependent students, the FAFSA asks about both student and parent income. For independent students, the FAFSA asks only about student income.

​How Do I Apply for the FAFSA?

​​​​You apply for the FAFSA online. You can find loads of information and helpful resources about how to apply for the FAFSA at the official FAFSA website.

When Should I Apply for the FAFSA?

Students can submit the FAFSA beginning October 1st each year. For example, if you want financial aid for the school year that runs from Fall 2019 through Spring 2020 you can file your FAFSA as early as October 1, 2018.

That seems really early, doesn’t it? Is there any benefit to applying for the FAFSA early?

Absolutely. You should file your FAFSA as early as possible because some federal financial aid is given on a first-come, first-serve basis. That means students who apply early may get more aid than students who apply later.

Remember, too, that the FAFSA is used to determine if you’re eligible for state financial aid. But states have different financial aid deadlines. Some states require you to apply for aid by February 1, while others have deadlines as late as June. By filing your FAFSA early, you don’t have to worry about missing your state’s financial aid deadline.

Ask your high school guidance counselor or college financial aid adviser if your state requires more than the FAFSA to get college aid. If there’s extra paperwork to apply for financial aid in your state, be sure to get it turned in by the deadline.

​How Much Financial Aid Can I Get?

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Information on the FAFSA is used to determine your expected family contribution (EFC). This is an estimate of how much families are expected to pay toward their child’s education. (Or, for independent students, how much they should pay toward their own education.)

EFC is based on several factors, including income, assets and the number of people in a household.

EFC is one number used to determine how much financial aid students can get for college. The other important number here is cost of attendance (COA). COA is based on the tuition, fees, housing and other expenses for a particular school.

The difference between the estimated cost of attendance (COA) and what you are expected to pay (EFC) is your financial need.

Money you get based on your financial need is called need based financial aid.

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​Need Based Financial Aid

The federal financial aid program includes several types of need based aid. Federal grants for college students are need based aid, as is the federal work-study program. The federal government also has several need based student loans. Many states also give need based aid, usually in the form of grants, to college students.

​The maximum amount of need based aid you can get is equal to your financial need.

For example, suppose you want to go to a university where the estimated cost of attendance (COA) is $12,000 a year. You fill out the FAFSA and learn your expected family contribution (EFC) is $5,000.

That means your financial need is $7,000 — the difference between the estimated cost of college and what you’re expected to pay.  So, the maximum amount of need based aid you can get is $7,000.

But what if you and your family can’t afford that other $5,000? You can use non-need based aid.

​Non-Need Based Aid

Non-need based aid doesn’t take into account financial need or how much money students or parents have. Everyone can apply for and receive non-need based aid.

The federal government has two non-need based types of financial aid: unsubsidized loans and PLUS loans. These will be covered in more detail later in the Financial Aid Fundamentals series, but here is a brief summary.

The unsubsidized loan program gives money to undergraduate and graduate students regardless of financial need. If you don’t get enough need based aid to cover the full cost of college, unsubsidized loans can fill the gap.

Federal PLUS loans are often used the same way: to pay for school when there’s not enough need based financial aid. One big difference between the two loan programs is that only parents and graduate students can get PLUS loans.

Aside from unsubsidized and PLUS loans, you should know that many scholarships are also classified as non-need based aid.

​What Is Financial Aid Disbursement?

Federal financial aid, especially federal student loans, are part of the Direct Loan Program. Under this program, your financial aid is sent to your school rather than directly to you.

Your school uses this money to pay your tuition, fees and housing (if you live on campus), plus any other money you might owe. Once all of your bills to the university are paid, the college gives you the remaining financial aid money. This is a financial aid disbursement.

Colleges are legally required to disburse your extra financial aid at least once a semester, but some schools ​schedule ​two disbursements​, so you get half of your aid early in the semester and the rest later in the semester. Your college financial aid adviser can tell you the financial aid disbursement schedule at your school.

​Do You Have to Pay Back Financial Aid?

This is one of the most asked questions about financial aid. The answer is yes and no.

You do have to pay back any loans you borrow for school, even if you leave school before finishing your degree.

You usually don’t have to repay grants you got to help pay for college. However, there are certain ​times when you’ll be required to repay some or all of your grant money, like if you drop out of school. You may also be required to pay back part of your grant money if your student status changes.

For example, suppose you begin the semester as a full-time student but decide to drop a few classes. That means your enrollment status has changed and you’re now a part-time student. Since your grant money was calculated based on you being a full-time student, you may have to pay back some of your grant money.

Grants and Scholarship Displacement

You may also be required to pay back some of your grant money if you get financial aid from other sources. For instance, if you get a scholarship from a private organization this reduces your overall financial need.

Remember that your need based aid cannot be more than your financial need. So when you get a scholarship, your need based aid, like grants, will be reduced. If you’ve already received grant money through your financial aid disbursement, you’ll be required to pay some of it back.

Losing financial aid when you get a scholarship is known as scholarship displacement. The good news is that some states are moving to outlaw scholarship displacement.

This likely wouldn’t apply to federal financial aid, but under such laws you would no longer lose financial aid from your state or university if you receive a scholarship.

In the last two posts we’ve learned what financial aid is and how financial aid works. In the next post we’ll take a deeper look at how student loans work. We’ll summarize the three student loans programs within the federal financial aid system. We’ll also discuss who qualifies for each type of loan and the major differences between them.

Do you have questions about college financial aid? Confused about anything you’ve read here? Feel free to send me an email or post a question​ here in the comments.

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