What Is Financial Aid? (How to Find Dollars For Your Degree)
Note: this is the first post in the Financial Aid Fundamentals series, which explains some basic financial aid concepts. This post answers a few general questions, such as the definition of financial aid and the common types of financial aid.
Do you know what the acronym FAFSA means? Or the difference between a subsidized and unsubsidized student loan? Or where to refinance student loans after you graduate?
If not, don’t worry…you’re not alone. Several recent surveys show that we just don’t know much about college financial aid.
For instance, only 15% of parents know the meaning of the acronym FAFSA. Only 2% of college students do.
Only 7% of college students know the difference between subsidized and unsubsidized loans. And just 4% of college students know they can refinance their loans after graduation.
These numbers are scary. Want to know what’s scarier? The total amount of outstanding student loan debt in our country: $1.4 trillion and counting.
One reason for this is lack of financial education in U.S. high schools. Many high schools have no financial literacy courses, while others have courses but don’t require students to take them. So students go to college with the ability to borrow tens of thousands of dollars…and absolutely no understanding of how those loans actually work.
I’ve seen this first-hand with my own students. Most of them get financial aid, but have no idea where it comes from or what the consequences will be after they graduate.
Well, I can't change the required curriculum in our nation’s high schools, but I can do my best to try and help you (and my students) understand the financial aid system.
In this post, we’ll answer some of the basic questions people ask about college financial aid. Specifically, here we’ll look at four topics:
- What is financial aid?
- What are the common types of financial aid?
- Where does financial aid come from?
- Who can get financial aid?
People know that financial aid helps students pay for college, but a lot of them aren’t quite sure how. Let’s start with that question.
What Is Financial Aid?
Financial aid refers to any funding that helps you pay for college. As we’ll see later, this aid comes from five different sources.
You can get financial aid from several sources at the same time because they provide different types of aid. Your university may give you grants or scholarships, while the federal government may give you loans or work-study.
Each type of aid has its own requirements. Some types are only available to full time students, while others are open to part-time students too.
Most types of financial aid require you to maintain a certain grade point average, but the GPA rules can be different for each type of aid.
All these rules and requirements are one reason students and families find the financial aid system so complicated. In the following sections we’ll break things down and answer some basic questions about college financial aid, starting with the common types of financial aid.
What Are Common Types of Financial Aid?
There are four primary types of financial aid: scholarships, grants, loans and work-study.
Scholarships are usually given out by schools or private organizations. You have to apply for each scholarship you want, which often means writing a personal essay and getting letters of recommendation.
Grants are usually given by federal and state governments. In most cases, students qualify for grants based on information from their Free Application for Federal Student Aid (FAFSA).
The FAFSA is also used to determine what types of federal student loans you qualify for, and how much loan money you might get. Federal work-study, which often allows students to work jobs on campus, is also given to students based on their FAFSA information.
As you can see, the FAFSA is very important. Remember to file a FAFSA each year you want to receive financial aid in college.
Where Does Financial Aid Come From?
As mentioned above, college financial aid comes from five sources:
- The federal government
- Your state government
- Your college or university
- Private banks
Each of these sources gives out different types of financial aid.
Federal Financial Aid
The federal financial aid program provides more aid to college students than any other source. There are three types of federal financial aid: grants, loans and work-study.
Federal financial aid grants
Federal grants for college are usually awarded based on your or your family’s income, which you report on the FAFSA.
There are two major federal grants for college students: the PELL Grant and the Federal Supplemental Educational Opportunity Grant (FSEOG). These grants do not have to be repaid after you graduate.
Federal student loans
The federal government also provides financial aid in the form of student loans. Unlike grants, you do have to repay loans after you graduate.
There are several types of federal student loans. The type of student loans you get depends on the information on your FAFSA.
Federal financial aid also includes the work-study program. Under this program, wages for student workers are split between the federal government and the university a student attends. Typically, the school and the government each pay 50% of wages for work-study students, but those percentages can vary. The work-study program also requires that universities devote a certain portion of work-study funds to college students in community service jobs, such as tutoring at elementary schools.
State Financial Aid
Students may also get help paying for college from state financial aid programs. Most state financial aid is in the form of grants, but some states have their own student loan programs.
Like federal grants, you do not have to repay state grants after you graduate. You will have to repay any student loans, though.
Most states use your FAFSA to determine if you qualify for state financial aid. Some states may have additional application requirements. Be sure to talk to your high school guidance counselor or college financial aid adviser about how to apply for financial aid in your state.
Financial aid that comes from your college or university is called institutional aid. Most institutional aid is given out as grants, scholarships and tuition waivers. Some private colleges and universities have their own work-study programs too.
When you’re applying to colleges, be sure to ask a financial aid adviser what kind of institutional financial aid is available to students.
Non-profit and other organizations often supply financial aid in the form of scholarships.
Some private scholarships are for students who meet specific criteria, like majoring in a certain field, while others are open to all students.
Most scholarships will require you to write an essay and submit letters of recommendation. If you want to apply for scholarships, be sure to plan ahead since the process can take several months.
And be aware of scholarships scams, like those that have an application fee or that promise you will win. No legitimate organization requires you to pay to apply for or promises you will win a scholarship.
Banks also lend students and parents money to help pay for college. These are referred to as private student loans, since the money doesn’t come from a taxpayer funded source like federal and state governments.
Private student loans are harder to get than federal student loans because they have higher income requirements and usually require you (or your parents) to have good credit. Private student loans usually have higher interest rates and fewer repayment options than federal student loans too.
You should think carefully before taking out private student loans to pay for college. They're generally not a good deal for students and families. If you do take out private loans to help pay for college, make sure you fully understand the terms of the loans and what you must do to pay them back.
Who Can Get Financial Aid?
Most college students can get some type of financial aid. The types of aid you qualify for depend on several factors, including income, your student status and your enrollment status.
Your student status depends on whether the federal government classifies you as a dependent or an independent student.
You’re considered a dependent student if you're under 24, unmarried and your parents still claim you as a dependent on their income taxes. You’re an independent student if you’re married (regardless of your age) or if you have children of your own or if no one else can claim you as a dependent on their income taxes.
Dependent students report both their and their parents’ income on the FAFSA. Independent students report only their own income on the FAFSA.
In addition to student status and income, enrollment status also helps determine how much financial aid you get. Students enrolled full-time are eligible for more aid than students enrolled part-time.
You should know that you can usually only receive financial aid through one school at a time. So, say you’re enrolled at a university but are taking a few online or night classes at a community college. You’ll only be able to get financial aid from one of those schools.
In the next part of the Financial Aid Fundamentals series, we’ll look at how financial aid works. We’ll talk a bit more about the FAFSA learn about need based and non-need based aid, the two big categories of financial aid.
Have questions about anything covered here? Feel free to ask me in an email, or drop your question here in the comments.