Guide to Financial Aid

As the U.S. economy struggles to recover and costs for post secondary education skyrocket, attending college on the parents’ dime is an increasingly unlikely scenario for many students. That shouldn’t deter you from pursuing higher education, though; federal and state governments and individual schools understand your need for funding and will work with you to create a reasonable financial aid package. Navigating the maze of financial aid can be daunting, but not impossible. Nearly all students qualify for some type of financial assistance, and understanding your options is the first step toward financing your education.

Who Qualifies for Aid?

The use of financial aid resources may be more common than you think. The National Center for Education Statistics reported that in 2009, 79.5% of first-year students received some combination of grants, student loans, scholarships or other aid. More recent data from the same source revealed a 66% increase in financial aid since 2009, indicating that 71% of all post secondary students received financial assistance in 2011.

The primary requirement for aid recipients is that students attend a vocational school, community college, baccalaureate or postgraduate institution that is accredited by the U.S. Dept. of Education. Students enrolled in non-accredited programs are not eligible to receive aid.

The vast majority of U.S. schools use information submitted on the Free Application for Federal Student Aid (FAFSA) to determine individual eligibility. Information from the FAFSA directly impacts the financial aid you may receive in the form of grants, student loans, scholarships and work-study programs. Many schools also use the FAFSA data to determine eligibility for various forms of need-based financial aid, institutional funding or state-sponsored financial aid programs. Though each school varies in its requirements for financial data (and some may require additional information), the data in the FAFSA generally serves as the building block for all financial aid packages.

The FAFSA eligibility guidelines state that students who wish to receive federal student aid must:

Be enrolled in an accredited, eligible educational institution
Be a U.S. citizen (some non-citizens may be eligible under some circumstances)
Possess a valid Social Security Number
Possess a high school diploma or its GED equivalent
Meet enrollment status as specified by the type of aid in question (part-time or full-time)
Make satisfactory progress academically
Be registered for the Selective Service, if you are a male over 18 years of age not currently serving active duty
Not currently owe a refund on previously awarded grant funds
Not have defaulted on a federal student loan
Not receive a conviction for felony drug sales or possessions during the time period that financial aid is awarded

Other materials submitted alongside the FAFSA, such as tax return data, may be used to determine need-based status for numerous financial aid programs.

Since the sheer number of public and private educational options in the U.S. result in an enormous range of tuition prices, it’s wise to view statistical averages with caution. That said, the average cost of tuition and living expenses in 2010 was $13,600 for public schools, $36,300 for private not-for-profit schools and $23,500 at private for-profit schools. Among all schools, the average financial aid package awarded was $10,800. This number has increased in recent years, mostly due to increased funding at the federal level.

Each state, as well as each individual school, has its own rules for the disbursement of financial aid funding. Students who apply to more than one college should expect a customized financial aid award package from each school. External factors like your geographic location, your parents’ financial or property ownership status, or the number of siblings you have at home can all play into your individual award package.

Financial aid funds are dispensed in a number of ways, and it’s impossible to estimate your net cost of attending college without filing a FAFSA and participating in the financial aid process.

Types of Financial Aid

Regardless of its source, financial aid is most often awarded on either a need or merit basis. Need-based funding is based on demonstrated financial need, which can be ascertained via tax documentation filed in the FAFSA. Need-based awards are often grants that don’t require repayment, but not always. Merit-based financial aid is based on a quality you possess, such as academic performance or sports ability.

Merit-based aid may also be in the form of scholarships that are awarded to students of certain ethnic backgrounds or to students who major in particular subjects. Merit awards can take many forms, but all of them require something on your behalf and are unrelated to your family’s financial situation. Any type of financial aid is available to students who attend accredited schools, including online degree programs.

Student Loans

There are a number of student loan options available to students and their families, each one comes with its own costs and repayment options. At the first juncture, students may choose between private and public loans. Public loans are dispensed and managed by the government and are generally repaid at a lower interest rate. Private loans, available from standard financial institutions like banks and credit unions, may have fewer restrictions but generally also carry higher interest rates. While grants and scholarships are ideally better sources of college funding, many middle-class families that do not qualify for need-based aid may have to rely on student loans to make up the difference.

Stafford Loans

A loan made directly from the federal government to students is commonly known as a Stafford Loan. In a subsidized Stafford Loan, accruing interest on the balance is paid for (subsidized) by the government while you finish school. Subsidized Stafford Loans are offered as need-based loans only.

Alternatively, unsubsidized Stafford Loans are available to students that cannot demonstrate high financial need. These loans begin to accrue interest immediately; while you may opt to defer payment until after school, subsidized loans carry more cost in the long term. Data from the FAFSA is used to award these funds, but this option is not need-based.

Qualifying students may borrow up to $20,500 per year with either type of Stafford loan, depending on certain enrollment criteria. After you leave school, you’ll be expected to pay the government back at a low variable interest rate. You may choose from several convenient repayment plans as long as you repay within 30 years, and you will have a six-month grace period after college before loan payments become due.

It’s important to note that recent legislative measures reconfigure the way loan interest rates work. Now, the interest rates of all new direct loans are tied to rates at the Federal Reserve. While former rates were fixed, students might find themselves paying more than they expected once these new loans come due. This change will generate more revenue for the government and possibly open up new government aid opportunities long term, but for now the decision is still somewhat contested in Congress.

The new law caps interest rates on loans at 8.5%. However, 8.5% is considerably higher than the interest rates on federal student loans has been historically. It is possible that a future Congress will act to intervene should the variable rate begin to approach the 8.5% cap. This rate doesn’t make federal student loans a worse deal than a private student loan, but it is important that today’s students understand that federal loans will cost students more than they have previously.

Direct Plus Loans

The Direct PLUS loan is a federal loan designed for certain classes of borrowers. These include graduate students or those in professional degree programs, OR the parents of a student in any program that qualifies for federal aid funds. These loans are not necessarily need-based, but eligibility and loan amounts are determined according to the borrowing student’s FAFSA information.

Direct PLUS borrowers must demonstrate good credit history, and may borrow any amount up to the maximum net cost to attend school. Direct PLUS loans are repaid at a fixed 6.41% interest rate and also carry a 4.204% origination fee, which will be deducted from your disbursement. Interest may be deferred until six months after you leave school, but continues to capitalize through the life of the loan.

Perkins Loans

Another federal loan program, the Perkins Loan, offers subsidized low-interest loans to students based on need. Only about 1700 schools participate in the Perkins Loan program, so check the financial aid options carefully at each school under consideration. Perkins Loans are based on FAFSA data and may be awarded to undergraduate, vocational and graduate students. While the funding is federal, eligibility is determined by the school, so your mileage may vary at different schools. Depending on availability, you may borrow $5,500 per year as an undergraduate or $8,000 per year as a graduate student. Perkins Loans are repaid at a fixed 5% interest rate and must be repaid within 10 years.

Perkins Loans are also eligible for the Federal Loan Cancellation program, which means students in some circumstances may have their loans forgiven. In particular, elementary educators in low-income schools and Peace Corps Volunteers may be eligible for full or partial forgiveness in return for a service commitment.

Private Loans

When no other options are available or can’t quite cover the full amount of schooling expenses, some students opt for private loans. Traditional lenders do not use the FAFSA, but rather a typical lending process that includes the demonstration of creditworthiness. Loan amounts may vary; but regardless of how much you borrow, variable interest rates can be as high as 18% and cannot be deferred until after graduation. Private loans are also ineligible for consolidation with any federal loans.

Grants, Fellowships and Scholarships

Ideally, all college students would be offered an amount of “free money” in the form of grants, fellowships and scholarships that do not have to be repaid. While it may not be possible to fund your entire education, or for every student to benefit from this type of financial aid, there is a considerable amount of cost-free funding available for the right candidates.

These are frequently need-based and merit-based, depending on the specifications of each award. They may or may not require participation on your part, such as serving as a teaching assistant or maintaining a high GPA. As with student loans, any student in an online or traditional accredited school is eligible for these funds.

Pell Grants

The Pell grant is arguably the most well-known form of federal grant funding. Pell grants are awarded based on information filed in the FAFSA and are based on your net cost to attend school versus your ability to pay. In 2013, the maximum Pell grant was $5,645 per student and carried zero cost. Pell grants may be awarded for a maximum of 12 semesters.

Federal Supplemental Educational Opportunity Grants

The Federal Supplemental Educational Opportunity Grant (FSEOG) is another need-based grant, designed for students and families in dire financial straits. FSEOGs are also based on the FAFSA and do not require a separate application; any student who receives a Pell grant is automatically considered for a FSEOG. Funding for these grants is federal but is administered at the campus level, so each school’s financial aid office determines eligibility and award amounts. You may be awarded up to $4,000 per year of FSEOG funding. Check to see whether your school participates in the FSEOG program, and remember that different schools may offer you different amounts based on enrollment.

FSEOGs, like Pell and other federal grants, are awarded on a first come basis. Awards are distributed to the highest need students until they run out each year. Since all of these programs are based on data in the FAFSA, it is to your advantage to file as soon as possible after Jan. 1 of each academic year.

TEACH Grants

The Teacher Education Assistance for College and Higher Education (TEACH) grant awards up to $4,000 per year in federal funds to future educators. Eligibility is established from FAFSA data and matches basic federal financial aid criteria. TEACH grants operate differently than other federal grants. In order to receive this funding, aspiring teachers must:

Enroll in an undergraduate, graduate or post-baccalaureate degree program in a TEACH-participating school
Maintain a 3.25 cumulative GPA
Agree to teach high-need subjects such as math, science, reading or any other identified elementary-school subjects
Agree to teach at a low-income educational institution
Agree to teach full-time for 4 years, and to complete this requirement within 8 years of graduation

Local and Institutional Awards

Grants may also be offered by state and local governments and individual institutions. These may be need-based or merit-based; data for these grants is derived from the FAFSA. The amounts vary widely, depending on your geographical area and the available funding at the schools you are considering. For example, in 2011, 80% of all U.S. students who received financial aid accepted institutional grants from private not-for-profit schools. 40% of students at public schools and 24% of those at private for-profit schools also accepted institutional grant funding.

Any other grant funding likely is awarded in the form of a scholarship. Scholarships are commonly awarded for academic performance or a demonstrated athletic ability, and are granted by individual schools. Hundreds of private scholarships exist for other qualified individuals; students may be eligible based on factors as varied as minority status, ethnicity, or membership in a club or professional society. Awarded scholarship amounts can range from a few hundred dollars, which could contribute to the cost of textbooks and supplies, to several thousand dollars per year.

Note: Two federal need-based grants were created by the government but are no longer available. In 2005, the Science and Mathematics Access to Retain Talent (SMART) grant and the Academic Competitiveness Grant (ACG) were established. These grant funds were awarded on a short-term basis to Pell grant recipients who met specific performance and educational criteria. The original legislation funded these programs through 2011; while the programs were considered successful, they are not currently funded.

Work Study and Assistantships

Some forms of financial aid are awarded in return for service on the part of the student. These tax-free funds do not need to be repaid as long as the service obligation is met. Eligibility is need-based and, as always, based on the FAFSA; any student in an accredited campus-based or online degree program is considered for eligibility.

Federal Work Study

The Federal Work Study program awards funds to needy students in return for services rendered, usually in on-campus jobs. Students must apply and interview as with any job, and can often choose between areas of the campus or departments that need assistance. More experienced students further along in a degree program often combine this tuition benefit with the valuable job experience that can be gained by working for a professor. Funds are paid directly to students in return for hours worked, and students must not be paid less than minimum wage.

Student Assistantships

Assistantships are common financial aid arrangements for graduate and doctoral students. These students work closely with professors and assist in classroom teaching and research projects. While assistantships operate similarly to work studies and provide tax-free income paid directly to the student, assistantships are in the form of stipends. This stipend is a bulk sum that is regularly dispensed, such as once a month or once per semester. This stipend is meant to enable graduate students to focus their energies on studies without having to seek outside employment.

Understanding and Filing Your FAFSA

As we have established, the FAFSA is the starting point for all federal financial aid at accredited U.S. educational institutions. In many cases it is also the end point for award funds; whether or not individual schools require additional information from you to determine your award eligibility, it all derives from this application. Since many awards are allocated on a first-come, first-serve basis, it’s advisable to file this application as soon as possible.

As discussed in detail in Part II above, completing and filing the FAFSA confers eligibility consideration for the following federal financial aid programs:

Pell grant
FSEOGs
TEACH
Subsidized Stafford Loans
Unsubsidized Stafford Loans
Direct PLUS Loans
Perkins Loans
Federal Work Study
State and Local Financial Aid Programs

Steps to Filing the FAFSA

The timeline for financial aid application can be confusing. Much of the information required by the FAFSA is the same information necessary to complete a tax return, and by law, the entities that provide you with the documentation to complete your return are not required to deliver those documents to you until Jan. 31st. The FAFSA is open to filers from Jan. 1 through June 30 of each academic year. Many families may choose to wait until the tax return is completed before turning to the FAFSA.

Collect Your Application Materials

Remember, since many aid programs are disbursed on a first-come, first-serve basis, it may best serve your needs to file an estimated FAFSA early in January. You can do this by submitting your form with last year’s tax information. After your tax return is completed, you’ll be able to update your FAFSA with accurate tax information, and you won’t miss out on financial aid that is quickly distributed to early applicants.

To file a completed FAFSA, you’ll need your completed tax return, the student Social Security Number, and the names of the schools where you plan to apply. If you’ve already filed your tax return, the FAFSA has an IRS Data Retrieval Tool that can automatically import your tax information into the FAFSA and forward it to the schools under consideration. In the past, this tool has been somewhat finicky; check carefully to ensure your tax data was received by each school.

The FAFSA requires detailed data about your family’s assets, liabilities, property ownership and living circumstances. If you or your family have unusual financial circumstances that interfere with your ability to manage the costs of college (such as a job loss by a parent), the FAFSA offers an opportunity to explain these circumstances. It’s a good idea to consult with financial aid counselors at your prospective colleges to discuss ways to maximize this opportunity. If you choose to consult with a finance professional, be aware that the FAFSA is free and you should not be charged to file.

Interpret Your Aid Reports

Data about your family’s financial situation is extrapolated into the Expected Family Contribution (EFC). This number is a reflection of what the government believes to be your family’s ability to pay for your education. Each school measures your EFC against its Cost of Attendance (COA) and available financial aid funds. Each potential school creates a financial aid package that is unique to that school and may be comprised of several forms of aid. This information will be communicated to you in an award letter that details your options.

It is possible to roughly estimate out-of-pocket costs. A Student Aid Report (SAR) will be generated by your FAFSA’s completion status, and will be mailed to you within a few weeks’ time. The SAR contains your EFC and offers an estimate of the federal aid for which you may qualify. You may also use an EFC calculator to further drill down to the net costs of attending a particular school. Ultimately, the award letter from the school will contain the information you need to make your final decision.

The FAFSA is not something you can submit your freshman year and forget about. Aid packages can change year-to-year and many programs will require updated information each year before disbursing your aid. That means every college student should fill out and file a FAFSA form for each year they are actively enrolled in school. If you do not file this form, you simply will not receive the full financial assistance you are entitled to. Your FAFSA results serve as the most important indicator to the government, your school and any other aid-granting institution that you need a certain level of support.