How Does Financial Aid Work?

Investment in education illustrationVery few students are lucky enough to come from families with pockets deep enough to cover all the costs of a college education. If you aren’t among the wealthy elite, you’ll need to look into the many different financial aid options to help pay for school. Many financial aid options exist, including loans, grants, scholarships and work-study programs, and you may qualify for different programs based on your financial need, your academic achievements and many other factors.

Applying for Financial Aid

Depending on the type of financial aid you want to apply for, there are several applications that must be completed. However, one of the first to focus on is the Free Application for Federal Student Aid, or the FAFSA. This application will determine how much you and your family can be expected to pay for your education, and can be used for a variety of different financial aid awards.

Free Application for Federal Student Aid

One of the first steps in applying for financial aid for college is to complete the FAFSA. This is a free federal form that’s required from all students who are seeking need-based financial aid. This form is used to collect financial and income information from the student and his or her family, and is required to apply for almost all forms of financial aid provided from the government. It’s available online, from high school guidance counselors, and from college financial aid offices.

The FAFSA application can be completed online, but you’ll need to gather some information before you start. You’ll need your current tax return, or your parents’ returns if you’ll be using their financial information, the Federal School Code of the colleges you’re thinking about attending, and personal information, such as your social security number. If you’re currently employed, you’ll need to gather your W-2 forms as well.

Although it’s time consuming, the application is rather straightforward. If you need help, the financial aid office of the school you are considering should be able to provide it. If you’re completing the form online, there’s a section of the site dedicated to frequently asked questions. You can also call the Federal Student Aid Information Center at 1-800-4FEDAID if you’re having trouble completing the form.

Your Student Aid Report

Once you‘ve completed and submitted your FAFSA, you’ll receive a Student Aid Report, or SAR. This report summarizes the information you gave on your FAFSA, and indicates your Expected Family Contribution, or EFC. This amount is what you, or your family, will be expected to contribute towards your education costs. The EFC is then subtracted from the Cost of Attendance, or COA. The COA is the student’s estimated budget for attending school and includes such things as tuition and fees, books and supplies, room and board, and some personal expenses for the semester.

The lower your EFC, the more financial aid will be available to you. Most colleges will try to help you meet this need with a package of financial aid funds from sources including federal and state loans, grants, and school sources, such as work-study or other employment options.

What Financial Aid Programs Use the FAFSA?

There are many grant and loan programs that will use the information from your FAFSA and SAR to help determine your eligibility. Some of these include:

  • Federal Pell Grant – For the 2008-2009 academic calendar, the maximum award is $4,731.
  • Academic Competitiveness Grant – A grant program providing up to $750 for first year and up to $1,300 for second year of school
  • National Science and Mathematics Access to Retain Talent Grant – A federal program that provides up to $4,000 per academic year
  • Teacher Education Assistance for College and High Education Grant – Qualified students can receive up to $4,000 each academic year
  • Federal Stafford Loan – Requires repayment of loan; however, if the loan was based on financial need, your interest and payment will be deferred.
  • Federal Plus Loan – Loans available for parents of students. Interest payments are due while the student is still attending school.
  • Federal Supplemental Education Opportunity Grant – Program that provides anywhere from $100 to $4,000 per academic year.
  • Federal Work Study – Provides jobs to students to help with education costs.
  • Federal Perkins Loan – Low interest rate loans that are deferred while the student is enrolled at least half-time. The maximum loan amount for undergraduates is $4,000; $8,000 for graduate students per academic year.

Of course, this list is not all-inclusive and there are many other programs that will use the SAR to determine your aid eligibility. It’s also important to note that not all financial aid programs are available at every school or college, and you may not qualify for every program listed above. Make sure you check with the financial aid office at the school you’re thinking about attending to see if they participate in the programs you’re interested in.

When Do I Have to Repay the Money?

Many of the financial aid programs available to you don’t require repayment. For example, grants and scholarships usually don’t have to be paid back. Most of the student loans will require repayment, but as long as you’re attending college, even half-time, you won’t have to make payments on the principal of the loan. Most of these loans also offer a nine month deferral period after you graduate before payments will be due. In addition, in some fields of study and eventual employment, you may be able to qualify for forgiveness of the loan. The criteria for forgiveness change each year, so you should plan financially to make these loan payments, no matter what your course of study is.

Where to Begin When Applying for Financial Aid

Are you afraid you may not quality for financial aid? Don’t be. Given the variety of financial aid available, every student can benefit from applying for financial aid. Whether you’re a brand new college student or returning to finish an undergrad degree, masters or PhD, you may qualify for subsidized and unsubsidized student loans, grants, scholarships and even work-study awards. However, you’ll never know unless you apply for financial aid.

When applying for financial aid, your first step is to find out what types of aid are available to you. Check with your school’s financial aid office to learn about school, local organization, and government-funded scholarships and grants. You may be asked to fill out the school’s financial aid application in order to be considered for any work-study award. You may qualify for scholarships and grants based on your talents, ethnic group or financial situation. You may qualify for a work-study award based on financial need.

The majority of students fund their college educations with financial aid in the form of education loans, many that are subsidized by the government. While all loans must be repaid, government education loans offer low interest rates, deferred payment and flexible payment plans. These features make them a stellar choice for any student needing to finance his or her education. Government education loans include the Stafford loan and Perkins loan for students, and PLUS loans for parents, professionals and graduate students.

In order to apply for a government education loan, you’ll need to fill out a Free Application for Federal Student Aid, also known as a FAFSA or federal financial aid form. You can actually submit the FAFSA online and receive your completed Student Aid Report (SAR) within a week.

Before filling out the FAFSA, you’ll need to gather documentation including your social security number, W-2 forms from the previous year, current pay stubs and records of any other income earned in the previous and current year. You will also need your previous year income tax return (and your spouse’s if married), your parent’s previous year income tax return (if you are still a dependent), your bank statements from the previous and current year, and records of any investments or business holdings.

If your parents intend to take out a PLUS loan on your behalf, they will need to submit a separate application. Some financial aid counselors recommend that they postpone this step until after you’ve received a financial aid package from your school so they will know exactly how much they need to apply for in order to cover the remainder of your education costs.

If you’re wondering how the school determines how much federal financial aid to award you, based on the information submitted on your FAFSA, the answer is the EFC number. Your EFC number (or Expected Family Contribution number) is the amount you and your family are expected to contribute to your education before any federal assistance. Once your school’s financial aid office has this number, they can put together a financial aid package to help you cover the difference.

Applying for financial aid can be a time-consuming process. It is best to submit your FAFSA as early as possible as the EFC number generated is essential to any federal financial aid award. Some schools may require you to fill out an additional state financial aid application. Still others may also require you to submit a CSS/Financial Aid Profile as well to determine any non-federal financial aid awards.