Financial aid comes in many shapes and sizes, and sorting through what’s out there can be a daunting task. Following are some of the basics to help you interpret any financial aid packages you may receive as well as understand your overall financial aid options.
Financial aid packages are generally made up of:
- Grants and Scholarships: These are funds that can be awarded by the federal government, state, college, or private organizations. They do not require repayment and are sometimes referred to as “gift aid” or “free money”. Grants can be based either on need or merit.
- Loans: Parents and students can borrow money to help pay for college costs. Loans can originate from the government, the college, or from private lenders and must be repaid with interest. Terms of loans vary depending upon the type. Although a loan may be an integral part of a financial aid package, the decision on whether to take out a loan or not is completely at the discretion of the student. The maximum amount that a student is permitted to borrow in federal funds is currently $5,500 per year. There are two types of federally-funded loans available to students:
- Subsidized Loans: These are loans that the student does not need to begin to repay until 6 months after graduation. The federal government pays the interest on the loan until that time. These are only offered to students who have need.
- Unsubsidized Loans: These loans are available to any student regardless of their level of need. The government doesn’t pay the interest while the student is in school, but the student does have the option of deferring the interest payments until graduation.
- Work–Study: In exchange for on-campus work, colleges and the government fund student employment. These programs are generally aimed at providing students with assistance that funds their college costs beyond tuition and fees.
Let’s dig a little further into federal need-based aid that I’ve noted above. As was mentioned in an earlier communication, when parents and students aren’t able to fund the cost of a college education, the federal government wants to help. Following are some of the financial aid offerings the federal government provides. Note that each has its own set of eligibility requirements, which are not completely specified here.
- Pell Grants: Depending upon the amount of need displayed by the family, a student can be awarded up to $5,500. Since this is a grant, the student does not need to repay the money. Pell grants are considered to be an entitlement, which means that if a student qualifies based on the criteria set by the government, the student will receive the money (i.e., the government can’t run out). That said, once the student’s Expected Family Contribution (EFC) exceeds $5,500, he or she becomes ineligible for any Pell Grant money.
- Supplemental Educational Opportunity Grants (SEOG): While the federal government funds these grants, colleges are responsible for awarding the money. These are need-based grants and currently range up to $4,000 per year. Because schools are provided with a finite amount of money each year for these grants, the pot can be depleted, and students who would otherwise qualify might not receive the funds if they apply too late.
- TEACH Grants: This grant is provided to students who commit to teach at the elementary level in underserved, low-income neighborhoods upon graduation. Grants range up to $4,000 per year.
- Stafford Loans: These come both subsidized and unsubsidized depending upon the student’s level of need. Stafford Loan rates and terms are often the best compared to other student loan programs. The interest rates for the current 2011-2012 academic year are 3.4% for undergraduate subsidized loans and 6.80% for undergraduate unsubsidized loans. Note that interest rates do change from year to year.
- Plus Loans: These loans can be taken out by parents of eligible students to pay for college costs and are not need-based. There is no limit on the amount that can be borrowed up to the full cost of the college education less any financial aid.
- Perkins Loans: Although the federal government funds these, colleges and universities are responsible for allotting the limited pool of money. The Perkins Loan is awarded to students with exceptional financial need and is a subsidized loan that does not need to be repaid until the student is out of school. Students may be able to borrow up to $5,500 per year. There are no origination or default fees, and the current interest rate is 5%. There is a 10-year repayment period. Because the money given to the school is limited, these funds can run out. This means that even if your student qualifies, if he or she is too late in the financial aid process, these loans may not be available.
Work-Study: As noted above, students who have need may be enrolled in a work-study program. The government provides funds to the school to employ the student. Note that having work-study as part of the aid package is not a guarantee of employment, however, it does make the student eligible for selected on and off-campus jobs.
Let’s touch briefly on institutional funds. In the last Financial Aid Primer blog post, I talked about students receiving merit money using institutional funds. In addition to merit scholarships, colleges and universities may also use their in-house funds to round out a student’s financial aid package with institutional grants. Some schools use a form called PROFILE to further assess a student’s need level, and then determine whether or not institutional money will be provided. These institutional grants can be a significant source of additional financial aid when federal funds aren’t enough.
Ultimately, it all begins with the FAFSA. To receive any of these federal or need-based institutional dollars, you must first apply and have your Expected Family Contribution (EFC) and need established. No FAFSA, no funds.
In our next installment, we’ll delve much more deeply into FAFSA and PROFILE. Stay tuned!
College Admissions Advisor, Westfield, NJ