Understanding how financial aid works
Whether you’re planning for a child’s education or pursuing higher education yourself, understanding the financial aid process and types of aid available will help you make the most of what’s available.
If you’re wondering how paying for college fits into your bigger financial picture, an Ameriprise advisor will help assess your financial situation and plan accordingly.
Financial aid can come from many sources, such as federal, state, or private institutions. Applying for federal student aid through the FAFSA® is generally a good place to start.
How Federal financial aid through the FAFSA works
Each year, the federal government provides financial aid to millions of students across the country. To be awarded money, students must first meet certain eligibility criteria. For example, they must:
- Be either a U.S. citizen or a qualified non-citizen
- Be registered with the Selective Service (if required to do so by law)
- Be enrolled in (or accepted to) an eligible degree program
If the student meets the eligibility criteria, the first step in the process is to complete the Free Application for Federal Student Aid, more commonly known as the FAFSA. When filling out the FAFSA, students should be prepared to provide details on their family’s financial situation, including income and assets.
The US Department of Education will use this information to determine the Expected Family Contribution (EFC). The EFC refers to how much money the student and/or their family will be expected to contribute towards educational expenses. The EFC score can be 0 or higher, with 0 indicating the greatest financial need. The following formula helps determine overall financial need by taking into account both the EFC and the cost of the college:
Financial need = Cost of college attendance – Expected Family Contribution (EFC)
The government will send the FAFSA results, including EFC, to the schools listed on the FAFSA application. Each school is then responsible for coming up with a financial aid offer.
- Turn in the FAFSA early. Schools only have so much grant money to give out, and once it’s gone, they may award loans instead.
- Renew the FAFSA every year. If a student’s financial circumstances change, then eligibility and awards may increase.
- Fill out the application online. Applying online will reduce processing time so results can be sent out faster.
FAFSA vs CSS Profile
To receive federal student aid, students must fill out the FAFSA. However, certain colleges will require an additional application: the College Scholarship Service (CSS) Profile. This application is used by about 300 schools, the majority of which are private.
The CSS Profile is similar to the FAFSA, but its purpose is to qualify students for non-federal aid. Compared to the FAFSA, it collects more in-depth financial details, such as information about house equity and medical expenses.
It’s important to note that while the FAFSA is free, the CSS Profile is not. Students must pay a fee for each school that receives the results of the CSS Profile.
The three main types of financial aid for college included in a financial aid package are:
- Student loans
- Grants and scholarships
- Work-study benefits
Student loans are loans that are offered exclusively to students with the goal of helping cover expenses while in school. Both the federal government and private entities, such as banks, offer student loans.
Federal student loans
The U.S. government offers student loans to undergraduate, graduate, and professional students, as well as special loans for parents of students. There are three main types of federal loans: direct subsidized, direct unsubsidized, and PLUS loans.
Direct Subsidized Loan
Direct Unsubsidized Loan
PLUS Loan (Parent PLUS Loan/Grad PLUS Loan)
Who is eligible to receive the loan?
|Undergrad students||Undergrad, grad, and professional students||Parents of undergrad students OR graduate and professional students|
Is the loan subsidized?
Does the student have to prove financial need?
Most students who receive a federal student loan will likely receive a Stafford loan, which may be subsidized or unsubsidized depending on the determined financial need of the student.
- Subsidized loans: The government will pay the loan interest on the student’s behalf while they are in school.
- Unsubsidized loans: The interest burden will fall entirely on the student.
Whether subsidized or unsubsidized, undergraduates generally receive a lower interest rate on their federal student loan than do graduate students.
Private student loans
Occasionally, federal loans may not be enough to cover a student’s expenses. In this case, it may make sense to explore private student loans to make up the difference.
Private loans often have less favorable interest rates and terms than federal loans. For example, private loans sometimes require students to start repayments while still in school, whereas federal loans generally allow deferment until a period after graduation. Private loan interest rates can vary from lender to lender, so be sure to shop around for the best terms before committing to a loan.
Grants and scholarships
Grants and scholarships don’t require repayment. For this reason, grants and scholarships are considered a desirable part of any financial aid package.
Grants are primarily offered to students by the federal government based on financial need or other special circumstances. Students apply by submitting the FAFSA to be eligible for one of four federal grants:
- Federal Pell Grant: The Pell Grant is the primary grant awarded to students by the federal government based on a student’s financial need. Students can use this grant money to pay for college tuition, books, housing, and other expenses related to education. The maximum amount of money a student may receive from a Pell Grant has fluctuated over the past few decades, but currently stands at $6,345 per year (source: studentaid.gov).
- Federal Supplemental Educational Opportunity Grants (FSEOG): Awarded to students with exceptional financial need
- Iraq and Afghanistan Service Grant: Reserved for children of U.S. Armed Forces members who died as a result of serving in Afghanistan or Iraq after 9/11
- Teacher Education Assistance for College and Higher Education (TEACH): Reserved for students who are pursuing a career in teaching
The federal government is not the only source of grant funding. Colleges and universities, private foundations and institutions, and state governments may also offer grants.
Scholarships are similar to grants in that they don’t need to be repaid. Scholarships, however, are generally merit-based, while grants are more often based on need. If a student doesn’t demonstrate sufficient financial need to be awarded federal grant money, they can still qualify for scholarships, which are usually based on academic performance or other kinds of merit.
The application process for scholarships differs from school to school, but students may be required to fill out the FAFSA as part of the scholarship application process. Colleges generally want students to take advantage of need-based aid before they offer money based on performance or merit.
The federal government’s work-study program allows students to earn money through specific part-time jobs offered at certain colleges and universities. Work-study hours are awarded as part of the student’s overall financial aid package and are based on financial need. Not every school participates in the federal work-study program, so students should be sure to check with the colleges on their list to see if work-study jobs are available.
Need help planning for college expenses?
Every day, our financial advisors help people save for college so they can pursue their dreams. We will help you explain your financial aid options and plan for college expenses, whether you’re the one going back to school or you’re planning for your child’s future. Find a financial advisor now.
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