So, you are thinking, “How do I pay for college?” If you have already set up a plan and started saving early, then you have nothing to worry about. However, if you are like most Americans and have no savings and no plan already set up, you’re now thinking “oops.” Now it is time to consider financial aid. What is financial aid? Financial aid is a general term for assistance given in the form of money. Financial aid is provided to a student for any type of postsecondary education (four-year college, two-year college, trade and technical schools).
Your first step is to review the basic forms for financial aid for college. You can file for the Free Application for Federal Student Aid (“FAFSA”) online at www.fafsa.ed.gov. (You can also get a paper version of the form from your high school counselor.) Federal Student Aid PINs for the student and one parent (of a dependent student) are required to file the FAFSA online. To apply for a PIN, go to www.pin.ed.gov.
TYPES OF FINANCIAL AID
Financial assistance to attend college comes in many forms.
Federal Aid Programs
In the United States of America, federal assistance, also known as federal aid, federal benefits or federal funds, is defined as any federal program, project, service and activity provided by the U.S. federal government that directly assists or benefits the American public in the areas of education, health, public safety, public welfare and public works, among others. The assistance, which can reach to over $400 billion dollars annually, is provided by federal government agencies, such as the U.S. Department of Housing and Urban Development and the U.S. Department of Health and Human Services, through special programs to recipients.
State Aid Programs
State governments also typically provide some types of need- and non-need-based aid, consisting of grants, loans, work-study programs, tuition waivers and scholarships.
Gift aid consists of grants and scholarships that do not have to be repaid. These may include grants or scholarships, state grants, federal grants (Pell and Supplemental Educational Opportunity Grants) and scholarships from outside sources.
Unlike grants and scholarships, you do have to pay back loans. For subsidized loans, no interest accrues and no payment is due until you have been out of school for 6 to 9 months. Unsubsidized loans are available for students who do not qualify for subsidized loans based on need.
Work awards give you priority for campus jobs. Most work award recipients use their earnings to pay for personal expenses, books and supplies. Students can sometimes get jobs related to their program of study. A majority of people use a combination of these forms of aid to pay for college.
FINANCIAL AID PACKAGESMost colleges arrange financial aid packages for students who have a financial need. The rules for these packages are based on federal financial aid rules. To be eligible to receive a student financial aid package, you must complete the Free Application for Federal Student Aid (“FAFSA”), be a citizen or permanent resident of the United States and must also be enrolled, accepted for enrollment, or currently attending half-time or full-time, in an approved, postsecondary educational institution. Be sure to begin the application process 3 to 6 months before the deadline. You can also review our list of financial aid resources.
Financial aid is divided into two groups:
- Need-based financial aid. Need-based financial aid is awarded on the basis of the financial need of the student. This type of aid is commonly awarded in the United States.
- Merit-based financial aid. Merit-based scholarships include both scholarships awarded by the individual college or university and merit scholarships awarded by outside organizations. Merit scholarships are typically awarded for outstanding academic achievements, although some merit scholarships can also be awarded for special talents, leadership potential and other personal characteristics. Merit scholarships are sometimes awarded without regard for the financial need of the applicant. At many colleges, every admitted student is automatically considered for a merit scholarship. At other schools, however, a separate application process is required. Athletic scholarships are a form of merit aid that takes athletic talent into account.
Need-Based Financial Aid
Most people believe they need financial assistance to pay for college. Because there is so much need and funds are limited, the federal government has set policies to measure need. Most financial aid is based on need.
Need-based means that your family’s financial resources, as measured by a formula established by the federal government, are not sufficient enough to cover your educational costs. This formula analyzes a family’s income and assets to determine its “expected family contribution” (“EFC”) toward the cost of college. The federal government’s definition of financial need compares your income and savings to the cost of the college you plan to attend. Therefore, if you choose to attend a local community college, your financial need may be small, while if you choose to attend a higher priced college, your financial need may be large.
You can estimate your EFC using ACT’s Financial Aid Need Estimator.
Once you determine your financial need, the college you plan to attend will help you to identify sources of financial aid to meet your need. If you apply for assistance early, they may be more successful in finding financial aid.
Merit-Based Financial Aid
Grants are financial awards that do not need to be repaid and typically come from state or federal sources. They are usually based on financial need. Scholarships are financial awards that do not need to be repaid and typically come from government or private sources. They are usually based on merit or merit plus need.
Merit-based scholarships can be earned based on your talents or performance in a variety of areas:
- Extracurricular involvement
- Volunteer work
- Art, theater, music
A few scholarships are based solely on merit, but most scholarships use a combination of financial need and merit. You can search for different scholarships that are customized to meet your needs at www.scholarships.com.
There are three types of loans:
- Student Loans. Interest begins when you get the money, however you do not have to repay the loan until you graduate.
- Parent Loans. Parent Loan for Undergraduate Students (PLUS) allows your parents to pay for your education. Parents may also want to consider a home equity loan.
- Alternative Loans. If student or parent loans do not cover the complete cost, private lenders may offer loans to cover the rest.
Student loans can be quite confusing since there are so many different types available. We have defined the most popular loan types below.
Direct Student Loans: US Department of Education: www.studentloans.gov
Stafford Loans. Most students obtain these loans. They are generally low interest rate loans. The annual limits for these loans range from $6,625 for college freshmen to $18,500 for graduate students. They are federally administered and can be either subsidized or unsubsidized.
- Subsidized: The interest on subsidized loans is paid by the federal government until you have been out of school for 6 months. You must demonstrate financial need for the subsidized Stafford loan.
- Unsubsidized: The interest accrues the entire time you are a student. You do not have to show financial need to qualify for this loan.
PLUS Loans. PLUS loans are relatively low interest rate loans (usually about 0.75% higher than the Stafford rate) that are made to parents to cover the cost of their children’s undergraduate educational expenses. After passing a credit check, the parents can borrow as much as is necessary to cover the educational costs.
Consolidation Loans. As the name implies, consolidation loans consolidate many federal loans into one larger loan. The payment is lowered by extending the payback time of the loans. The maximum limit is dependent on the financial need demonstrated. You can apply for a consolidation loan by submitting the FAFSA application.
Perkins Loans. Perkins loans carry the lowest interest rate of all the student loans. You must demonstrate extreme financial need to qualify for this federally-sponsored loan. The maximum amount is set at $20,000 for undergraduate and $40,000 for graduate students.
Private Loans. Private loans available from banks and other private lenders can cover any costs beyond aid that the government loans provide. These should be used as a means of last resort. You will also want to be very careful to read everything carefully before signing for this type of loan. Private loans carry the highest interest rates. They often times provide the total amount you need for the school year several weeks before the fall semester payment deadline. If this happens, you will generally have a temporary credit balance with the bursar’s office. The school will likely need a few weeks to issue you a check for this amount and interest will be accruing for these funds from the initial date the private bank distributes the funds to the college. We share this with you not to frighten you, but to make you aware of why private loans should be used only as a means of last resort.
Parent Loans – Direct Parent PLUS
www.studentloans.gov – Parent will use their pin number to sign the Master promissory Note
Parent loans enable parents and legal guardians with good credit histories to borrow up to the cost of education for dependent undergraduate children.
Why choose a Parent PLUS Loan?
- The interest rate is a low fixed rate.
- Use it for tuition, room and board, supplies, lab expenses, up to the cost of education.
- PLUS loans are credit-based, not need based, which means that any parent(s) can apply.
- PLUS loans require no collateral (unlike other type of loans – including home equity).
- No penalty for early repayment, and consolidating your loans after graduation is easy!
- Interest may be tax deductible on your federal tax return.
- Completion of the FAFSA Financial Aid Application may not be required (but is recommended).
- Funds are usually disbursed quickly, during the first weeks of the semester.
Alternative loans are loans that fill the gap between your total college expenses and your awarded financial aid. Many students and parents take out alternative student loans to pay for all college expenses, from tuition to every day college expenses such as off campus living expenses, student car loans, supplies, travel, etc.
As alternative student loan lending has become competitive, most all lenders fix their interest rates at Prime + 0%. Lender interest rates do vary so check with your respective lender before applying. We recommend applying with lenders offering the Prime + 0% rate. Repayment is deferred until you graduate, as long as you maintain at least half-time status as a student. You do have the option to repay while you are in school. Once you have graduated, you must begin making payments, though you can receive deferments in 6 months increments, if you are unemployed or unable to work. The total number of deferments is limited to 4 (2 years).