Watch this short video to get your bearings in a seemingly endless sea of financial-aid options. Grants, scholarships, loans—you name it—we cover it in this informative clip.
Watch all videos in the Personal Finance 101 Conversations series »
Let’s talk a little more about how to pay for college.
You know that you have to fill out the FAFSA before you can be considered for any kind of college funding, so we won’t get into the particulars of that again, but you can always go to the PF101 Conversation on that subject if you’ve got questions.
Ok, so let’s break this down. Let’s think about financial aid a little bit like a tree. Hopefully that’ll help you get a good picture in your head of how all these things are related.
There are three main branches on our financial-aid tree–gift aid, work study and loans. To start off with, we’re just going to talk about gift aid, but don’t worry, we’ll be coming back around to work study and loans in a few minutes.
So what’s gift aid? Well, once again, our tree branches out in two different directions. Gift aid can be in the form of either grants or scholarships. We’ll start off talking about grants first. Grants are money that doesn’t have to be paid back, unless you withdraw from classes during the semester for which the grant was provided.
The Pell Grant is probably the most common type of public grant and is funds made available by the federal government as part of your overall student-aid package. Pell Grants are need-based, which means that they’re available to low-income students and based on the amount of the student’s Expected Family Contribution, or EFC–which is determined by filling out the FAFSA– the cost of the school, whether you attend full or part time and whether the you attend for a full academic year.
REMEMBER – These grants must be paid back in full or in part if you withdraw from classes during the semester the grant was for!
When you complete the FAFSA you are automatically applying for a Pell Grant!
Another type of federal grant is called the Federal Supplemental Educational Opportunity Grant, whew! It’s called the FSEOG for short and it’s an additional sum of money available only to those who have already qualified for the Pell Grant and demonstrate the most extreme financial need based on their EFC. Once again, the only way to apply for the FSEOG is to fill out the FAFSA.
Let’s go back to the scholarship branch of our tree now. Like grants, scholarships don’t have to be repaid. Some are renewable, meaning that you continue to get the money each semester that you attend school, as long as you maintain the scholarship’s required minimum GPA; others are one-time awards. Scholarships typically either come from private sources or from the school you attend.
Let’s look at private scholarships first. These can come from corporations, community organizations and non-profits. Some of these are merit-based, which means that they’re based on things like grades, volunteer work and involvement in community and social organizations.
Some of those private scholarships are need-based, which means that they’re based strictly on the student’s family income. Finally, some private scholarships are demographic-based, meaning that they are available to applications with a particular sort of categorization–this might be based on where you live or your ethnicity, whether or not you have children or whether your parents went to college or not, and so on.
Private scholarships are the only type of financial aid not covered by the FAFSA. You will need to search and apply for these on your own. There are several free online databases to help you find these private scholarships. Remember, there’s no reason to pay for scholarship searches; there are plenty of free resources on the web for discovering them on your own!
As for scholarships granted by your school, once again, the FAFSA is your starting point. When your school is determining your financial-aid package, they will look at your financial need, any grants or loans you may be eligible for and then determine what they will offer in scholarship funding. Again, scholarships don’t have to be paid back and are usually renewable as long as you continue to meet the eligibility requirements.
That covers gift aid, which is all of the financial aid that, under most circumstances, need not be paid back.
Work study is the most straight-forward branch of our financial-aid tree. Simply put, work study programs provide you with a job while you’re enrolled in school. These programs are administered through your campus and availability is determined by—you guessed it—the FAFSA! You are paid directly, and may use work-study money toward education-related expenses like tuition, fees, books, room and board. Alright, let’s tackle loans.
The loan branch on our financial-aid tree splits in two smaller branches for public and private loans. Let’s talk about public loans first, because they typically have much lower interest rates and much more favorable repayment terms than private loans.
There are three main types of public financial-aid loans. Your eligibility for these loans will be determined by completing the FAFSA. These loan types are Stafford, Perkins and PLUS loans.
First, let’s take a look at the Stafford Loan, which can be either subsidized or unsubsidized. The unsubsidized Stafford Loan has a low variable interest rate and begins to accrue interest while you’re in college. The interest that’s accruing while you’re going to school is usually just rolled into the principal of the loan, and the payments are deferred, which means that you don’t have to start making payments, as long as you’re enrolled in school as at least a half-time student. There is a six-month grace period after leaving school, after which loan repayment must begin.
Subsidized loans are the same as the unsubsidized ones, but the government pays the interest that accrues while you’re in school, instead of just having it rolled up into the principal of the loan. This, of course, means that you ultimately wind up paying less for your loan, since it’s effectively not accruing any interest while you’re in school. Subsidized loans, when they’re available, are preferable to unsubsidized loans.
In much the same way that the FSEOG that we discussed earlier is a grant for students with exceptional financial need, so too is our next type of loan. Eligibility for the Perkins Loan is also determined by the FAFSA. The Perkins is the best college loan available in that it is completely subsidized – again, meaning that no interest accrues while you’re in school–it has a low, fixed- interest rate and a 10-year repayment period that begins six months after you leave school.
The other type of financial-aid loan available isn’t a student loan at all. It’s a loan that can be taken out by parents to help their children pay for college. These loans are called PLUS Loans and they’re available to parents with an established history of good credit at a fixed-interest rate. The maximum loan amount is determined by subtracting all other available financial aid, as determined by the school, from the total cost of attendance. The FAFSA is all you need to determine if you or your parents are eligible.
Finally, as a last resort, there are private college loans available from traditional financial institutions like banks and credit unions. These loans typically have higher interest rates, shorter grace periods and origination fees. They may also have penalties for pre-payment of the loan. Some colleges have their own on-campus credit union that offers more favorable loan terms than larger banks or credit unions.
There are several search engines out there specifically for private college loans. It’s smart to do a lot of comparison shopping and make sure you know what you’re signing up for ahead of time. Make sure you understand all fees, grace periods and deferments, interest rates and total loan costs, and options for consolidation after graduation.
This sums up all of the various financial-aid options that you have. Remember, it all begins with the FAFSA! You can use some terrific free search engines to find private financial aid, and there’s never a reason to pay someone to find financial aid for you or to help you complete or submit the FAFSA.