Before we look in depth at the types of financial aid available, let’s take a moment to define what “financial aid” is and is not. Your college and Uncle Sam typically define it as any assistance that does not come from your own pocket. This includes loans. Most of the money does not come from entitlement programs like the Pell Grant. Therefore, it’s best to keep in mind that outside of the Pell Grant program no student is “owed” anything. Everyone must apply on their own and be judged accordingly. This may sound harsh, but it’s not. Every year our government and colleges are tasked with the huge responsibility of identifying the most needy and most deserving students out of the hundreds of thousands that apply. It’s not a perfect science, but their primary intent is to open doors, …not close them.
And once those doors are opened, what will you find on the other side? Hopefully you’ll find the resources that will afford you the best investment you’ll ever make: your education. All aid resources are grouped into two categories: 1) gift aid and 2) self-help aid. Gift aid is defined as financial assistance that you don’t have to pay back. Typically, grants and scholarships comprise these types of financial aid. Self-help aid is assistance that requires you to do something; either work for it or pay it back. College work-study programs and all loans fall into this category.
Gift Aid: Grants & Scholarships
Pell Grant – The federal Pell Grant program is the backbone of all federal aid programs. Once a student has completed their FAFSA, the first thing a school will determine is if he or she is Pell eligible. The information a student and his or her family provide on the FAFSA is used to calculate the Expected Family Contribution or EFC. The EFC determines whether the student is eligible for a Pell Grant. Recipients of Pell Grants must be undergraduate students who have not earned their first bachelor’s degree. They must also be a U.S. Citizen or eligible noncitizen who has a high school diploma or GED or demonstrates the ability to benefit from the program. Completing the FAFSA is the only thing a student must do to apply for a Pell Grant.
The maximum Pell Grant for the 2008-2009 academic year is $4,731 While the EFC is the primary factor in determining a student’s Pell Grant eligibility, the student’s cost of attendance and their enrollment status (full-time, part-time, etc.) also can have an impact. An eligible student may receive only one Pell Grant at one institution per award year.
Federal Supplemental Educational Opportunity Grant (FSEOG) – These grant dollars are reserved for those Pell Grant recipients who demonstrate the most financial need as determined by the FAFSA. FSEOG money is funded by the federal government but administered by the local college. SEOG awards can vary by institution depending on availability of dollars. Award amounts can vary from $100 to $4,000.
Institutional and State Grants – Most states do offer grant programs for their residents, but eligibility and availability of dollars may vary. You can click on http://www.ed.gov/about/contacts/state/index.html to get more information about your state’s educational contacts. There you can find guidelines for your state’s grant program(s). Additionally, many colleges make available institutional grant dollars that come from endowment sources or other private donations. This is more typically found at private colleges. The school’s admission brochure or web site will by the best place to locate additional information.
Scholarships – We expand upon the topic of scholarships under our section devoted totally to this topic (Scholarships). The term “scholarship” evokes an assortment of definitions and, to be honest, misunderstandings. Scholarships are not only for the valedictorians and star athletes, but for regular students with some unique qualifications. They typically fall into two categories: 1) need-based or 2) merit-based.
Need-based scholarships are more often than not determined by the student’s EFC. Outside of the college, many scholarship foundations will want your prospective school to provide them with your EFC or at least answer some questions about your family’s financial situation. As we’ve stated many times throughout this site, eligibility requirements can vary quite a bit among schools and foundations looking at “need” as the primary selection criterion. Consult the source.
Merit-based scholarships are typically based on a student’s talent or academic prowess. However, other things like the leadership ability, moral character and involvement in extracurricular activities can warrant scholarship accessibility. While a family’s financial situation could impact merit-based eligibility, usually it does not.
There are literally thousands of scholarships available to all types of students. A student’s extracurricular activities, area of study, county of residence or musical talent are all examples of different criterion used to select scholarship recipients. Don’t get locked into the idea that there is nothing out there for you to apply. With some grit and determination, any student can uncover a pot of gold in the form of a scholarship.
Work-Study – Most colleges offer work-study programs where a job is provided to the student and the earnings can be used toward their educational expenses. The earnings are not automatically deducted from the student’s bill; rather, they are presented to him/her in the form of a check or direct deposited into their bank account. Jobs can be located anywhere throughout the campus or even off-campus. A significant portion of work-study jobs are tailored to promote community service. Work-study is a need-based program available to undergraduate and graduate students. To be considered for work-study, a student must complete the FAFSA. Work-study jobs will pay at least at the current minimum wage not to exceed the amount shown on the award letter.
Loans – Loans are far and away the single largest aid program available to students. A student loan is extremely accessible and very often a student’s first venture into the world of credit/debt. Because loans must be repaid, the decision to borrow should be made carefully and the resulting debt be managed methodically. We’ve dedicated an entire section of this site to examine the subject in greater detail (Student Loans).
Completing the FAFSA is the first step in determining your loan eligibility. Once the EFC is calculated, additional steps will be communicated to you on how to actually receive the loan proceeds at your institution. This usually involves completing a paper or electronic promissory note. Let’s briefly look at the different loan programs available to students and their parents (please refer to our section on Student Loans for more information):
Stafford Loan – Stafford loans are loans that the student will borrower in his/her name. There are two types of Stafford loans: subsidized and unsubsidized. Subsidized loans have the government paying the interest for the student while he/she is in school and during their grace and deferment periods. Unsubsidized loans have interest accruing while the student is in school. Subsidized loans are based on need while unsubsidized loans are not need-based. Both loans are not required to be repaid until six months after the student graduates or drops below half-time
Over a four-year period beginning July 1, 2008, the interest rate on subsidized Stafford Loans made to undergraduate students will be reduced. The applicable interest rates for loans made during this period are as follows:
|Made on or After…||…and Made Before||Interest rate|
|July 1, 2008||July 1, 2009||6.0|
|July 1, 2009||July 1, 2010||5.6|
|July 1, 2010||July 1, 2011||4.5|
|July 1, 2011||July 1, 2012||3.4|
The interest rate for subsidized Stafford loans for graduate and professional students and all unsubsidized Stafford loans is 6.8%.
The maximum yearly amount a dependent, undergraduate student may borrow in combined subsidized/unsubsidized Stafford loan eligibility is:
- $5,500 for freshmen (maximum of $3,500 subsidized)
- $6,500, for sophomores (maximum of $4,500 subsidized)
- $7,500 for juniors and seniors (maximum of $5,500 subsidized)
The maximum yearly amount an independent, undergraduate student OR dependent student whose parent was denied a PLUS loan may borrow in combined subsidized/unsubsidized Stafford loan eligibility is:
- $9,500 for freshmen (maximum of $3,500 subsidized)
- $10,500 for sophomores (maximum of $4,500 subsidized)
- $12,500 for juniors and seniors (maximum of $5,500 subsidized)
The maximum yearly amount a graduate student may borrow in combined subsidized /unsubsidized Stafford loan eligibility is:
- $20,500* (maximum of $8,500 subsidized)
Stafford loans carry with them fees and interest charges that should be considered when making the decision to borrow. Stafford loans also come standard with a ten year repayment plan with a minimum payment of $50. There is no penalty for paying the loan off early.
* Some exceptions exist for medical students.
Parent Loan for Undergraduate Students (PLUS) PLUS loans are loans made available to credit-worthy parents of dependent, undergraduate students. The maximum yearly amount a parent may borrow under this program is the student’s cost of attendance minus any other assistance he/she is receiving. A parent may borrow for multiple children during the same year. For PLUS Loans disbursed on or after July 1, 2006, the interest rate is fixed at 7.90 for Direct PLUS Loans and 8.50 percent for FFEL PLUS Loans.
PLUS loans for graduate students As a result of the Higher Education Reconciliation Act of 2005, PLUS loans are now available to graduate students. The same terms and conditions apply to these loans as those used in determining Parent PLUS loan eligibility…including a credit check. Applicants for a Graduate PLUS loan must first exhaust their Stafford loan eligibility; thus requiring the completion of the FAFSA.
Perkins Loan – These loans are funded by federal and institutional dollars and given to the neediest undergraduate and graduate students. They carry a 5% interest rate and do not have to be repaid until nine months after the student graduates or drops below half-time. The maximum an undergraduate student can borrow is $4,000 annually and $6,000 annually for graduate students.
Private loan – Recently, there has been a huge increase in private loan funding in order to fill the gap created by the rising costs of education while federal loan limits remained relatively dormant. Some schools have begun actively awarding private loans on the award letter since the demand is so strong. Private loans are inherently more costly to borrow as they carry higher interest rates and fees than federal loans. The higher rates and fees are due to the private lenders owning 100% of the risk of lending the money. The federal government does not back these loans as they do with Stafford, PLUS and Perkins loans.