A Financial Aid Overview

Getting the financial aid you need for college should not only take into account what you can receive in terms of student loan funding, but also what you can obtain via other types of financial aid instruments.

This means that to maximize your ability to get the absolute most amount of aid you can for any given school year you must take into consideration not only student loans, but other forms of aid as well, including grants, scholarships, and various kinds of work-study programs.

The major types of financial aid you should consider including the following:

• Federal Student Loans
• Private Student Loans
• Education Grants
• Scholarships
• Work-study Programs
• Gift Aid
• Other Loans and Credit Instrument

Before you can get started with such aid you must first have at least a general idea of the positives and negatives of each kind of aid, and how you should go about applying for each category in an appropriate manner. The following is a brief synopsis that should in fact accomplish this, thus giving you a rough idea of how you should proceed while building your financial aid package.

Federal Student Loans

Federal student loans are education loans that are provided by the Department of Education, which is ultimately a federally funded division of the United States government that deals with providing funding for college students and postsecondary institutions.

For all types of federal college loans student must be able to qualify for federal student aid. To do this, students must be able to satisfy a list of basic requirements that have mostly to do with general personal information. I have provided a brief article that goes over such requirements here.

There are four major types of federal student loans:

• Subsidized Stafford Loans
• Unsubsidized Stafford Loans
• Perkins Loans
• Direct PLUS Loans

Subsidized Stafford Loans

Subsidized Stafford Loans are federal student loans that have a fixed interest rate of 3.4%, which doesn’t accrue while the student is attending classes. The amount that can be borrowed is capped with regard to the level of degree progress of the student, and increases with each year the student moves forward in their curriculum.

Applying for a Subsidized Stafford Loan involves completing the FAFSA, and eligibility is based primarily on financial need. Students with lower EFC values typically receive a higher amount of subsidized aid, although a student’s cost of attendance will also factor into the equation.

Unsubsidized Stafford Loans

Unsubsidized Stafford Loans are similar to their subsidized counterparts despite the fact that interest does accrue while the student is attending class. Another difference is that the interest rate for an Unsubsidized Stafford Loan is set at 6.8% for the life of the loan, double the rate of a Subsidized Stafford Loan.

This Stafford Loan can be applied for via the FAFSA, while the eligibility requirements aren’t nearly as strict as they are for the subsidized version, as most students who demonstrate any level of need for aid should be able to get assistance provided they completed their FAFSA by the appropriate deadlines and in a proper manner.

Loan amounts for the Unsubsidized Stafford Loan are capped with regard to the amount a student may be able to receive via subsidized funding, and are also contingent on the student’s degree progress.

In total, both the Subsidized and Unsubsidized Stafford Loans comprise of the vast amount of federal student loan funding that students receive for any given school year. Most students who complete the FAFSA get at least some portion of this type of federal education loan funding.

The Federal Perkins Loan Program

Federal Perkins Loans are federal education loans that are given out by approximately 1,800 postsecondary institutions from across the nation, and are heavily based on financial need.

They are much more difficult to obtain than Stafford Loans for these two reasons, and students who receive this type of aid should feel very fortunate because these loan and indeed tough to get.

Undergraduate students are able to get up to 5,500 dollars in aid at a fixed interest rate of 5.0 percent via a Perkins Loan for each year that they are attending class on a full-time basis, with a total amount of funding of 27,500 dollars for the life of their undergraduate education.

Most students who become eligible don’t receive this full amount however, and the average Perkins Loan amount for 2009 was set at 2,231 dollars. The amount students end up receiving is heavily reliant on having an expected family contribution close to zero.

Direct PLUS Loans

Direct PLUS Loans are essentially federal education loans that can be taken out by an undergraduate student’s parent if they haven’t received their bachelor’s degree, and on their behalf if they are attending graduate school. They are a great complement to the aforementioned types of federal student loans, as they can provide money up to the cost of attendance where necessary.

PLUS loans can be applied for via a separate application than the FAFSA, commonly referred to as the Direct PLUS Loan Application. A Master Promissory Note will also have to be completed that will detail how the applicant must repay they loan and any accrued interest and fees.

PLUS Loans are unlike the aforementioned types of federal loans in that they are based on credit, so either the parent applicant, or graduate student applicant must have at least good credit in order to be able to get an approval for a PLUS Loan. Overall PLUS Loans are a great alternative to private student loans funding, as they have a fixed interest rate of 7.9% and lesser fees than most private student loans.

Private Student Loans

Private student loans are education loans that are not provided by the Department of Education, and have nothing to do with the federal government whatsoever. They are instead made by independent private banks and other lending institutions who are not affiliated in any way with the United States government.

Unlike most federal student loans that are based on financial need, private student loan funding is based mostly on credit, and unless you have at least what is considered to be a “good” credit score, you will typically have a tough time getting approved for a private student loan.

The main advantage in getting a private student loan is in their ability to provide you with up to your cost of attendance in funding, as they typically have no capped loan amounts like the Stafford loans do. That being said, they are fairly difficult to get approved for, and normally carry higher interest rates and fess than most federal student loans.

Federal Education Grants

Federal education grants are in actuality better types of financial aid to receive when compared to either federal, or private student loans, as they are not loans, and therefore do not have to be paid back.

There are five major types of federal education grants, and they can all be applied for via the FAFSA:

• Federal Pell Grant
• Academic Competitiveness Grant
• National Smart Grant
• Federal Supplemental Education Opportunity Grant
• Teach Grant

All of these federal education grants can provide students with money that they don’t have to pay back under normal circumstances, and while each is unique in its own way, they all are great types of aid to receive if you are a college student.

I will explain each of the federal education grants in greater detail in a later article, so stay tuned.

Scholarships

Scholarships are similar to education grants in that they are money that does not have to be paid back under normal circumstances. The main difference is that they aren’t based upon financial need most of the time, and are rather based upon merit.

Merit-based aid consists of aid that is given to students who have succeeded or have accomplished something special in some unique area. Examples include athletic scholarships for students who have excelled on the playing field, academic scholarships to students who have thrived in the classroom, and even societal scholarships to those students who have done substantial work in their community.

Scholarship aid should be welcomed by any student who is able to qualify, as it typically doesn’t have to be paid back, and can pay for a substantial portion of any student’s education-related expenses.

Work-study Programs

Work-study programs are essentially employment opportunities that are available to college students who are willing to work while they are attending classes. There are two types of work-study programs—federal work-study, commonly referred to as FWS, and non-federal work-study, or non-FWS.

Federal work-study is awarded by the Department of Education, and is based heavily on financial need. Non-federal work-study is not associated with the federal government, and is rather awarded exclusively by the college the student is attending.

Both types of work-study programs are great for students who need additional money for education-related expenses, and are unable to acquire other types of aid such as grants, and scholarships. Both kinds of work-study pay the student as if they were a normal employee that was working that the particular workplace at-hand, and in most instances pay a fair wage for the position that the student may be fulfilling.

To apply for federal work-study, the student should complete the FAFSA and answer yes to the question that asks about whether such an opportunity would be welcome. For non-FWS, students should inquire within the college they are attending, and in particular their school’s financial aid office about what opportunities may be available.

Gift Aid

Gift aid is financial aid that is provided by people that may be close to a student who wish to help them pay for their college education. It really isn’t a formal type of financial aid, but I figured I would include it in this list because of the fact that students ask me about the money they may receive from their parents, family, and friends so frequently.

The great thing about this type of aid is that as long as you don’t have a problem accepting it, you shouldn’t have to pay it back unless the person that is giving to you is a stickler and want to make it a loan of some kind. The bottom line with gift aid is that the more you can get, the better, as you won’t have to seek the aforementioned types of aid if you are able to get enough gift aid to pay for all of your education-related expenses.

Other Loans and Credit Instruments

Students often ask me about whether it is a good idea to pay for their tuition with a credit card, personal loan, or some other kind of credit instrument. I typically respond by saying that it is not a good idea, and that they should exhaust they previous types of financial aid before seriously considered going into debt in such ways.

That being said, college is expensive, and students and parents are old enough to make their own decisions with regard to how much debt they are willing to go into. Do I think it is a good idea to for tuition costs with a credit card? Definitely not, as they will immediately be responsible for such payments at an elevated interest rate that could prevent them from getting additional financial aid further on down the line.

The most appropriate circumstances that may warrant the taking out of such credit instruments would be for everyday living expenses at school, and perhaps for an emergency resource for when all other avenues of finance become exhausted. Otherwise I think it is best to stay away from any debt instrument that may commonly be referred to as a credit card, personal loan, or payday loan, as these can often overwhelm students while they are in school, and are best left to be utilized after graduation.