Focus on Financial Aid: Terminology and Words to Know

Part II. Types of Financial Aid

Grants and Scholarships. Money given to a student that carries no stipulation of repayment is known as a scholarship or a grant. Scholarships and grants can originate from the federal or state government, private sources or the college itself. Grant eligibility tends to be based on need; when need is high, the grant aid tends to be high as well. Scholarship eligibility is often based on financial need, academic achievement, particular talents or skills, or a combination of one or more of these factors. In some cases, the terms "grant" and "scholarship" are used interchangeably.

Loans. Any program described as a loan requires repayment, usually with interest, to the source of the funding. Loans often come from the institution or private lender. Generally, the greater the financial need, the larger the loan. A variety of repayment options are usually available, and sometimes permit payment to be deferred while the borrower is enrolled in school. The time frame for loan repayment can be as little as two to three years, or as long as twenty years. Many banks and lending institutions now make special loan programs available to help parents finance their student's education. These loans are not based on financial need, but can help stretch the family's budget over the years of schooling. Loans may be referred to as "self-help" aid.

Jobs. On- and/or off-campus employment for hourly wages during the academic year. In some cases, the jobs are designed to complement the student's field of study. Jobs may also be called "self-help" aid.

Part III. Federal Student Aid Programs

Eligibility for federal student aid programs, except the Federal PLUS loan and unsubsidized Federal Stafford Loan, which we'll describe later, is primarily based on financial need. Families demonstrate need for federal student aid by completing the Free Application for Federal Student Aid (FAFSA), available at www.fafsa.ed.gov.

Federal Pell Grant. The largest single aid program. Grants are awarded to students demonstrating high financial need and are not required to be repaid. Using FAFSA data, financial need is determined according to the Federal Methodology, a formula established by Congress to assess the family's ability to contribute to the student's educational costs. For each eligible student, the Department of Education forwards funds to the school, which are then delivered to the student's account at the school, or are paid directly to the student. The maximum award varies annually, according to the level of federal funding. For 2005-2006, the maximum Pell Grant is $4,050.

Federal Perkins Loan (formerly National Direct Student Loan). A federally funded campus-based loan that is administered by the college aid office. Students do not apply separately for the Federal Perkins Loan-it is awarded to eligible students as part of an aid package at the college. A five percent interest rate is charged annually after completion of studies, and a grace period is specified in the promissory note. The maximum Federal Perkins Loan that most colleges can award to an undergraduate is $4,000 per year. In order to distribute limited funds to as many students as possible, most schools make awards that are smaller than the maximum.

Federal Supplemental Educational Opportunity Grant (FSEOG). A federal campus-based grant awarded to students who demonstrate significant financial need. Like Federal Perkins Loan, students do not apply separately for FSEOG--it is awarded to eligible students as part of the aid package at the college. The maximum Federal SEOG that most colleges can award is $4,000 per year. However, due to extremely limited funding in this program, awards are frequently smaller than this amount.

Federal Work-Study (FWS). A part-time work program awarding on- or off-campus jobs to students who demonstrate financial need. FWS positions are primarily funded by the government, but are also partially funded by the institution. FWS is awarded to eligible students by the college as part of the student's financial aid package. The maximum FWS award is based on the student's financial need, the number of hours the student is able to work, and the amount of FWS funding available at the institution.

Federal Family Education Loan Program. This term encompasses two separate loan programs: a student loan known as the Federal Stafford Loan; and a parent loan known as a Federal PLUS Loan. A FAFSA must be filed for Federal Stafford Loan consideration.

Federal Stafford Loan. A long-term, low interest rate loan administered by the Department of Education through private commercial lending agencies (banks, credit unions, etc.). The maximum amount a dependent borrower can receive is $2,625 for the first year of study; $3,500 for the second year of study; and $5,500 for third year and beyond, with a limit of $23,000 for an undergraduate education. The interest rate to first-time borrowers is fixed at 6.8 percent. Students can borrow Federal Stafford Loan funds regardless of financial need. However, if financial need is demonstrated, the federal government may subsidize (i.e., pay to the lender) part or all of the interest while the student is in-school and during grace and deferment periods. If the student does not demonstrate financial need, part or all of the loan will be unsubsidized-that is, the student, rather than the federal government, is responsible for the interest during in-school, grace and deferment periods. An additional cost of borrowing is an origination fee up to 3 percent and an insurance premium up to 1 percent that are deducted from the loan.

Federal PLUS Loan. A long-term, variable interest rate federal loan that is capped currently at 9 percent and is available to the parents of dependent students. Like Federal Stafford Loans, Federal PLUS loans are administered by the Department of Education through private commercial lending agencies. There is no set limit on the amount of Federal PLUS funds that a parent may borrow; however, the maximum loan cannot exceed the student's portion of the cost of education minus any other aid the student receives. Federal PLUS loans are not subsidized, and eligibility is not based on financial need. Repayment usually begins immediately after the entire loan is disbursed. Federal PLUS Loans, like Federal Stafford Loans, have a maximum 3 percent origination fee and 1 percent insurance premium that are deducted from the loan.

William D. Ford Federal Direct Loan Program. A program almost identical to the Federal Family Education Loan Program, except that the federal government is the lender and the funds are delivered directly to the school. If the college the student plans to attend participates in the Federal Direct Loan Programs, he or she will apply for a Federal Direct Stafford Loan and/or a Federal Direct PLUS Loan, rather than a Federal Stafford or Federal PLUS Loan. Federal Direct Stafford Loan applicants must file a FAFSA, and if eligible, must complete a promissory note provided by the college. Federal Direct PLUS Loan applicants must complete an application available at the college.

Institutional Scholarships and Grants. Non-federal gift aid programs administered by the college. Institutional grants are generally based on financial need. Institutional scholarships are often awarded based on particular abilities or skills in areas such as athletics, music or academic achievement. These scholarships are often renewable for each college year, usually contingent on the student continuing to engage in the activity that prompted the award, or, in the case of academic achievement, maintaining a certain grade point average. Unfortunately, there are relatively few scholarship awards available through institutions. In many instances, it is the college that controls the scholarship process, inviting only certain students to become candidates.

Institutional Loans. Non-federal loan programs administered by the college. These loans usually bear low-interest rates and have favorable repayment terms. In many cases, loan payments are deferred while the student is enrolled in school. Colleges have individual application requirements for institutional loans. Applicants should contact the college to learn the types of loans that are available, the criteria that must be met to qualify, and the terms and conditions of the available loans.

Institutional Student Employment. On- or off-campus employment programs, similar to the Federal Work-Study program. These positions may be awarded based on financial need, the student's job qualifications or a combination of the two. In some cases, these positions may be related to the student's field of study. The financial aid office should be contacted to learn what types of student employment are available through the school.

Part IV. State Aid Programs

Various states have different financial aid programs for residents of their own states. To determine the programs available in your state, consult your guidance office or email the department of education in your state.

Part V. Private Aid Sources

Private Scholarships. Non-federal scholarships that originate outside of the college, and generally require the student to file a separate application. Although academic standing or financial need may be conditions for some private scholarships, these funds may also be awarded based on such qualifiers as field of study, religious affiliation, ethnic background, leadership skills, place of residence, or other criteria. Because these scholarships are from private funding sources, the criteria can reflect whatever qualities their benefactors wish to reward or encourage. You should seek out and apply for as many of these awards as you can. High schools, Dollars for Scholars, churches, local businesses, and civic service organizations frequently have scholarship programs. So may the company where a parent works. Information about private awards, including how to apply for these funds, is usually available at the high school or local library.

Private Loans. Like private scholarships, private loans originate outside of the college and usually require a separate application. Some private loans are awarded based on the same factors as private scholarships. Others, particularly those offered through commercial lenders, are approved according to the family's ability to repay the loan. Non-federal loans through commercial lenders are often available only to the student's parents. Amounts, interest rates and repayment terms, and application procedures vary according to the individual loan program. Before considering a private loan, students should be certain they understand their rights and responsibilities under the loan program, including how interest is assessed, when repayment begins, and what repayment options are available.