Applying for College Financial Aid: Financial Aid 101

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People tend to use the term financial aid to refer to any sort of outside money that your student may receive to help pay for his education. However, aid may come to your student based on merit, as in the case of many scholarships, or because he and you lack sufficient resources to pay the full amount at the time the payment is due.

And it is this second category, the need-based one, that best fits the definition of true financial aid, or assistance that you and your child receive to help pay for higher education costs. If you're fortunate, some or all of that assistance may come to you in the form of outright grants, or money that carries only the string of satisfactory academic achievement from your student, rather than any work obligation or repayment plan. The vast majority of money, though, is not given outright, but rather through work-study and student loan programs.

Knowing Where The Money Comes From

Loans, work-study money, and need-based grants are available from a variety of sources. Among these are the following:

• United States government: Uncle Sam provides outright grant money (through Pell Grants and Federal Supplemental Educational Opportunity Grants), low-rate interest loans (through the Perkins Loan program), and federal work-study funds. It also offers access to and guarantees for other types of loans, such as Stafford and PLUS loans.
• State governments: Depending on the state where you live, tuition grants may be available for your in-state student and, occasionally, for a state resident attending an out-of-state school.
• Colleges and other postsecondary educational institutions: Very often, schools have money available to help offset the costs for their students. These funds are typically awarded based on need, merit, or some combination of the two. The funds available and the basis for awarding the funds vary significantly among colleges.
• Private lenders, such as commercial banks, savings and loan associations, and credit unions: These institutions lend money directly to you or to your student through a variety of loan programs, some of which the federal government guarantees.

Finding Out What's Available

You can choose from a wide variety of financial aid programs, but be aware that they come with an even broader expanse of qualifying rules and regulations. Although I can't possibly cover every program and every requirement, the following subsections highlight the most common forms of financial aid available.

Grants

A grant is free money (it doesn't have to be paid back), and it is often one of the component parts of a financial aid award. This money may come from the federal government in the form of Pell Grants or Federal Supplemental Educational Opportunity Grants (FSEOGs), which are awarded solely on need. Grant money may also come from the schools themselves, which may choose to award money based on need, merit, or a combination of the two.

• Pell Grants: These need-based outright grants — given by the federal government — currently are available in amounts up to $5,350 per academic year (in 2009-2010, adjusted annually as a result of federal appropriations — and not always upward). They're generally only for undergraduate students who haven't yet received a bachelor's or professional degree. If your child qualifies for a Pell Grant in any year, he will receive it. These grants aren't subject to any work requirements or loan repayments, and they may be used to pay for any portion of the college's established cost of attendance, including room and board, books, transportation, and so on.
• Federal Supplemental Educational Opportunity Grant (FSEOG): The federal government awards this grant to undergraduate students with exceptional financial need (the need requirements here are even stricter than for Pell Grants). These grants, which presently range from $100 to $4,000, don't need to be paid back, nor is there any work requirement.

  Generally, students who qualify for a FSEOG also receive a Pell Grant; however, even if your student qualifies for a FSEOG, he or she may not receive any money from this program. Funds are extremely limited and are awarded to the schools themselves, which then determine which students will receive the available money and in what amounts.

Loans

As college costs soar and grant amounts remain fairly constant, loans have become the meat-and-potatoes measure that parents and students use to plug funding gaps. Some of these loans come directly from the federal government. Others come from private sources but carry federal guarantees so that, if the borrower doesn't pay the amount due, the lender isn't left holding the bag. Still others come from private sources and carry no guarantees (for which you'll pay a higher rate of interest) but may provide you with some added flexibility.

If you need to borrow some money to pay for college costs, here are a few types of loans you should be familiar with before you begin:

• Federal Perkins Loans: These low-interest loans are available to both graduate and undergraduate students with significant financial need. Your student's school is the lender (albeit with government funds), and you or your student must repay these loans to the school.

  A student may borrow a maximum of $4,000 a year as an undergraduate and $6,000 a year as a graduate student; individual schools determine actual amounts lent based on the funding they receive from the government and the number of students who can demonstrate need. Interest on this loan is paid by the federal government while a student is attending school and for nine months after that student leaves school. Loan repayments are made over ten years, are the responsibility of the student, and don't begin until after your student has left school or drops below half-time status.

• Subsidized Stafford Loans and Unsubsidized Stafford Loans: Need is one of the criteria for subsidized Stafford Loans, as is filing a FAFSA. But all students may borrow under the Stafford Loan program. These relatively low-cost loans are available for both undergraduate and graduate education. Yearly and lifetime loan ceilings vary, depending on whether a student is a graduate student or an undergraduate student and whether he is financially independent of his parents.

  Interest accrues on the loan amounts over the life of the loan. Loan payments may be made while a student is in school, but you're not required to do so; the unpaid interest, however, continues to accrue and add to the amount of principal that's been borrowed.

  The major difference between a subsidized and an unsubsidized Stafford Loan is that the federal government pays the interest on a subsidized loan while a student is still enrolled in school and for a short deferral period after graduation. Stafford Loans are provided through two sources:

• The Federal Family Education Loan Program (FFELP): This program uses private lenders while providing federal loan guarantees. If the student defaults, the government will pay back the lender for the unpaid amount.
• The Federal Direct Student Loan Program (FDSLP): The government lends the amount to students, not parents (typically making payments directly to their universities), and is the student's responsibility to repay.
• Federal Parent Loan for Undergraduate Students (PLUS): You may choose to use these loans to plug the gaps between what you have saved, your student's actual financial aid award, and the real dollar cost of attending a particular school. These loans carry with them a higher interest rate than either the Perkins or Stafford loans, repayment begins 60 days after the loan proceeds are disbursed, and the repayment term is 10 years. Unlike Perkins or Stafford loans, these loans are the parents', not the student's, responsibility. Loan amounts may be as great as the full cost of attendance at a particular school, and the loans may be obtained either through the FFELP (private lenders) or directly (from the government).
• Private loans: These loans are available to parents from private lenders based on the lender's own criteria. Because these loans have no federal guarantees, they generally carry higher interest rates (similar to those on car loans or other sorts of consumer debt). They may be used to pay for any expenses that you haven't already covered through other forms of funding, whether savings, student loans, or PLUS loans. Because these loans aren't part of any federal program, repayment terms may be more liberal than for the federal loan programs, including the ability to defer payments until after your student has graduated, although interest begins to accrue on the amount borrowed as soon as you receive the money.

Work-study

If your student is able to juggle his schoolwork with employment and has demonstrated financial need, the federal Work-Study Program may be the answer to your prayers. This program provides part-time employment for eligible undergraduate and graduate students through their university or in public service work in the community. These jobs generally pay at least the minimum wage, and earnings are subject to federal and state income taxes; however, Social Security and Medicare taxes (FICA) are not withheld. Although the federal government provides the funds for this program, they're allocated directly by the individual schools based on the need of a particular student and the number of students who can demonstrate need.