Approximately 38 million Americans are saddled with student loans, and the number of students in debt climbs with each passing year. In 2012, a whopping 71% of graduates left school in the red on their loans, owing an average debt of $37,172. According to MarketWatch, student loan debt continues to rise at a dizzying rate of $2,726 every second, and research shows that only about 37% of borrowers are actually paying down the principal of their debt. These numbers are in part a reflection of government spending cuts on education, though there are several other factors at play. Tuition cost is perhaps the easiest one to grasp, as the price of schools continues to climb each year. In fact, the cost of an average four-year public education is 40% higher (after adjusting for inflation) in 2015-16 than it was in 2005-06.
Perhaps counterintuitively, as tuition rises, so to do the number of undergraduate and graduate students enrolling in higher education. One inevitable consequence is that, as enrollment rates climb, applications for financial aid increase in lockstep.
What is financial aid? In simple terms, financial aid is any form of funding that a student borrows or is awarded to help fund their college education.
The average amount of aid received was $15,941, a rise of about $4,000 over the last decade.
As more graduating high school seniors, undergraduates, and adult students pursue financial aid, the amount of student loan debt appears destined to rise as well. That said, students should know that they’re not obligated to take on more debt than necessary, and there are many aid sources available that don’t require students to repay any funding. This financial aid overview aims to help students and their families learn more about the student loan borrowing process from beginning to end, so they can be prepared to make smart financial aid decisions.
Step 1: Determine Your Financial NeedContrary to what many students think, the search for college funding should start before you begin applying for scholarships. Informed students know how much they’ll need to borrow from outside sources in order to fully fund their college experience at least a year before they start applying. The amount of money you’ll need is based on the information that you and your family supply on The Free Application for Federal Student Aid (FAFSA). Filling out the FAFSA is an important first step in applying for both federal and institutional financial aid. The following section will introduce you to the FAFSA and its requirements, and explain why it’s so crucial that you fill it out.
Start With the FAFSA
What is the FAFSA and why is it important?
Am I eligible for financial aid without filling out the FAFSA?
Should everyone fill out the FAFSA even if they don't think they need to?
What You’ll Need
- Student Aid Pin: As an additional security measure, the FSA ID replaced the Federal Student Aid PIN as a mandatory identification credential. Your FSA ID is used to update or make any changes to an existing FAFSA application, link and import existing federal tax information into your application, and electronically sign the FAFSA. Students and parents can apply for an FSA ID at anytime, though they’ll also be prompted to do so upon starting the FAFSA application. Parents of dependent students who plan on signing the FAFSA application will need their own FSA ID, which can be used across applications for multiple children. Students who already have a student aid PIN may link existing information to their new FSA ID during registration. If students have forgotten their sign-in information, they can create a new FSA ID. FSA ID passwords expire every 18 months unless changed.
- Social security number: Students must provide an accurate social security number, as well as their parents’ social security numbers (if dependent), to apply for FAFSA. Undocumented students will not have a social security number, and many are ineligible for federal aid. These students may be eligible for state or college financial aid though, and should consult with their high-school counselor or their chosen college’s financial aid office. A potential exception are students labeled as Deferred Action for Childhood Arrivals, or DACA. This status is given by the U.S. Citizenship and Immigration Services (USCIS) office, and these students may have a social security number; qualifying DACA students do not need their parents’ social security numbers to apply for FAFSA.
- A list of the schools you are interested in attending: When applying for FAFSA, students are allowed to submit up to 10 schools for which they’re interested in applying (acceptance is not required and no firm decisions need to have been made). Students who plan on applying to a different school at a later date can sign in to their existing application and add a new school code, which will overwrite another school selected for removal. Schools listed on the FAFSA will automatically receive a student’s application, and they can use this to determine if a student qualifies for any school-based aid.
- Tax records: Tax (income) information must be submitted for the tax year previous to the academic year for which the student is applying for aid. Students who have not yet filed taxes can estimate their tax amount for the required year. Students who have already filed may be able to import information digitally using the online IRS data retrieval tool. Tax records include federal tax information and returns, including IRS 1040, 1040A, 1040EZ, and W-2 information for students (and their spouse if married) and parents, if a student is considered dependent. If applicable, tax information must also be provided for foreign tax returns, as well as tax returns for U.S. territories, including Puerto Rico, Guam, American Samoa, and the U.S. Virgin Islands.
- Records of untaxed income: Untaxed income, which must also be provided for consideration in the FAFSA financial need algorithm, may include any child support, interest income, veteran noneducation benefits, and other assets that may or may not apply to an individual. Information must be provided for students and their parents (if dependent).
- Records of all assets: Assets are any valuable property owned by a student (and their parents, if dependent) that could be used to pay for debts and other financial commitments. FAFSA-requested asset information includes records of cash; savings and checking account balances; any investments, including stocks and bonds and real estate (NOT including the home in which a student or parents reside), and any related business and farm assets.
- Driver’s license number: A student’s driver’s licence number is requested on the FAFSA. You can skip this question if you don’t have a driver’s license.
How Your School Determines Your Financial Need
Cost of attendance (COA) is the calculated total amount you’ll pay for the school year (usually fall and spring semesters), and includes tuition and fees, room and board, school supplies, and other related fees. Most two- and four-year colleges will calculate your COA, which is the first factor considered when a financial aid office is determining how much aid you’re eligible to receive.
Expected Family Contribution (EFC) is calculated as an index number based on the financial information provided by students (and their parents) on the FAFSA application. Federal aid administrators subtract a student’s EFC from their COA to establish a student’s financial need for federal assistance. Students are not eligible to receive more financial aid than their financial need dictates. For example: if a student’s COA is $20,000 and their EFC is $6,000, then their financial need is $14,000: $20,000-$6,000 = $14,000.
Step 2: Know Your OptionsOnce you’ve determined how much you and your parents or guardians can afford to put towards college, the next step is obtaining financial aid. Many students miss valuable financial aid opportunities because they’re not aware of or don’t take the time to search out the various forms of aid they can receive. This section of the financial aid overview aims to provide students with a thorough understanding of the different types of financial aid available. Many students will qualify for and receive more than one type of financial aid if they apply for FAFSA.
Sources of Financial Aid
|Institutional Scholarships and Aid||Institutional scholarship and grants, often called merit awards or scholarships, are any financial awards not given by the federal government. This includes aid given by colleges to graduate students and undergraduate students. Scholarships are awarded based on specific achievements or other criteria (such as heritage or military service), and may or may not depend on a student’s financial need. Institutional grants may include state grants, college grants, and private grants, many of which can be found online (for example, most states have a higher education website with information on available scholarships and aid). Students are not required to repay scholarships or grants, assuming all associated qualifications and terms of the agreement are met.|
|Federal Aid||Federal aid is offered by the U.S. Department of Education and includes grants, loans, and work-study programs. A full description of all these options can be found on the Federal Student Aid website. Federal student aid can be applied towards tuition, room and board, and most other education-related expenses. Thousands of schools accept federal aid, and participating colleges have a federal code that can be listed on the FAFSA application. Other types of federal aid include (but are not limited to): funds for serving (or having family who served) in the military, community service programs like Americorp, and educational vouchers for former foster care youth.|
|State Financial Aid||Students may also be eligible for aid from their state government. Students can find more information about these financial aid opportunities through their state’s higher education agency, which can be found through the U.S. Department of Education’s state agency directory. Financial aid opportunities vary widely by state, but most offer grants and scholarships that do not need to be repaid.|
|Private Orgs and Nonprofits||Students can apply for thousands of scholarships from a variety of private organizations and nonprofits nationwide. Some are merit-based, others are awarded based on a particular group associations (such as belonging to a particular church or other entity), while others are awarded according to a student’s background (such as minority-based awards). Most scholarship opportunities can be found by searching around on Google; other tools include the U.S. Department of Labor’s career-based database of scholarships.|
Types of Financial Aid
|Scholarships||Scholarships are one of the most popular forms of financial aid because students are not required to pay them back upon graduation. Each year, thousands of different scholarships are made available to students. Scholarships are also often granted to students who choose to study in a particular field, such as a STEM discipline or a teacher in a low-income school district. Low-income students or applicants who belong to underrepresented groups may qualify for additional scholarships. While several full tuition scholarships are available, many scholarships are granted for a much lesser amount, and students will likely need additional financial aid. Students can find a searchable scholarship database at Fastweb, as well as through a simple Google search.|
|Grants||Grants are similar to scholarships in that students are not required to repay anything upon graduation. Where they differ is in how they’re awarded: grants are largely need-based, while scholarships are usually merit-based. Students can find grants at both the federal and state level, though they may also find others through public and private organizations and professional associations. Information pertaining to federal grants can be found on the Federal Student Aid website. For more info on state grants, search your state’s higher education department website. Other grants can typically be found through various outlets online, including Fastweb, and they are often grouped with scholarships. Special college grants are often available to active and veteran military service-members and their families, and the federal government offers Iraq and Afghanistan Service Grants. TEACH (Teacher Education Assistance for College and Higher Education) Grants are also given out by the U.S. Department of Education to students who meet certain qualifications. Graduate students can also often find grants in the form of fellowships, typically given for entering a particular field of study.|
|Federal Loans|| |
A federal loan is money borrowed from the federal government that is invested in your higher education expenses; any federal loan must be paid back, with interest, after graduation. Interest rates are generally lower on federal student loans than on private loans. Current federal interest rates range from 3.76% to 6.31%. Interest is calculated according to a set formula:
Remaining principal balance (loan amount) x number of days since last payment x interest rate factor = interest amount
(The interest rate factor in the equation above can be found by dividing your loan’s interest rate by the number of days in the year)
When it comes to how interest is paid, there are two types of student loans: subsidized and unsubsidized. The federal government pays interest for subsidized loans while the student is in college or while the loan is in deferment, whereas interest rates begin to accrue for unsubsidized loans as soon as it’s borrowed, and the student is responsible for paying this down after graduation.
The U.S. Department of Education offers two federal student loan programs. One is the William D. Ford Federal Direct Loan Program, the largest loan program in the nation, and the one in which the government is the lender. The other is the Federal Perkins Loan Program, a school-based loan program in which the school is lender. Under the Direct Loan program, undergraduates demonstrating financial need are offered subsidized loans, while unsubsidized loans are available to undergraduate, graduate, and professional students, regardless of financial need. By filling out the FAFSA, students automatically receive information on the loans for which they qualify; most students will qualify for some form of federal loan. Federal loan programs also tend to have more flexible repayment options than private organizations.
|Private Loans|| |
These loans are offered by private lenders, typically to students and parents who need more funding than granted by the federal government. While private lenders can offer flexible repayment terms, federal programs tend to offer more cost- and payment-friendly terms. General best practice is to use private loans as a last resort option, after exhausting federal loan, scholarship, and grant opportunities.
When searching for private loans, students should be aware of the interest-to-fee ratio; loans with a low interest rate but with high fees can end up costing more than a loan with a higher interest rate but low fees. FinAid offers a loan discount analyzer calculator, which helps students and families determine the actual cost of loan repayment based on loan fees, interest rates, repayment terms, and other variables. All private loans are unsubsidized, meaning that interest rates begin to accrue as soon as they take out a loan.
Many private loans can be found through banks, credit unions, and other financial institutions, such as Citizens Bank or Discover Student Loans. Credible is one good source for comparing private student loans offered by qualified loan providers.
|Work Study|| |
The federal work-study program provides part-time jobs for both full- and part-time undergraduate and graduate students who demonstrate the financial need for earning money to put towards educational expenses. Students are encouraged to find qualifying opportunities that contribute to the community or align with the student’s field of study. The work-study program is competitive, and students should apply early for awards, which are given on a first-come, first-serve basis.
Jobs may be either on or off campus; those in the latter category are often provided by private nonprofit organizations or public agencies with a civic service focus. Students who attend a private or for-profit school may find additional restrictions or parameters on the jobs they can work.
Students earn a minimum of the current federal minimum wage, but their pay depends on a number of factors, including time of application, level of financial need, and a school’s funding level. Undergraduate students are paid an hourly wage, while graduate and professional students may be paid hourly or by salary. Students receive pay from their school’s financial aid office once a month.
Students cannot work more than the total federal work-study award amount stipulates. Depending on a student’s job, work hours may be assigned by an employer or the school’s financial aid office; both entities must evaluate a given student’s academic schedule and progress before determining their work schedule.
Step 3: Accepting Financial AidReceiving your school acceptance and financial award letter is an exciting time, but it’s not the final step in deciding which and how much aid to accept. Colleges with financial aid determine a student’s total financial award eligibility (including loans, grants, and scholarships) based on a student’s FAFSA application, as well as on past achievements, and then make an offer that a student has the right to accept in full or deny altogether.
Students usually receive a personalized letter from colleges offering a specific amount of financial aid, in the form of a grant, scholarship, loan, or a combination of those. This letter should also include a deadline by which the student must reply in order to receive the aid. Once a student accepts, he or she should contact the school’s financial aid office to find out how and when the aid will be disseminated. Students receiving a first-time federal student loan will be required to sign a promissory note (a written promise to pay the defined sum to the specified lender by a specified date) and complete entrance counseling (may be required to be done in-person but usually takes place online).
Private schools tend to provide the best financial aid packages. According to Sallie Mae, in 2012 private schools awarded an average of $12,000 in merit-based scholarships to 55% of its students; public institutions gave an average of just under $6,000 in scholarships to 35% of its students. It’s important to note that most ivy league schools, however, do not provide merit-based scholarships, simply due to the high levels of competition. Typically, the lower the admission rate, the less likely a school is to offer scholarships.
Any scholarship(s) won outside of a school must be reported by the student to their school’s financial aid office; students who fail to do so risk having to repay the school or government all or a portion of any outside aid. While it’s true that outside scholarships are factored into a student’s financial need, most schools encourage these awards and will apply the scholarship amount toward reducing school loans and work-study time before replacing any grants or scholarships.
Deciding What To Accept
When deciding which types of financial aid to accept, it’s important to understand the pros and cons of each. Scholarships and grants are the best types of financial aid because they do not need to be repaid. However, students are often required to meet certain criteria to keep their scholarships and grants, which typically includes maintaining a predetermined minimum grade point average. Federal student loans are generally considered a smarter long-term investment than private loans. Additionally, students should accept subsidized loans before unsubsidized ones in order to pay as little interest as possible. If federal financial aid can not cover your educational expenses, students should the next consider state- and school-based loans.
When borrowing money, it’s essential to understand the difference between federal loans and private loans. Federal loans are funded by the federal government, and they are generally more desirable than private loans for two important reasons:
- Federal loans usually offer lower fixed interest rates than private loans
- Typically, federal loans offer more flexible repayment plans, including some that are dependent on how much you earn after you graduate (income-based plans)
The following points outline the major differences between federal and private loans:
Federal Vs. Private Loans
|Repayment||Federal loans are not required to be repaid until students graduate, leave school, or enroll for less than half-time. In contrast, some private loans must be repaid while you’re still in school.|
|Interest rates||Interest rates are fixed and usually much lower on federal student loans (unsubsidized undergraduate loans have the lowest rates) than on private loans. Private student loans may have variable interest rates, similar to high-interest credit cards, that will extend and increase the amount that a student owes over time.|
|Subsidized versus unsubsidized||Federal loans come in both unsubsidized and subsidized form. Subsidized loans are best for borrowers, as the government pays interest while you are in school or the loan is deferred. Private loans are never subsidized.|
|Credit checks and cosigners||While approval for a private student loan may require a credit check, credit records are not required for federal loans. In fact, responsibly borrowing a federal student loan can help students establish a solid credit record. Additionally, most federal loans do not require a cosigner (unless the student is a dependent), while many private loans do require a cosigner.|
|Loan consolidation||Once repayment begins, students have the option of consolidating several federal loans into one streamlined Direct Consolidation Loan. While private loans may be able to be consolidated separately, they cannot be consolidated into a Direct Consolidation Loan.|
|Repayment options and fees||Students have several repayment plan options for federal student loans, and they also have the option to temporarily postpone or reduce payments due to pressing financial circumstances. While some private loans may have repayment options, these choices are likely to be more limited across providers. Private loans often do not offer a deferment option.|
|Loan forgiveness||In special circumstances, part or all of a student’s federal loans may be forgiven. For example, the Total and Permanent Disability (TPD) Discharge offers financial relief to those who become permanently disabled. Private loan providers are unlikely to offer any type of loan forgiveness program.|
While it may be tempting to accept as much aid as possible, it’s important to remember that this is money that you need to repay. Students should only accept the amount of financial aid that they need. All students have the right to turn down loans or to request a lower loan amount. Estimate your college and related expenses and have a firm idea of how much money you’ll need to borrow before accepting a loan. Schools usually show you how to request a lower loan figure.
Federal loan programs offer several repayment plans for when a student graduates and begins to pay their loan. The government’s Repayment Estimator calculator can help students determine the best repayment plan for their financial circumstances. Income-driven repayment plans are a good option for students who graduate with high loan payments relative to their current income. Monthly payment amounts are calculated as a percentage of your discretionary after-tax income, with percentages varying based on plan. Students who do not actively choose a plan will be placed on the Standard Repayment Plan, which breaks down your monthly payments in order to pay off loans in 10 years.
Repayment plans are flexible, and students can choose a new plan that better fits their current income needs at any time. All federal loan payments are made to a loan servicer, which is assigned to you at the time of repayment. You can find your loan servicer by logging in to the Federal Student Aid website with your FSA ID.
If you find yourself in a challenging financial situation and can’t afford your payments, be proactive and keep your loans in good standing. There are several options that students can take if they find they’re temporarily unable to afford their monthly loan payments. A simple modification includes changing your payment due date.
If your paycheck schedule doesn’t align with when your payment is due each month, contact your loan service provider and ask them about switching your loan due date; most loan services are willing to accommodate this request.
Students can also opt into a different repayment plan if they find their monthly payment is too taxing. The federal government offers four different types of income-driven repayment plans to help reduce monthly payments, though proof of income on an annual basis is usually required to qualify for one of these plans. Another option is to consolidate your loans. Consolidating all of your federal student loans into one Direct Consolidation Loan allows you to make one monthly payment (for up to 30 years). Note that once loans are consolidated, they cannot be separated back out. While consolidation is in general a beneficial move for most students, you might lose some borrower benefits associated with individual loans (such as rate discounts or cancellation benefits).
If you can’t repay any part of your loan, a last resort is to apply for deferment or forbearance. A deferment allows you to discontinue payments for a specified amount of time. Deferments are often activated if an individual returns to school for at least part-time, enters activity duty military, becomes unemployed, or qualifies for other reasons. During deferment, unsubsidized loans still collect interest. Students who do not qualify for deferment may be approved for a forbearance, which grants a temporary hold or reduction in payments for up to 12 months.
Loan forgiveness may be granted to students who enter specific career fields and/or encounter unfavorable life circumstances. The Teacher Loan Forgiveness program is available to teachers who teach full-time in a low-income school or agency for five consecutive years; this loan forgiveness can be applied to Direct Loans (not PLUS loans) and Federal Family Education Loan (FFEL) Program Loans. Those with qualifying public service jobs, such as with the government and not-for-profit organizations, or in a medical or legal field, may be eligible to have all remaining loan balances forgiven through the Public Service Loan Forgiveness Program after their first 120 payments. Other types of loan cancellation and discharge programs include the Total and Permanent Disability Discharge, Discharge in Bankruptcy, and Perkins Loan Cancellation and Discharge. A full list can be found at the Federal Student Aid website.
Anyone who believes that they qualify for loan forgiveness should contact their loan servicer to discuss their case and formally apply. An exception is the Federal Perkins Loan; in these cases, the school that granted the loan (or the loan servicer appointed by a school) needs to be contacted directly. Schools will automatically defer payments for a Federal Perkins Loan in this case.
Once someone applies for loan forgiveness, he or she must continue to make loan payments until their discharge is approved. If a student has applied for forgiveness for a Direct or Stafford subsidized/unsubsidized loan, some loan servicers can grant a forbearance while a decision on forgiveness is being made.
Financial Aid for Graduate StudentsFederal financial aid is available for graduate students through one of the following federal student aid programs: The William D. Ford Federal Direct Loan Program (Direct unsubsidized and Direct PLUS loans), the Federal Perkins Loan Program, the TEACH Grant, the Federal Work-Study Program, and/or a Federal Pell Grant. It’s important to note that not all graduate and professional schools participate in federal student aid programs, and students should contact their school’s financial aid office to verify eligibility. In addition to federal financial aid, graduate students can also extend their search for scholarships and grants through other private and public organizations, including the U.S. Department of Labor, professional organizations or employers, state educational agencies, and others.
In most cases, graduate students are considered independent and loan applications, including the FAFSA, do not require a cosigner. Graduate students are usually eligible for the same types of loan forgiveness as undergraduate students. There’s an exception for the Teacher Loan Forgiveness program, under which any Direct PLUS loans granted to graduate students or independent undergraduate students cannot be forgiven.
Law and medical students also have access to federal loan programs. Law students can apply for a Direct Unsubsidized loan or a Direct PLUS loan, both of which qualify for the Public Service Loan Forgiveness program, assuming all other criteria are met. Full-time law students may also apply for the federal Work-Study program, although American Bar Association (ABA) standards prohibit students from working more than 20 hours per week. Many lenders also offer loans that are structured to meet the specific needs of medical students. The Association of American Medical Colleges (AAMC) offers medical students an Education Debt Manager guide to help them manage medical school financial aid decisions and debt.
Financial Aid for International StudentsInternational students may find more funding opportunities in their home country than abroad. If you are an international student coming to the United States, you should begin searching for financial aid in your local educational advising center, through your government, a U.S. embassy or consulate, and private organizations, businesses, foundations, or other community organizations. The FastWeb database also offers a searchable online database for other financial aid opportunities offered to international students.
While certain international organizations, including the United Nations and the Organization of American States, offer financial awards, applications are competitive and are usually offered only to graduate students.
Beyond these organizations, the U.S. Department of State’s Bureau of Educational and Cultural Affairs offers about 4,700 graduate students a prestigious Fulbright scholarship each year.
Fulbright students are required to take the TOEFL and GRE or GMAT exams, and they must be on a J-1 visa for the length of their scholarship.
Unfortunately, students studying in the U.S. internationally are not eligible to receive federal aid; however, other government-based funding sources may be available for students from specific countries. To find out what opportunities may be available to you, contact your U.S. embassy, the U.S. Department of State, EducationUSA, or the Agency for International Development.
School-based financial aid for international undergraduates is rare, though some schools offer direct exchange programs with a foreign educational counterpart, and many of these programs include financial aid for international students. You can find a list of schools that offer some financial aid to international students at eduPASS, and students can explore other scholarship opportunities through other resources, including International Education Financial Aid and College Board.
Additional Financial Aid Resources
- Federal Student Aid Program and Resources In addition to a comprehensive financial aid overview, the Federal Student Aid site provides an organized chart of PDF links to workbooks, checklists, fact sheets, and other specific financial aid guides, such as federal student aid for adult learners. Links to videos covering various financial aid topics, such as the process of applying for financial aid and responsible borrowing, are also available.
- Disability.gov’s Guide to Student Financial Aid Students with disabilities will find links to several resources that specifically address their questions and needs concerning financial aid. The College Funding for Students with Disabilities link provides a list of disability-specific scholarships, grants, and fellowships available nationwide.
- Sallie Mae Scholarship Search Sallie Mae, one of the largest U.S. student loan providers, offers a free scholarship search and college planning calculator (in addition to other college preparation resources) with free online registration. Registered students are also automatically entered into a $1,000 monthly drawing.
- College Board Financial Aid Calculators The college board offers a variety of financial aid-related calculators, including a Student Loan Calculator, Student Loan Comparison Calculator, Parent Loan Repayment Calculator, and others. A useful college financial aid comparison tool, which allows students to enter awarded financial aid for up to four colleges, is also available.