Financial Aid Doesn't Always Mean Free

As students are reviewing their financial aid award letters and getting ready to decide which college they'll attend in the fall, it's important to keep in mind that financial aid doesn't always mean free. The term encapsulates two types of aid: One that is free (grants and scholarships) and one that has to be paid back (loans). This can be confusing for students and parents as the two types of aid are almost always lumped together in financial aid packages. So when you're comparing your financial aid award letters, it's important to differentiate between aid that is free and aid that must be paid back. To do this, we must first define the two kinds of aid:

Gift aid: Financial aid that does NOT need to be paid back

Federal grants. Grants are typically awarded on the basis of need. Federal Pell Grants are usually awarded to undergraduate students. Pell Grants are based on a combination of financial need, college costs and enrollment status. Federal Supplemental Educational Opportunity Grants (FSEOG) are awarded to undergraduate students with exceptional financial need. The amount of the award is determined by the college's financial aid office, and it also depends on the student's financial need and funds available at the university. Pell and FSEOG aid doesn't need to be repaid.

Specific grants are also available for students who intend to teach in a public or private elementary or secondary school, as well as for students whose parents or guardians were members of the military and died during their service in Iraq or Afghanistan after Sept. 11, 2001.

Work-study. The Federal Work-Study Program is campus-based and provides part-time jobs for students with financial need. Your school will provide work hours based on your award amount, class schedule and academic standing. Although these programs provide work experience, they also cut into free time and extracurricular activities.

Scholarships. Some states, local governments, colleges, community organizations, private employers and other organizations award scholarships based on academic ability or other factors. Scholarships don't need to be repaid. The NerdScholar Scholarship Search Tool helps you find the information you need. While there are plenty of scholarships, they are also competitive. Invest time and energy into the application process to avoid leaving any money on the table.

Loans: Financial aid that MUST be paid back

Now, let's look at other financial aid options. There are two federal student loan programs. The Federal Perkins Loan Program is a campus-based program that provides low-interest loans. The amount of the award depends on the student's financial need, the amount of other aid the student receives and the availability of funds at the student's college.

Federal loans. The William D. Ford Federal Direct Loan Program allows students and parents to borrow money at low interest rates directly from the federal government. The program includes subsidized or unsubsidized federal Stafford loans and Direct PLUS loans. Subsidized loans are based on financial need and are available only to undergraduate students. The federal government pays the interest on subsidized loans while the borrower is in college and during deferment, a period of time when the borrower is not required to make payments on a loan. Unsubsidized loans are based on the student's education costs and other aid received. The borrower must pay all accrued interest on unsubsidized loans. The low interest rate on federal student loans is especially valuable over time. It is important to note that borrowing any money -- at a low interest rate or not -- requires repayment for many years after graduation.

Private loans. Finally, if grants, scholarships and federal loans still leave you with a gap in your college costs, consider private loans. If you take this route, borrow responsibly. Private loans have higher borrowing limits, but they also usually have higher interest rates.

So, how do you get gift aid and loans?

To apply for aid, always start by completing the Free Application for Federal Student Aid (FAFSA), regardless of your financial situation. Colleges use this application to put together your financial aid package. NerdScholar's FAFSA Guide can help answer questions you have along the way. Filling out the FAFSA is a simple process as long as you and your parents, if needed, have the necessary documents.

There are two other important factors to take into consideration when thinking about financial aid. First, the estimated cost of attendance (ECA) describes how much it will cost to attend your school. This total includes tuition, room and board, textbooks and personal expenses. You should make this estimate to help you figure out your individual living expenses while in school.

Next, the estimated family contribution (EFC) explains how much your family is expected to pay. This estimate is based on taxed and untaxed income, your parents' jobs, assets, benefits, family size and how many of your siblings are enrolled in college.

Subtract what you and your family will pay from your estimated costs and you'll get an idea of how much financial aid you need. Discuss these estimates with your parents and financial aid office. Going over these figures will help you understand your financial need and how much aid you should accept to pay for college.

More options

States. Your state government may also provide aid. Some states offer scholarships, grants, loans and other aid to state residents. To find out more, visit your state's website, as well as those of states where you plan to attend college.

Colleges. Colleges also provide aid. Students should contact the financial aid offices at the schools they are considering for more information. Some colleges offer merit scholarships to qualified students who have shown that they can't afford the school's full price.

To learn more about some of the finance terms used in this article, check out the NerdScholar Finance Glossary for Students.

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