Types of Financial Aid and Application Process
Financial aid may be classified into two types based on the criteria through which the financial aid is awarded: merit-based or need-based.
Student aid is awarded as grants and scholarships, low-interest, government-subsidized loans, and education tax benefits.
In the United States, to apply for most student aid, a student must first complete the Free Application for Federal Student Aid (FAFSA). The application must then be submitted either electronically to the United States Department of Education, using the Department of Education's website, mailing a paper form, or, as the law also authorizes, by getting professional assistance from a fee-based preparer. A student's aid application (FAFSA) may be submitted to the Department of Education as early as January 1 before the summer or fall when the student enrolls and must be re-submitted with updated information each year. The FAFSA typically consists of 130 questions regarding a family's financial situation. The Department of Education processes each request and tells a student how much the federal government expects their family to contribute toward paying for college—the Expected Family Contribution (EFC). However, an EFC is not necessarily how much a student will pay for college — aid can reduce an individual's cost. Then, the post-secondary institutions to which a student applies, determine how much federal, state, and college-specific aid a student will receive. An individual's student aid award is likely to vary from institution to institution.
Grant programs include the Pell Grant and the TEACH Grant. Federal loan programs include the Federal Direct Subsidized Loan and Federal Direct Unsubsidized Loans, the Perkins Loan and the Parent PLUS Loan and Graduate PLUS. Unlike with federal grants, a borrower must repay the loan amount and any interest. Federal loans offer lower interest rates and better repayment terms than private student loans from banks and other financial institutions.
Students (or their parents/guardians) can take advantage of education tax benefits to ease the financial burden of attending college. Education tax benefits added up to more than $6.8 billion in 2008–2009. Education benefit programs include the American Opportunity Tax Credit and the Lifetime Learning Tax Credit. These programs reduce a student's (or his or her parents'/guardians') taxable income while the student attends college.
In addition to federal student aid, students may be eligible for state-based aid. States provide students more than $10.2 billion of aid every year. Each state aid program is different. Usually, a student must reside and attend college in the state providing his/her aid. In some cases, a student can spend state aid on colleges in neighboring states.
Most aid is provided on a first-come, first-served basis so it is essential that students prepare and submit their aid applications in as close to January 1 as possible. The aid "window" stays open 18 months in case student's financial circumstances change and require adjustment to their aid application.
The application — approximately 130 questions each year — considers household size, income, assets, the number in college and other financial factors to determine a student's aid eligibility and an expected family contribution (EFC). Institutions use EFC to guide their decision about how much need-based financial aid to award a student. The EFC also takes into consideration any participation in college savings or pre-paid tuition plans. In the past, financial aid officers weighed pre-paid tuition plans more heavily than other 529 college savings plans when determining a student’s eligibility. In February 2006, Congress passed legislation to treat both types evenly.
Read more about this topic: Student Financial Aid
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