By The Princeton Review
Two students apply for federal student aid – a mediocre student and a high–achieving student. Which applicant will receive a higher award?
A.) The mediocre student
B.) The high-achieving student
C.) The student who applied first
D.) The better-looking student
E.) Cannot determine from the information given
Are you holding an intense internal debate, vacillating between C and D? Well, you might be surprised to learn that the correct answer is actually E. Federal student aid is need–based. That means it doesn't discriminate by any factor apart from need. Eligibility is based solely on the assets and income of the prospective student and his or her family. Factors such as test scores or athletic ability have no bearing on any aid designated need–based.
On the other side of the coin is merit–based aid. Merit includes a variety of categories: academic, artistic, athletic, and the list goes on. Scholarships are the most common type of merit–based aid (though some do have a need-based component). Assuming need is not a condition, a student with extensive assets and income is just as entitled to a merit-based award as a student with limited assets and income.
For the far majority of students, the chief source of financial aid will be need–based aid. However, it's important to educate yourself on the variety of assistance available. Regardless of your economic situation, take every opportunity to lessen the financial burden.
How Does Federal Student Aid Work?
Trying to understand financial aid can induce headaches, anxiety, and frustration. If it's not the acronyms (EFC, SAR, FAFSA), it's the vocabulary (unsubsidized, unmet–need, institutional grants). Let's take a step back and look at the big picture.
The intent of federal student aid is to make up the difference between (1) what your education costs and (2) what you can afford to pay. This equation clearly paints the picture…
Sound simple? Well, it is and it isn't. Financial Aid officers prefer using other terminology to express the same meaning. Here is exactly the same equation written using financial aid jargon:
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The cost of attendance refers to the total cost of tuition, room & board, insurance, books, transportation, and other fees. Be cautious not to confuse tuition with cost of attendance – one will be higher than the other!
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Your estimated family contribution (EFC) is the amount of money the federal government has determined you and your family can afford to contribute toward your education. Uncle Sam determines your EFC from your answers on the Free Application for Federal Student Aid (FAFSA).
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Your NEED is the amount that remains to be paid. If you are lucky, the schools to which you apply will "meet" all of your need with grants, loans and work–study. Any left–over amount is called unmet need.
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Remember this simple equation and you can safely navigate the jargon–infested federal student aid waters.
Federal Student Loans
Most families borrow money to help defray the cost of education. In fact, the greatest portion of federal student aid comes in the form of loans.
Loans may not be as attractive as grants or scholarships, but don't dismiss them outright. A government–sponsored loan is one of the best deals in town.
Perkins Loans are offered to undergraduate and graduate students with exceptional financial need. Perkins loans are subsidized, meaning the government pays the 5% interest while you attend school. (In other words, you borrow $1,000. After a year, the loan's value is $1,050. The government pays the $50 interest; you still owe $1,000.)
Repayment begins nine months after you graduate, after you leave school, or if you drop below half-time status.
Stafford Loans are the most common type of aid conferred to undergraduate and graduate students. They come in two varieties: subsidized and unsubsidized. All students with need may receive unsubsidized Stafford loans.
The interest rate on a Stafford loan changes each year, but the rate is capped by the federal government. Repayment begins six months after you graduate, after you leave school, or if you drop below half-time status.
Parent PLUS Loans are for parents of dependent undergraduates only. They have reasonable, fixed interest rates (those disbursed after July 1, 2006), but they're higher than the rates for both the Perkins and the Stafford. Repayment of these loans begins 60 days after the money is disbursed.
Parents may borrow up to the cost of attendance minus all other aid. Unlike the Perkins or Stafford loans, eligibility relies on a good credit history. If a parent cannot secure a PLUS loan, the student may qualify for an increase in the limit to their unsubsidized Stafford.
Graduate PLUS Loans are available to graduate students only, but resemble Parent Plus loans in most other aspects. Before you can take this loan, you must first max out the Stafford loan.