Nearly every student is eligible for some form of assistance. Here's your primer on the various forms of Federal aid.
The four most common types of aid offered from the federal government are:
- Pell Grant—A needs-based grant of up to $6,495 reserved for students of families with lower incomes that may equate to a low expected family contribution (EFC) rate.
- Stafford Loan (subsidized)—The current interest rates (first disbursed on or after July 1, 2022 and before July 1, 2023) for direct unsubsidized loans are 4.99% (Undergraduate Student) and 6.54% (Graduate or Professional Student). The interest rates are fixed for the life of the loan.
- Stafford Loan (unsubsidized)—Students who may not be eligible for need-based aid may still be eligible for an unsubsidized Stafford Loan regardless of income or circumstances. An unsubsidized Stafford Loan is a federally guaranteed student loan that is not based on financial need. For unsubsidized student loans, interest accrues from the time the loan is disbursed to the school and is the responsibility of the student. This is the key difference between subsidized and unsubsidized
- Federal Work-Study Program—A program where students with financial need can get part-time work, allowing them to earn money to help pay education expenses. In most cases, the federal government pays half of a student’s wage and the school pays the other half.
To determine if you are eligible, schools generally use a formula to determine the EFC. Colleges use various methods to determine whether a prospective student is eligible for any need-based aid. Under each methodology, eligibility is based on the following formula: Cost of Attendance – Expected Family Contribution = Need.
Assets in accounts owned by a dependent student or one of their parents are considered parental assets on the FAFSA. The parental assets may be entitled to a small asset protection allowance. For parents who save more than the allowance, only a maximum of 5.64% of parental assets are counted. This is quite favorable compared to other student assets, which are counted at 20%. Higher EFC means less financial aid.
When a grandparent withdraws the funds to pay for their grandchild’s college expenses, it will be counted as student income on the FAFSA. Student income is assessed at 50%, which means if a grandparent pays $5,000 of college costs it would reduce the student’s eligibility for aid by $2,500. One strategy to avoid this problem: If the student will graduate in four years, a grandparent can wait to contribute until after the student’s third semester of college, since the FAFSA looks at income from two years prior.
It’s important to discover as early as possible how savings, investments, retirement accounts, 529 college plans and income affect eligibility. To do so, you will need to determine:
- Which colleges use which aid forms and formulas
- How your family’s finances will be assessed under each formula and, therefore, at each college
- If the income of a parent will disqualify a child for need-based aid regardless of the amount and type of assets or who owns them Application process (the FAFSA and CSS Profile)
The process of applying for need-based financial aid for college begins by students and parents completing one or two financial aid forms, the FAFSA and/or the College Scholarship Service (CSS) Profile. Any college or university that awards federal student aid must require that students complete the FAFSA in order to determine eligibility for federal aid (it works for most state aid, too). Most colleges and universities nationwide use the FAFSA as their sole application for need-based financial aid. Students applying for aid at those colleges only need to complete the FAFSA. However, there are about 250 colleges that require the CSS Profile to be completed in addition to the FAFSA. Those colleges use the CSS Profile to assess the student’s eligibility for their own institutional aid dollars.
Typically, “Profile” colleges are very selective private colleges, but the University of Michigan at Ann Arbor, Georgia Institute of Technology and the University of North Carolina at Chapel Hill are examples of flagship state universities that require the Profile, not just the FAFSA. There is also a group known as the 568 Presidents’ Group, which was formed by a group of 28 college and university presidents for the purpose of assessing students’ ability to pay for college using a “consensus” methodology. The 568 Presidents’ Group schools also require students to complete the CSS Profile, but they treat students’ assets and parents’ home equity differently (more favorable to families) than the institutional methodology. Thus, there are two financial aid forms but three methodologies for calculating a student’s EFC.
Helpful websites to learn more about financial aid and college savings:*
- TIAA.org/public/offer/products/529-educational-savings
- ablenrc.org
- bigfuture.collegeboard.org/pay-for-college/payingyour-share/expected-family-contribution-calculator
- collegeboard.org
- collegesavings.org
- finaid.org
- studentaid.gov/h/apply-for-aid/fafsafinaid.org
There are also private loans that may be available to students. These loans can be obtained through banks, Sallie Mae or online. Generally, private loans are more expensive and have higher interest rates, so you may want to consider federal student aid first.
*Please note that we do not endorse nor are affiliated with the third-party websites, but are providing them merely as examples from which you can obtain additional information. We are not responsible for the information or services they provide.
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