How to Finance College with Loans, Grants and Scholarships
Financial aid is government assistance designed to help students finance books, room and board, school supplies, and tuition. Currently, there are nine types of federal financial aid options and over 600 state-based educational funding options.
Pell Grants and Stafford Grants are two types of federal educational funding. Another type of federal funding known as a Perkins Loan is a need-based student loan furnished to qualified students by the United States Department of Education.
Merit-Based Versus Need-Based
Financial aid is conventionally classed as either need-based assistance or merit-based assistance. Merit-based aid might be a university scholarship awarded for applying students with special abilities or especially high SAT scores. Need-based aid, on the other hand, is granted based on the applying student's financial circumstances. For need-based loans, the Free Application for Federal Student Aid (FAFSA) form is employed by incoming students to tabulate need at the state, federal and university levels.
Subsidized Student Loans
In President Obama's 2012 State of the Union address, Barack Obama drew notice to the increasing cost of college tuition. In theory merit-based and need-based financial aid seeks to counteract tuition increases, but some fear saddling students with loans into their 30s is no solution.
According to the National Postsecondary Student Aid Study, one quarter of exiting four-year undergraduates accrued more than $30,000 of debt. Subsidized student loans aim to lessen the post-graduation economic toll of attending college.
Federal Direct Subsidized
Many experts note that federal direct subsidized student loans have preferable terms to federal direct unsubsidized student loans. (1) Federal direct subsidized student loans are furnished to financially needy students by the university or college that the student is applying to.
The core idea behind a federal direct subsidized student loan is that the federal government will cover the interest rate on the loan. Importantly, such a promise by the United States Department of Education has the following caveats: the student must be in school at least half-time; interest will be covered for the first six months upon leaving school (aka, grace period); and, interest will be covered over a deferment period of the student's choosing. (1)
All students enrolled at least half-time in a college or university awarding either certificates or degrees are eligible for federal direct subsidized student loans. Loan experts note that the interest rates for federal direct subsidized student loans tend to be extremely competitive for all students. (2) That said, the above terms vis-a-vis federal direct subsidized student loans still apply.
Federal Direct Unsubsidized
Federal direct unsubsidized student loans are intended for graduate and professional students seeking higher degrees. The interest rate for a federal direct unsubsidized student loan is also competitive. The difference between a federal direct unsubsidized student loan and federal direct subsidized student loan is that the former is typically awarded to graduate students and is unsubsidized by the US Department of Education.
Applying students, however, should be aware that both federal direct unsubsidized and subsidized student loans have a mandatory loan fee affixed to them. That said, both subsidized and unsubsidized loans can be applied to books, tuition, room and board, and other miscellaneous charges associated with attending college.
Federal Pell Grant
What is the difference between a federal loan and a federal grant? Both types of financial aid are provided on behalf of the US Department of Education, but a federal grant does not need to be repaid. (3) Another difference between a federal direct loan and Pell Grant is that the latter's maximum amount is $5,550 whereas student loans can exceed $20,000 per year. Federal educational loans and grants, however, can both be applied to myriad costs of attending college.
Students can apply for Pell Grants via FAFSA. Successful applicants are determined based on financial need. Moreover, successful applicants must demonstrate their willingness to attend college at least part-time over the course of an academic year. The experts at FAFSA inspect the student's independent yearly earnings and net assets when determining Pell Grant amounts for needy individuals. (3)
PLUS Loans are awarded to professional and graduate students and can be employed to defer educational costs for parents of dependent undergraduate students as well. The core conditions for a PLUS Loan are as follows: the lendee (e.g., the needy student) must not have a poor credit history; the PLUS loans will have a fixed interest rate; and, the total loan amount will be the total cost of college attendance minus other financial aid. (4)
A PLUS loan is typically granted to professional or graduate students, but PLUS loans are also distributed to biological, adoptive or step-parents of dependent undergraduate students. (4) Importantly, the dependent undergraduate student must be enrolled at least part-time over the course of an academic year and the parent must meet minimum financial requirements like a non-adverse credit history.
Federal Perkins Loan
A federal Perkins Loan is one form of need-based assistance furnished to students via the United States Department of Education. The fixed interest rate of a federal Perkins Loan is very low. The repayment terms of a federal Perkins Loan are especially generous: students have up to a decade to pay off their student debt.
The loan limit for a federal Perkins Loan is $5500 whereas the lifetime loan limit on a federal Perkins Loan is $27,500.
Federal Work Study Program
The Federal Work Study Program helps incoming college students defer the cost of post-secondary education. Over 3,000 institutions nationwide have opted into the Federal Work Study Program, which provides financial aid for part-time work programs. The Federal Work Study Program is predicated on the financial need of the applying student. The student must be enrolled at least part-time and be a permanent resident of the United States.
Most college scholarships are merit-based rather than need-based. A scholarship, like a grant, doesn't need to be repaid in the future. College scholarships are normally granted for outstanding high school GPAs or stellar ACT scores. For instance, a robust ACT score will normally garner financial aid from most colleges.
Grants and Loans
The foregoing information should help students differentiate between grants and loans. The latter need to be paid back, but loans may be subsidized by the US Department of Education. Interest rates for undergraduates tend to be very competitive and federal financial aid has generous repayment terms.
Grants and scholarships can be used to defer costs associated with college but, unlike loans, do not need to be paid back.