Types of Financial Aid

Financial aid is actually a broad term for a wide variety of scholarships, discounts, and subsidies that can make attending college more affordable. It's important to understand the differences among these types of aid. One distinction is that of the basis upon which the aid is awarded:

A. Need-based aid. Put simply, "need-based" financial aid is awarded to students who demonstrate financial need. If only it were so simple! The complexity enters the picture as colleges and families try to determine which students have need, and how much that need is. Never, never, never assume you will not qualify for need-based aid. Filing the application may be time-consuming, but some private colleges award some sort of financial aid to over 85% of their students. Unless your name is Bill Gates, or you have a back yard full of oil wells, it doesn't hurt to apply! At least two forms are generally required:

1. The FAFSA. The Federal government has developed a process to collect information about each student and his or her family's resources , all of which leads to a dollar amount which is considered to be the student's and/or family's expected contribution toward the cost of college. The family completes the FAFSA (Free Application for Federal Student Aid) with information about their financial resources. Further information, as well as information about filing on-line is available at: www.fafsa.ed.gov

The FAFSA must be filed after January 1 for the coming year, and generally requires information from the most recent federal tax return.

2. Individual College Applications for Financial Aid. To supplement the information provided in the FAFSA, many colleges also require an additional application that is specific to the college. While most colleges use the FAFSA methodology in calculating financial aid, many use other formulas in making final determinations. Most colleges will have this form available at their web site.

Once the College has determined how much the student and family can be expected to contribute to the cost of the student's education, that amount is subtracted from the total cost. This total cost includes tuition, room and board (either in a college facility or the cost of private housing if the student will not be living at home), books, travel, and incidentals, including the cost of a personal computer. The amount of difference (if any) is the student's "need."

Some colleges are committed to fully meeting each admitted student's "need" with financial aid. Other colleges admit that there is sometimes a "gap" between the financial aid awarded and the amount of family contribution. This information is often available by a close reading of the college's financial aid policies, or in summaries of financial aid awards provided by the major college comparison publications.

B. Merit aid: Merit aid is awarded on the basis of the student's ability alone. The student does not have to demonstrate financial need to receive merit aid. Merit aid includes aid based on academic talent, athletic talent, or other personal characteristics. As colleges continue to compete for talented students, the amount of merit aid being awarded to students is increasing. A careful reading of the college's financial aid policies will reveal whether the college awards merit aid, and on what basis. Many colleges have clearly defined criteria based on high school grade point average, SAT/ACT scores or other academic indices published in college marketing material. Some merit aid is earned solely upon the high school record; other scholarships require that the student maintain a particular grade point average each year in order for the aid to be renewed.

Terms of Aid

A second way to distinguish different types of financial aid is whether it has to be repaid or earned. Colleges typically provide financial aid in some combination of the following forms:

A. Grants: Grants are financial gifts; they do not need to be repaid. Obviously, the greater the proportion of the financial aid award that consists of grant, the better. Merit aid is nearly always grant aid.

B. Loans: Loans must be repaid, usually with interest. Student loans have lower than market interest rates for those students who demonstrate financial need. The federal government makes up the difference between the low rate and market rates. Generally, students do not have to begin repaying student loans until 6 months after they leave college, and they make take up to 10 years to repay the loans. Students who do not demonstrate financial need may also borrow for college, but at regular interest rates. Parents are also eligible to borrow money at discounted rates in order to pay a child's tuition.

C. Work Study: For some students, a portion of their financial aid award will be in the form of eligibility for federally subsidized work study jobs. This means that they must work at a college sponsored job to earn that portion of the award. It does not need to be repaid, but the student will not receive that portion unless he or she works for it. Colleges benefit from having work-study eligible students because the federal government pays a portion of their wages.

Sources of Funds

Finally, another way to think about financial aid relates to its source.

A. Federal: The U.S. Government funds Pell Grants (yearly grant aid based on demonstrated need), subsidize loan interest (although the loan itself is usually from a traditional lending institution), and subsidizes work study wages. Federal aid is entirely based on financial need, and eligibility is determined by the FAFSA filed by the student and the family.

B. State: Some states award grants to students who attend institutions within the state; some states even award grants to students attending private institutions within the state. Students should speak with their high school guidance counselors to determine what state grant aid may be available, and how to apply for it.

C. Institutional: Colleges may also dedicate institutional funds to financial aid, either on the basis of merit or demonstrated need. The majority of institutional aid comes from private colleges that draw upon their endowment income to fund these awards. State institutions may also award merit aid to particularly strong students.

D. Local/private entities: We've all heard stories about foundations or organizations who award scholarships to worthy students, to left-handed students, to students who are the children of veterans, or this sort of thing. This form of financial aid is the most difficult to identify. High School Guidance offices may have lists of local groups that award grants. A search of the Internet will yield dozens of web sites with links to private scholarships. One such site is www.fastweb.com. However, BEWARE. There are plenty of groups out there who will charge you money for this information, and they are rarely worth the investment. Most private scholarships are small: $100--$500. It's impractical to count on this source to pay for a college education. It may be nice "icing on the cake," but the best place to start is with the FAFSA and with your college's financial aid office.

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