College financial aid 101 part II: Types of need-based aid

Before we explore portions of the need-based financial aid universe, I need to make sure you did your homework. Did you fill out your FAFSA form, like we told you to here?

Yep. Now what?

Generally speaking, there are three types of need-based student aid:

  • grants
  • work-study
  • loans

Grants are money that’s given to students and doesn’t need to be paid back. Work-study is money that students earn through a federally subsidized job. Loans are money that needs to be paid back after graduation or the end of schooling.

Let’s talk about grants first, I like free money.

I see you are a sensible person. There are several types of federal grants available, but the most common are Pell Grants, which provided roughly $38 billion[3] in funding to help students in fiscal year 2012.

The general rule of thumb is that a student whose expected family contribution (EFC) calculated from the family’s income and assets on the FAFSA is less than the maximum Pell grant will receive a grant. For example, the maximum grant for the 2013-14 school year was $5,645 – so if your EFC is less than that, you can get a Pell Grant.

Lower EFCs mean larger Pell Grants. Pell grants will be disbursed through the student’s educational institution. Grants are first applied to tuition, fees, room and board; the remainder is distributed directly to the student.

Other points to know about Pell Grants are that they are a mandatory spending program, meaning that if you qualify for one, you get one, without having to worry about there being enough money in the program.  Also, changes to federal law in 2012 capped the number of semesters a student can earn a Pell Grant at 12. Finally, Pell Grants are only available to undergraduate students.

Ok, that sounds good, what’s Work-Study?

Work study is exactly that: the student works at a part-time job while enrolled in college. Grants from the federal government are distributed to schools to fund students with work study allotments.  Sometimes off-campus non-profit or public sector groups also have work-study money to distribute to a student.

Work study jobs ideally relate to a student’s course of study.  Undergraduates are paid hourly and at least minimum wage.  The level of work study funds a student can get is determined by the EFC, the availability of work-study jobs and the amount of work-study available to the college in question. Both graduate and undergraduate students are eligible for work-study.

OK, that leaves loans – there are so many types available and it seems rather confusing.

It is rather confusing – and taking out thousands or tens of thousands of dollars in loans is rather intimidating as well. That’s doubly true because educational loans are one of the few forms of debt not dischargeable in bankruptcy proceedings (something to keep in mind).

Here, we’ll focus on the two types of federal need-based loans – Federal Direct Subsidized Loans and Perkins Loans, which are low-interest loans to meet financial need as determined by the college’s particular cost of attendance and your EFC.  The two programs are quite similar but have some differences in the repayment mechanism. Federal Direct Subsidized Loans come directly from the Federal government.

The interest rate is fixed for the life of the loan at a low rate (currently 3.86 percent for loans that originate before July 1, 2014). A small origin fee is also charged (currently equivalent to 1.071 percent of the loan). Repayment terms range from 10 to 30 years. The amount of subsidized loans for students who are dependents is limited to $3,500 for the first year of school, $4,500 for the second year of school and $5,500 for the third and fourth years of school.

The “subsidized” part of the loan is that the government pays interest on the loan while the student  remains in school at least half time, and for a six-month grace period after graduation. It seems like a small subsidy, but it adds up – a student taking out the maximum amount of loans over a four-year BA program will avoid about $2,150 in interest fees before having to start paying the loans back. These loans are also eligible for income-based repayment after a student completes school, which limits repayments to a fixed percentage of a graduate’s income.[7]

Graduate students are not eligible for subsidized loans – and are charged higher rates (currently 5.85 percent) for unsubsidized loans.  Other students are limited to receiving loans for 150 percent of the expected length of a program – so students need to complete a two-year associates degree in three years to continue receiving loans.

Got it, but you mentioned another form of subsidized loan….

Right. Perkins loans are another version of subsidized loans, open to both undergraduate and graduate students. The interest rate is a flat 5 percent, which is greater than subsidized Federal Direct loans, but there is no interest while a student is enrolled in school half time or for a nine-month grace period afterward.  There is also no origination fee. Limits are $5,500 a year and the repayment period is 10 years. The availability of  both subsidized and Perkins loans depend on the participation of the student’s college or university participating in that particular program.

That’s it?

Not really. That’s just a really quick look at some of the major federal need-based aid programs. There are numerous other programs at the state and college level. So check with your local financial aid office for more details. Also keep in mind that financial aid programs change all the time – federal loan and Pell grant policies underwent major changes in 2008, 2010 and 2012.

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