How Does Financial Aid Work?
Financial aid comes in many forms, including scholarships, grants, and loans, and is offered through a wide variety of sources.
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The costs of college have been rising for some time now. In fact, according to the National Center for Education Statistics, prices at public universities have increased 31% since 2007. And last year? The average student paid over $30,000 in tuition and fees.
Naturally, most families can’t cover these sky-high bills out of pocket. Instead, they rely on various types of financial aid to pay for schooling — things like scholarships, grants, and student loans. Data from Sallie Mae shows that 58% of families used scholarships to cover education costs last year, while another 48% used grants. Student loans covered about 21% of college costs.
Financial aid may be able to help you, too. Here’s what you need to know.
In this guide:
- What is financial aid?
- Who offers financial aid?
- How do I qualify for financial aid?
- Do I have to pay it back?
- Is one form of financial aid better than the rest?
What is financial aid?
Financial aid is monetary assistance designed specifically for education costs. It comes in many forms and can often cover tuition, room and board, supplies, books, and other related fees.
Here are just a few types of financial aid you might be able to use for school:
- Scholarships: This is aid that does not need to be repaid. It can be need- or merit-based (more on what that means below.).
- Grants: This is also a form of gift aid that doesn’t need to be paid back. It’s typically need-based.
- Federal student loans: These are loans offered through the federal government. In most cases, they need to be repaid once you graduate.
- Private student loans: These are loans offered by private companies. They always need to be paid back (unless you file for bankruptcy).
- Work-study programs: These allow you to work on campus and earn funds to pay for your education.
Due to the high costs of college, most students use some combination of the aid above when paying for school.
Who offers financial aid?
Colleges and universities typically offer their financial programs, as do various federal and state agencies. Private companies and non-profit companies often provide financial aid as well.
Financial aid from these sources typically falls into two categories: Need-based and merit-based. With need-based aid, your eligibility and the total amount you can qualify for are based on your household income, as well as your Expected Family Contribution (what your household could comfortably contribute to your college costs).
Merit-based aid is based on achievement — academic, athletic, or, in some cases, philanthropic.
To learn more, check out our guide on where financial aid comes from.
How do I qualify for financial aid?
Qualifying for financial aid depends on the type of aid. In many cases, you’ll need to fill out the FAFSA, which we’ll go into below.
Step one: Start planning early
Some forms of financial aid can be issued on a first-come, first-serve basis, so you’ll want to get your applications in early.
To start, speak to your school counselor and the financial aid office at the college you intend to attend. They can point you to aid programs that may be able to help.
Be sure to note any application deadlines for aid you may be interested in, and get ready to start applying as soon as you can.
Step two: Fill out the FAFSA
You should fill out the FAFSA — or Free Application for Federal Student Aid — every year you plan to attend school. The FAFSA helps determine your need for aid, and it’s required for all federal financial aid programs and many state- and college-based ones as well.
On the FAFSA, you’ll need to include data about your household’s income and finances. This is used to calculate your Expected Family Contribution to determine how much assistance you’ll need.
FAFSA forms are typically due in the summer. This year, for example, they’re due June 30, 2022.
Step three: Review your financial aid offer & accept the offer from one of the schools
Once your FAFSA has been received, you’ll get an official financial aid award letter for each school you’ve been accepted to. This will detail the grants, loans, and scholarships you’re eligible for at each institution. It will also show how much you’re eligible to receive for each type of aid. From there, you can choose which school is best for your budget.
How does college financial aid work from here? After you accept an offer from a college, their financial aid office will take over from there, applying your chosen aid packages to your tuition, fees, and other expenses.
Do I have to pay it back?
This depends on the type of aid you use. Some forms of aid are free — like scholarships and grants — and others, like loans, require repayment.
To learn more about repayment responsibilities, check out our guide on paying back financial aid.
Is one form of financial aid better than the rest?
All types of financial aid aren’t created equal. You’ll want to prioritize free aid that doesn’t require repayment first and then move on to work-study and federal aid next. Private loans are typically a last resort.
Generally speaking, here’s how you should prioritize the various types of aid:
- Priority No. 1: Free aid, like scholarships and grants.
- Priority No. 2: Earned aid, like work-study programs.
- Priority No. 3: Federal aid that requires repayment (i.e., federal loans). These typically come with lower interest rates and more flexible repayment terms than private options.
- Priority No. 4: Private aid that requires repayment. Private student loans can be used to bridge the gap between what you received in the first three options and the remaining cost of your education.
The bottom line: There’s lots of financial aid out there, so fill out the FAFSA and explore your options. College may be costly, but with the proper assistance, you may be able to cover those expenses affordably and without hassle.
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