Financial Aid 101 : Types, Terms, and How to Apply
Did you know that $240 million was awarded in financial aid last academic year? Today, we're diving into the world of financial aid, demystifying the jargon, and giving you the knowledge you need to navigate this crucial aspect of your college journey.
What Exactly is Financial Aid?
First things first: what is financial aid? Financial aid is simply money used to pay for college. Sounds straightforward, right? But here's where it gets a bit tricky. Many people use terms like FAFSA, CSS Profile, loans, scholarships, and grants interchangeably with financial aid, which can lead to a lot of confusion. These terms refer to different components of financial aid, but they are not the same thing.
The Four Types of Financial Aid
Understanding the different types of financial aid can make a huge difference in planning how to fund your education. Let's break down the four main types:
1. Need-Based Aid
Need-based aid is financial assistance that is based on a family's ability to pay based on information obtained from the FAFSA. Each year, you'll need to fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA form collects your financial information and uses a formula to determine your Student Aid Index (SAI) (it looks like a number, for example 30,000). This number indicates how much your family can reasonably contribute to your college expenses. (Warning: it’s always something insane that you don’t think you can afford, but don’t worry. In practice, you won’t understand what to do with the number- that’s the school’s job.) The financial aid offices at the schools you apply to use this number to create your award letter, which outlines the aid you're eligible for.
Need-based aid can include federal grants like Pell Grants, state grants, and subsidized loans (where the government pays the interest while you're in school). Essentially, need-based aid is financial assistance awarded because your family needs help paying for college.
2. Non-Need-Based Aid
Non-need-based aid is awarded regardless of your financial situation. It includes things like unsubsidized student loans (where you’re responsible for the interest while in school) and parent loans. Even if the formula determines you don't need financial help, you might still be eligible for this type of aid to cover educational expenses.
3. Merit Aid
Merit aid is awarded based on your achievements, talents, or other criteria set by the institution. This can include academic scholarships, athletic scholarships, and music scholarships. Unlike need-based aid, merit aid is typically funded by the institution itself rather than the federal or state government. It’s a reward for your hard work and talents, so make sure to showcase your strengths in your applications and pay attention to your grades. This is where things like missing assignments and late work (or staying up all night gaming) can have big consequences.
4. Self-Help Aid
Self-help aid requires you to contribute to your education costs. This can include work-study programs, where you earn money through a part-time job, or funds from a 529 savings plan, personal savings, or contributions from family members. Work-study programs are a bit of a hybrid because they are need-based but also involve earning a paycheck.
Clearing Up Common Misconceptions
Now that you understand the different types of financial aid, let's clear up some common misconceptions:
FAFSA vs. Financial Aid:
Remember, FAFSA is just a form that you fill out to apply for federal student aid. Financial aid is the actual money you receive to pay for college. The information you provide on the FAFSA helps determine the aid you’re eligible for.
The FAFSA opens every year on October 1st. I always recommend students fill it out before Thanksgiving. As the FAFSA doesn’t have a deadline since you aren’t required to do it in the first place, it’s easy to forget about until the inevitable day you get a huge bill for next semester’s tuition.
Submitting Accurate Information:
It's crucial to fill out the FAFSA correctly. If you make mistakes, it can affect your financial aid package. The definitions used on the FAFSA are different from those used on your taxes, so double-checking everything and getting professional help if your financial situation is complex will put you at ease.
Types of Financial Aid:
Your financial aid package will likely include a mix of need-based aid, non-need-based aid, merit aid, and self-help aid. Each college will offer a different package, so compare them carefully to understand your options. Once you compare your offers apples to apples, it’s very normal to see differences of tens of thousands of dollars you’ll have to pay out of pocket between schools.
Making the Most of Financial Aid:
Financial aid can seem overwhelming, but with the right information, you can make informed decisions. Here are some tips to help you navigate the process:
Start Early:
Begin researching financial aid options as soon as possible. Understand the deadlines for FAFSA and other applications. Meet with your financial advisor and financial aid advisor to create a strategy months before you submit your FAFSA.
Fill Out the FAFSA:
Even if you think you won’t qualify for need-based aid, fill out the FAFSA. Many merit-based scholarships and other aid options require it.
Tip: The FAFSA requires the student AND the parent to submit their information, unless the student is deemed “independent.” People often submit one signature when both are needed. The FAFSA cannot be processed without both signatures.
Compare Offers:
When you receive your financial aid award letters, compare them carefully. Look at the total cost of attendance and the types of aid offered. You want more free money than loan money, but many times colleges trick you with a big scholarship ($30,000 a year) to draw you in. These colleges can often be more expensive at the end of the day. You have to run the numbers.
Ask for Help:
If you're unsure about any part of the process, don't hesitate to ask for help. Financial aid officers at your prospective schools are there to assist you with basic questions. If you need a strategy and someone to do your FAFSA with you (i.e. share screens while you fill it out and make sure it’s done correctly), you need a Certified Financial Aid Advisor like we have at College Insights.
The Role of Financial Aid in Making College Affordable:
Financial aid plays a crucial role in making college affordable for many families. It’s important to understand that financial aid is not a handout, but a necessary support system to help you achieve your educational goals. Here’s how you can maximize the benefits of financial aid:
Understand the Different Sources:
Financial aid comes from various sources, including the federal government, state governments, colleges and universities, private organizations, and non-profits. Each source has its own criteria and application process, so be sure to explore all your options.
The Impact of Financial Aid on Your Future:
Properly managing your financial aid can significantly impact your future financial health. Accept grants and scholarships first, as these do not need to be repaid. Only take out loans if absolutely necessary, and be mindful of the terms and conditions. Understanding your financial aid package can help you avoid excessive debt and set you on a path to financial stability after graduation. Parents need to be very careful with parent plus loans as they can seriously derail your retirement options. I recommend talking with your financial advisor first and let THEM tell you what you can afford to avoid the parent guilt and urge to leverage your financial future so your child can go to their dream school.
Navigating the world of financial aid can be daunting, but with the right information and approach, you can secure the funding you need for your education. Remember, financial aid is there to help you achieve your dreams. By understanding the different types of aid, filling out applications accurately, and making informed decisions, you can make college more affordable and less stressful. Remember, financial aid is just one part of the puzzle, but it's an essential part that can make a significant difference in your college journey.
For even more helpful information, be sure to check out the detailed video I’ve created! 🎥 It dives deeper into the topic and includes additional insights that may help you. Click here to watch!
