Finance

What Is Financial Aid and How Does it Work?

By Mindy Trotta

What Is Financial Aid and How Does it Work?

By Mindy Trotta

Published December 12, 2017

What is financial aid?

The answer is obvious–money for college.

Of course, you probably realize that it can’t be as simple as that.

Saying college financial aid is simply money for college is about as explanatory as saying health care insurance is how you pay for your doctor.

Yes, it’s a bit more complicated.

Let’s start with the basics…

What Is Financial Aid for College?

There are two types of college financial aid awarded to your student: need-based aid and merit-based aid.

All aid is money used to pay for college that does not come from the student or family when they pay the tuition bill.

This leaves two other possible sources for paying the tuition bill. The first is money that comes from another source in the form of grants or scholarships.

This is free or gift money used to pay the tuition.

The second possibility is money that will come from the student or the family at a later time.

Colleges will often refer to this kind of college financial aid as “self-help” aid.

This is what the rest of us call loans or jobs (work-study.) The loan is coming from someone else to pay the tuition now but you will be expected to pay the loan at a later date.

Using loans to cover tuition may not always seem like the best way to pay the bill, but for some, it’s the only way.

With an understanding of what your financial limits are, using loans as a form of financial aid can work.

College financial aid refers to both gift money (free money) and loans.

Where Does Financial Aid Come From?

College financial aid can come from a variety sources. The largest source of financial aid comes from the federal government.

Federal aid is pretty much dominated by student loans. Federal student loans are by far the major component of federal financial aid.

They offer fixed interest rates, along with protections and favorable repayment terms. Some of their benefits include income-based repayment, longer deferment options, and loan forgiveness opportunities

Pell grants, awarded only to undergraduate students who exhibit extreme financial need, come in second at 15%*.

Colleges themselves provide the largest source of free money for financial aid. In 2018-19, colleges awarded $64.7B* to students compared to 441.3B* from the federal government.

There are also outside scholarships for students. These are awarded by private foundations such as the Gate Foundation or various community groups like the Rotary Club.

Businesses and occupational organizations also offer scholarships to qualified students.

Ultimately, the percentage of money from outside scholarships is pretty small compared to that from the colleges themselves or the federal government.

States generally have a variety of financial aid programs consisting of grants and loans. The average amount available varies dramatically from state to state.

What Qualifies You to Get Financial Aid?

The requirement for the vast majority of financial aid is to compete the Free Application for Federal Student Aid (FAFSA.)

The FAFSA opens on October 1 and students fill it out in their senior year in high school.

The federal government along with many state governments, use the FAFSA to determine the student’s eligibility for financial aid.

The majority of colleges also use the FAFSA to award financial aid and merit aid.

There are over 400 colleges that require students to complete a different financial aid application, called the CSS Profile, to qualify for financial aid from the school.

This means that students will have to submit two forms if they want to be considered for financial aid from federal sources as well as from the college.

Outside scholarships will all have their own application forms.

Therefore, the number of forms students have to complete for financial aid will depend on the number of outside scholarships they decide to apply for.

Can You Negotiate with Financial Aid?

Appealing your financial aid award is NOT a sure thing.

In order to appeal either need-based or merit-based aid, you must have a solid reason to ask for more money.

To appeal need-based aid, colleges need to understand your financial situation beyond what they saw on the FAFSA.

To appeal merit-based aid, your student should offer the college a reason to increase their merit award based on other award offers or a stellar academic performance.