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The Basics of Student Financial Aid

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The Financial Aid Basics

Today, the average cost of college exceeds $7,000 per year. That is a huge chunk of change for any one person to be responsible for paying. Luckily, there are billions of dollars given each year in financial aid. One simply needs to find them.

Receiving a bachelor's degree can increase your overall net worth by $800,000. With statistics like these, it becomes clear that money you put into your education will pay off exponentially.

By setting up the right payment plan and finding student loans, scholarships, and grants that meet your budgetary needs, you can attend the college of your dreams despite the expensive price tag. The following set of articles covers everything from types of financial aid and the specifics of the FAFSA, to financial aid resources.

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Types of Financial Aid

On any given day, there are over 15 million people in America pursuing a degree at some level of postsecondary education. Half of these students cannot pay for school on their own, and therefore, must depend on financial aid in order to earn their degree. Fortunately, there are many forms of financial aid available to students.

Many students applying to college get an acceptance letter along with a financial aid offer. This means that a college or university has figured out, according to the family's income, how much money a student will need to pay for college. Unfortunately, too many of these students sign at the bottom of the page without knowing what the offer really entails for their financial future. The loan offer may have a poor interest rate, no grace period, or very harsh penalties. Before signing any student loan agreement, do the following:

  • Read everything. Don't be an uninformed borrower.
  • Look at other options before locking yourself into a loan.

If you know financial aid is something you will need in order to achieve your educational and career goals, it's important to plan ahead and consider the pros and cons of each option available.

Financial aid can be broken up into two categories: need-based aid and non-need-based aid. Need-based aid is for those individuals who cannot afford to go to college. Those receiving non-need-based aid are usually recipients due to some sort of merit such as academics, sports, or extracurricular activities. Aid can come in many different forms. These are some of the most common forms:

  • Fellowships: Academic fellowships are available to students as a way to help fund a specific area of study or research. Although fellowships are a form of "gift aid" and do not need to be repaid, they must be used for the attainment of a certain academic goal, such as the funding of a semester-long research project. This makes fellowships a better option for upper-level undergraduate or graduate students than for younger students, who may not have yet chosen a specific career path.
  • Grants: Federally funded grants are another form of "gift aid" that usually don't have to be repaid, as long as the recipient meets a set of minimum academic requirements. Like scholarships, grants can be used to pay for anything academically related, including tuition, fees, books, or housing costs. Pell Grants, SMART grants, Academic Competitiveness grants, and Supplementary Education Opportunity grants are all available for students through the federal government; however additional state-sponsored grant programs may be available for certain students as well.
  • Loans: Federal and private student loans are generally the least popular of the financial aid options due to the fact that they must be repaid. Although interest rates and repayment rules vary depending on the lender, federally funded loans are typically the most popular for students because of their low interest rates and flexible repayment schedules. Although a number of private lenders offer education loans as well, these are usually seen as the less favorable option.
  • Scholarships: As one of the most common forms of financial aid, scholarships can be based on need or merit. Because they are known as "gift aid," scholarships don't need to be repaid, making them a very attractive option to students looking for a way to pay for their education. In addition to those scholarships that are given out by the US Department of Education and universities themselves, thousands of scholarships are given out each year by private organizations who aim to recognize students who have special skills, excel in extracurricular activities, have a financial need, or have specific career goals.
  • Work Study: Often included as part of a federal financial aid package for undergraduate students, work study is a government program that pays students to work part-time at their university during the academic school year. Students can use these funds to pay for whatever they wish, rather than just academic-related expenses, and are often given a more flexible schedule during peak periods such as midterms and finals to allow ample time to study.

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How to Avoid Financial Aid Scams

Students and parents looking for ways to pay for school are scammed for over one hundred million dollars every year. Many of these financial aid programs seem legitimate, but in reality, people pay a substantial amount of money for no apparent benefit. A few of the most common scams to watch out for include:

  • Advanced-Fee Loan Marketing: Students should be wary of any advertisements offering unusually low interest rates on education loans. That is because many of these advertisements are placed by scam artists. What their ads don't say up front is that there is an application fee or a certain amount of "down payment" that students must provide to guarantee the loan. These are all bogus ploys used to manipulate college students and take their money.
  • Fee-Based Scholarship Scams: The most common way people are scammed is through fee-based scholarship applications in which fraudulent organizations will commonly ask applicants to pay a fee in order to apply. Some scholarship scams collect money and run with it, while others collect a large amount of money and then give back only a small portion of the proceeds. Both of these tactics are illegal, and both are something to watch out for. Even organizations that charge a fee to match students with scholarships are not legitimate.
  • Free Seminars: Another way that criminals will try to get money is by sending letters to students advertising a financial aid seminar in their local area. Because the letter says the seminar is free, many people fail to realize this is a scam. However, what often ends up happening is that these "seminars" are actually just sales pitches for fee-based services such as financial aid consulting or scholarship-matching organizations that will charge students a hefty fee for participation.
  • Scholarship "Prizes": Scammers know that college students are likely to have applied for multiple scholarships each year, which is why they will commonly send out mass emails notifying people that they have won a scholarship without specifically stating what the name of the scholarship is. Scammers will then ask for a "disbursement" or "redemption" fee before the student can collect the full scholarship amount. From there, scammers will either write out a fake scholarship check -- which will bounce when the student tries depositing it at the bank -- or suddenly vanish without ever handing over the scholarship funds.

The best tip that will help keep you from being a victim of these kinds of scams is this: Don`t ever pay money to receive money. Legitimate scholarships, grants, and financial aid organizations will never charge you money for their services, which is why students should be skeptical of any company that asks for up-front fees or payments.

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What Can I Use Financial Aid For?

In a nutshell: Textbooks, yes. Beer, no.

The world of financial aid can be confusing. Many students miss out on serious opportunities because they're not sure how to find financial aid or what expenses might be covered by it.

Cost of Attendance

Federal financial aid is calculated based on a few different areas of expense: tuition, room and board (or equivalent cost of living for students living off campus), books and other academic expenses, such as a personal computer, and transportation. These factors, added together, represent the total cost of a student's college attendance. If you have a dependent, or a disability with related costs, or if you will be studying abroad, these also come under consideration when financial aid is calculated. Collectively, this is known as the Cost of Attendance (COA).

Financial need is determined by the COA, minus the Expected Family Contribution (EFC), which is determined by a set formula applied to the information on your FAFSA (Free Application for Federal Student Aid). Each college uses this information to come up with a financial aid package. Some colleges are able to provide more aid than others; a few colleges meet all of a student's demonstrated financial need. The difference may be made up with loans and third-party scholarships.

What Happens to the Money?

In many cases, your bank account will not actually see the money from your aid package. Instead, federal aid is administered by the college and applied to your bill. If the total cost of tuition is $8,000, and you receive $6,000 in aid, the aid money will probably go directly toward the cost of offsetting your tuition. If a federal Perkins loan is part of your package, your school may either apply the money directly to expenses, such as room and board, or may provide you with a check.

In addition, the Federal Work Study program allows students with financial need to obtain jobs on campus (or certain off-campus jobs). These earnings are managed directly by the student. There is usually a limit on the number of hours a student may spend at a work-study job. The total amount of work-study money you may earn is determined by your college's aid office.

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What Is the FAFSA and Why Do I Need It?

FAFSA stands for Free Application for Federal Student Aid. It is used to figure out how much money a family is expected to contribute to the cost of any accredited postsecondary education. The government then uses these results to figure out what grants, work study, and loan amounts a student should be given.

The grants involved in this process are the Federal Pell Grants and the Minnesota State Grants.

  • The Federal Pell Grant is open to all students whose families' have an income that is less than $60,000. However, most are awarded to individuals with family incomes that are less than $30,000. The amount given can be anywhere from between $609 to $5,350.
  • The Minnesota State Grant is given to low-income families who are Minnesota residents. Forty-four percent of these grants are awarded to families who make less than $20,000. Seventeen percent go to families with incomes over $50,000. In order to receive this grant, the FAFSA must be turned in 30 days prior to the start of the school's first day.

All scholarships must be applied to separately from the FAFSA.

It is extremely important that students fill out the FAFSA when applying to colleges. Even if you think your family is able to pay the tuition of the college of your choice, you never know what the government will determine, and you could save thousands of dollars. Remember: Pay attention to due dates and the fine print. You do not want to miss out on an opportunity to receive extra money.

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Are There Ways to Qualify for Financial Aid Without the FAFSA?

If students want to qualify for need-based financial aid in the United States, they almost certainly need to fill out a Free Assessment for Federal Student Aid (FAFSA) form. The federal government uses FAFSA to estimate how much a student's family (or him- or herself) should be expected to contribute to his or her college education. Pell Grants and subsidized Stafford and Perkins loans are awarded to students whose FAFSA shows that they are deserving enough.

Universities and colleges around the country also rely on FAFSA for information about how much students and their families can be expected to pay for college, though they may also require current and future students to fill out additional paperwork as well. Most schools offer their own financial assistance to needy students, and FAFSA helps them determine who is the most deserving of that aid.

Filling out a FAFSA may not be necessary for all types of aid, especially those types that are not based on need or family income. For students seeking scholarships or certain types of private educational loans, for example, FAFSA may be recommended but not required.

When it comes to the merit-based scholarships that many institutions commonly hand out, a student's award may be given without taking into account his or her FAFSA whatsoever. Among the other types of scholarships that do not require a FAFSA to apply are those given based on athletic ability, special interests, or success in a particular major or academic area of study. For the majority of scholarships handed out by private or non-profit organizations, a student's FAFSA is not taken into consideration.

Also, for those who plan on obtaining private loans to cover the costs of their education expenses, filling out a FAFSA may not be necessary. While the FAFSA is required to obtain federal funding, there is no such requirement for education loans handed out by banks and other private lenders. For these types of financial aid funds, students or their parents must fill out a separate set of paperwork specified by the lender.

Although a FAFSA may not be an absolute requirement for every student, it is strongly advised that those who think they may need financial aid funding go ahead with the process and fill it out. Doing so can only benefit students in the long run, since many may find out that they are eligible for financial aid funding that they didn't even realized they would qualify for.

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The Ins and Outs of Employer Tax Credits for Education

As the economy evolves, many businesses are finding it harder and harder to keep their employees up to date with the latest advances. To stay competitive in the global market, the federal government and many state agencies are increasingly offering incentives to companies that fund employee coursework in the form of tax credits for education. Not only are these credits an excellent opportunity for those who may be finishing up their undergraduate degrees, but they are also a way to make graduate-level degrees, such as a master's in business, more affordable for returning students.

From the employer's perspective, these tax credits allow his or her business to deduct up to $5,250 from the company's federal tax returns as a business expense for each employee involved in the program. Meanwhile, employees themselves can deduct the same $5,250 credit from their own personal income tax return, as well. Benefits above $5,250 per year, however, are taxed normally.

Employees may be eligible for the credit as long as they are enrolled in undergraduate or graduate-level coursework at an accredited institution They don't need to be working toward obtaining a specific degree in order to qualify. Tax credit funds may be used to pay for tuition, fees, books, and school equipment, but not for room, board, or transportation to and from the university. In addition, the spouses or dependents of an employee are not eligible to receive this tax credit.

Some states offer their own incentives for employers to advance the education of their employees. Oregon, for example, offers money to employers who educate their employees in a way that will lead to further job growth or job retention, especially in trade sectors or in fields experiencing a shortage of skilled workers. Instead of offering tax breaks, WorkSource Oregon evaluates company applications and funds those that need the most help.

Virginia offers a tax credit similar to the federal government, which covers up to 30 percent of educational costs, though the program only receives a limited amount of money every year. Other states, such as Arizona, offer to reimburse employers who train employees. Under Arizona 's grant program, businesses can apply for grants to reimburse up to 75 percent of training costs for new employees in jobs that meet specific wage criteria. They can also receive up to 50 percent for retraining existing employees.

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How Does Independent vs. Dependent Status Influence Financial Aid?

Whether or not a student is classified as having independent or dependent status can have a great influence over how much financial aid he or she can expect to receive from the federal government. Students who have obtained independent status can generally expect to be eligible for more financial aid; however, there is very little a person can do to change his or her own status.

As a general rule, a dependent student is someone who lives with, and is provided support by, his or her parents. Students who fall into this category can expect to have their own income and assets added to those of their parents when determining how much financial aid they are eligible to receive. Based on this amount of income and assets, the federal government will then determine the student's expected contribution. Another condition that is commonly factored into the equation and could impact the amount of aid a student is eligible to receive is the number of siblings the student has.

Unfortunately, the amount of money a dependent student's parents are willing to pay toward his or her college education is not factored into the equation, which is why applying for financial aid as a dependent can occasionally hurt a student in terms of how much funding he or she can expect to receive.

If the student qualifies as an independent, the government will only consider the student's income and assets and will ignore those of his or her parents. Since the income and assets of the average student are far below that of his or her parents, an independent student will almost always qualify for a greater amount of financial aid than they would as a dependent.

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Resources for Financial Aid Assistance

There are a number of different resources available to help students pay for school. The first place any student should begin his or her search is in a financial aid counselor's office. A university's financial aid officers can offer students a wealth of information on the different ways to pay for school. Counselors, as well as many librarians, generally know the most about scholarships available to students.

For students who prefer to do the research on their own, however, a number of excellent resources exist online. When it comes to government-sponsored loans and grants, the US Department of Education is the one- stop shop for all the information students need to decode the mystery of financial aid. Another great source that is not federally assisted is finaid.org. This is a non-profit website set up by an expert in the field of financial aid.

Other noteworthy websites that offer a wealth of information on financial aid, scholarships, and student loan opportunities include the following:

  • FAFSA: Created by the US Dept. of Education, this site offers information about filling out the FAFSA and applying for other forms of federal aid.
  • Federal Student Aid: Whether you are just starting the college application process or looking at paying back loans after graduation, this site offers a comprehensive guide to all stages in the student aid process.
  • National Student Loan Data System: To retrieve student loan information and find out what options are currently available, check out the National Student Loan Data System.
  • USA.gov: This site offers a complete listing of government-sponsored scholarships, grants, and loans.
  • Sallie Mae: Students who are looking into their educational loan options can do so on Sallie Mae's informational loan website.
  • National Association of Student Financial Aid Administrators: For the most up-to-date information on legislative policy changes regarding student financial aid, check out the National Association of Student Financial Aid Administrators website.

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