Families fear that they will make a mistake that will ruin their child’s future. They worry that they will miss something important about paying for college. This article provides an overview of the student aid landscape and the most important types and sources of money for college.
Slightly more than half of financial aid is awarded as gift aid and slightly less than half as self-help aid. About 43% of gift aid is provided by the colleges, 38% by the federal government, 11% by private scholarships and employers, and 8% by state governments.
Types of Financial Aid
There are two main types of financial aid: gift aid and self-help aid.
Eligibility for some financial aid is based on financial need and some is based on merit.
Gift Aid
Gift aid is money that does not need to be repaid or earned through work.
Gift aid includes grants, scholarships, tuition waivers and education tax benefits.
The terms grant and scholarship are often used interchangeably, like synonyms, but there are important differences in eligibility and selection criteria.
- Grants are generally based on financial need and include the Federal Pell Grant and the Federal Supplemental Educational Opportunity Grant (FSEOG), as well as state grants like the Cal Grant and New York TAP grants. The TEACH Grant includes the word “grant” in its name, but is more accurately described as a forgivable loan.
- Scholarships are generally based on merit, such as academic, artistic or athletic talent, or something completely different, like making a prom costume out of duct tape.
There really is a scholarship for making a prom costume out of duct tape, sponsored by Duck Brand Duct Tape. The grand prize is $10,000 each in the Dress and Tux categories. The winning costumes are amazing. Visit StuckAtProm.com for more information.
Education tax benefits are forms of financial aid that you get by filing a federal income tax return. They include exclusions from income and tax credits based on educational expenses.
Examples of exclusions from income include the Student Loan Interest Deduction and the Tuition & Fees Deduction.
Examples of tax credits include the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Tax Credit (LLTC).
Self-Help Aid
Self-help aid is money that must be repaid or earned through work.
Self-help aid includes student loans and student employment.
The term “student loans” is sometimes used generically to refer to all types of education debt, including parent loans.
Student loans must be repaid, usually with interest.
Student loans include the Federal Direct Stafford Loan, Federal Direct PLUS Loan (which includes the Grad PLUS and Parent PLUS loans), private student loans and private parent loans. There are two versions of the Stafford loan, subsidized and unsubsidized.
After a student graduates, they may obtain a Federal Direct Consolidation Loan to combine two or more federal loans into one. Borrowers may also refinance private student loans to obtain a new interest rate based on the borrower’s credit score and the credit score of the cosigner, if any. Refinancing federal education loans into a private student loans is not advisable, since the borrower will lose the superior benefits associated with federal loans, including income-driven repayment options, any federal loan forgiveness, generous deferments, and more.
Student employment includes the Federal Work-Study program as well as part-time jobs on or near campus.
Other Aid
Other types of financial aid include college savings plans, military student aid, employer-paid tuition assistance, loan forgiveness and student loan repayment assistance programs (LRAP).
Military student aid includes ROTC Scholarships, the GI Bill, VEAP Kicker, Tuition Assistance and money from private sources, such as community-based organizations and private foundations
Loan forgiveness programs include debt cancellation for working in particular occupations, such as public service, military, doctors, nurses, veterinarians, public interest law and teaching, or for volunteer work through AmeriCorps.
Sources of Financial Aid
Financial aid for college is available from several sources, including the federal and state governments, colleges and universities, and private organizations.
Private sources include private foundations, non-profit organizations, philanthropists, corporations and other businesses, education lenders and employers.
Most families will have to rely on financial aid from the federal and state government and from the colleges, which can be obtained by filing the Free Application for Federal Student Aid (FAFSA).
Families can find private scholarships using a free scholarship matching service.
Check out our Complete Guide to Financial Aid and the FAFSA
Use our Financial Aid Calculator to estimate your expected family contribution (EFC) and financial need based on student and parent income and assets, family size, number of children in college, age of the older parent and the student’s dependency status.
