Financial Aid Process

Financial aid is intended to make up the difference between what your family can afford to pay and what college costs. Over half of the students currently enrolled in college receive some sort of financial aid to help pay college costs. In a nutshell the financial aid system is based on the goal of equal access. That anyone should be able to attend college, regardless of financial circumstances.

Students and their families are expected to contribute to the cost of college to the extent that they're able. If a family is unable to contribute the entire cost, financial aid is available to bridge the gap.

The amount your family is able to contribute is frequently referred to as the Expected Family Contribution, or EFC. The figure is determined by whom ever is awarding the aid, usually the federal government or individual colleges and universities.

The federal government and financial aid offices use "need formulas" that analyze your family's financial circumstances (things like income, assets, and family size) and compare them proportionally with other families' financial circumstances. For many families, the EFC amount is larger than they believe they can pay. First, the formulas assume that families will meet their contribution through a combination of savings, current income, and borrowing. In other words, most families can't just pay the EFC out of current income. Instead, they'll need to rely on one or both of the other sources -- savings and/or borrowing to meet that amount. Financial aid is limited. The formulas therefore measure a particular family's ability to pay against other families' ability to pay.

Financial aid is any type of assistance used to pay college costs that is based on financial need.

1. Grants and scholarships, also called gift aid, don't have to be repaid and you don't need to work to earn them. Grant aid comes from federal and state governments as well as individual colleges. (Some grants and scholarships are awarded based on merit rather than need.)

2. Loans Most financial aid (more than 60 percent) comes in the form of loans, aid that must be repaid. Most loans that are awarded based on financial need are low-interest loans sponsored by the federal government. These loans are subsidized by the government so no interest accrues until you begin repayment after you graduate.

3. Work work-study aid allows you to earn money to help meet education costs such as books and supplies and personal expenses.

In order determine whether you qualify for any financial aid you must fill out a Free Application for Federal Student Aid or FAFSA. This form must be filed every year that you are in school.

Don't rule out colleges with higher costs. Say your EFC is $5,000. At a college with a total cost of $8,000, you'd be eligible for up to $3,000 in financial aid. At a college with a total cost of $25,000, you'd be eligible for up to $20,000 in aid. In other words, you'd be contributing the same amount at both colleges.

                                                                                                    [ Top ]

Types of Educational Loans

Student Loans (Stafford and Perkins Loan)
The Stafford Loans allow dependent undergraduates to borrow up to $2,625 their freshman year, $3,500 their sophomore year and $5,500 for each remaining year (independent students can borrow an additional unsubsidized $4,000 the first two years and $5,000 the remaining years). Graduate students can borrow $18,500 per year, although only $8,500 of that is subsidized. Many students combine subsidized loans with unsubsidized loans to borrow the maximum amount permitted each year. Stafford Loans have variable interest rates (based on 91-day T-bill rate + 1.7% during school with an additional .6% increase upon graduation) capped at 8.25% or less, depending on yearly adjustments. All lenders offer the same rate for the Stafford Loan, although some give discounts for on-time and electronic payment. If your borrowing needs are not met by the federal programs, lenders offer a variety of supplemental borrowing programs known as Private or Alternative Loans.


The Perkins Loan is awarded to undergraduate and graduate students with exceptional financial need. This is a campus-based loan program, with the school acting as the lender using a limited pool of funds provided by the federal government. (The Perkins Loan is the best student loan available. It is a subsidized loan, with the interest being paid by the federal government during the in-school and 9-month grace periods. There are no origination or guarantee fees, and the interest rate is 5%. There is a 10-year repayment period. The amount of Perkins Loan you receive is determined by your school's financial aid office. The program limits are $3,000 per year for undergraduate students and $5,000 per year for graduate students, with cumulative limits of $15,000 for undergraduate loans and $30,000 for undergraduate and graduate loans combined. Institutions participating in the Expanded Lending Option (ELO) may offer higher loan limits for the Perkins Loan. The Perkins Loan also offers better cancellation provisions than the Stafford or PLUS loans. See the section on loan forgiveness for more details.

Parent Loans (also called PLUS)
Parents of dependent students can take out loans to supplement their children's aid packages. The federal Parent Loan for Undergraduate Students (PLUS) lets parents borrow money to cover any costs not already covered by the student's financial aid package, up to the full cost of attendance. Like the Stafford Loan, PLUS loans are either FFELP (provided by private lenders, such as banks) or Direct (funds provided by the government). PLUS loans have variable interest rates (based on 52 week T-bill rate + 3.10%) capped at 9%. Repayment begins 60 days after the funds are fully disbursed, and the repayment term is up to 10 years. PLUS loans are the financial responsibility of the parents, not the student. If the student agrees to make payments on the PLUS loan, but fails to make the payments on time, the parents will be held responsible.

Private Loans (also called Alternative)
Private Loans, also known as Alternative Loans, help bridge the gap between the actual cost of your education and the limited amount the government allows you to borrow in its programs. Private loans are offered by private lenders and there are no federal forms to complete. Some families turn to private loans when the federal loans don't provide enough money or when they need more flexible repayment options. For example, a parent might want to defer repayment until the student graduates, an option that is not available from the government parent loan program. Lenders provide different types of private loans depending on the student's level of study.                              

 [ Top ]