The financial aid process can often feel very stressful given the uncertainty of the outcome. However, there are some basic financial aid terms you should know to become a savvy consumer. Learning these terms could help you ask the right questions, spot a good financial aid award, keep you out of debt, and navigate the process like a boss.
To access financial aid, most students will be required to complete the FAFSA or the CSS PROFILE.
Types of Financial Aid
Financial aid comes in the form of grants and scholarship (gift aid which does not have to be repaid) and work-study and loans. There are many sources of financial aid: the federal government, state government, colleges, and private institutions (for e.g., Microsoft).
When financial aid is awarded based on a family's ability to pay, it is considered need-based. Need-based financial aid is based on a family's Expected Family Contribution (EFC) as determined by the federal methodology used (for federal funds) or institutional methodology (for college's own funds) from the information provided in the FAFSA and/or CSS PROFILE.
However, merit aid is based on some academic or other metrics and is not based on the family’s ability to pay. It is often based on GPA, test scores (ACT® or SAT®), class rank, special talent (athletic, artistic or other talent) or other holistic measures. Not all colleges offer merit aid. For example, Ivy League and some highly selective colleges do not offer merit aid.
However, at those colleges where merit aid is awarded, you'll generally have to fall within the top 10-25% of the applicant pool to get a substantial award. It's not uncommon for students applying for merit aid to fill out the FAFSA and/or CSS PROFILE, or the college's own application.
>>RELATED: 6 Things You Should Know About The FAFSA
16 Basic Financial Aid Terms You Should Know:
1. Award Letter
The award letter will provide a breakdown of any financial aid being awarded to the student if they accept the offer of admission.
In addition, awards will often include loans so it is important to carefully review and compare them with other Award Letters. Here are some questions to ask when comparing your financial aid awards:
- Does the award renew itself each year?
- What GPA has to be met for renewal of award?
- How much is guaranteed in second, third and fourth year of college?
- Will the college adjust the award for special financial circumstances?
2. Cost of Attendance (COA)
Cost of Attendance includes the tuition, housing fee, food and meal plans, transportation, textbooks and other fees a student is expected to pay to attend college in an academic year.
3. Demonstrated Financial Need
Some colleges claim to meet 100% of a student's demonstrated financial need, but what does that even mean. In simple terms "demonstrated need" is calculated as follows:
Cost of Attendance MINUS Expected Family Contribution = Demonstrated Need
EXAMPLE: (the following is for demonstration purposes only):
Cost of Attendance (COA) at Austin College $56,557
Expected Family Contributed (EFC) - $20,000
Demonstrated Need = $36,557
Using the example above, a college that meets 100% of demonstrated need would award a financial aid package of $36,557. This package may or may not include loans. In most cases, colleges will not meet 100% of your demonstrated need. Depending on the makeup of your financial aid package, you may need to take out additional loans to cover your unmet demonstrated need.
4. Expected Family Contribution (EFC)
The EFC is a number used to determine the types of federal aid and the amounts students are eligible to receive. It is the amount the formula has determined your family can afford to contribute towards the cost of your education. This EFC number is calculated based on the data families provide when they complete the FAFSA and, in some cases, the CSS PROFILE (used by approx. 250 private colleges).
Some of the factors that affect a family's EFC is number of students in college, parents' income and assets, and the student's income and assets. It might be a good idea to get an estimate of your EFC before you submit the FAFSA or CSS PROFILE.
5. Free Application For Federal Student Aid (FAFSA)
The FAFSA is used to determine eligibility for federal student aid – grant, work-study, and loans. Prospective college students are required to complete the FAFSA. The FAFSA becomes available on October 1.
Above all, high school seniors should remember to apply for financial aid around the same time they are apply for college. Some financial aid is awarded on a first come, first served basis so the early bird will catch the worm.
And, you must reapply for financial aid every year you are in college.
6. Federal Pell Grant
The Pell Grant is available for undergraduate students with financial need. The maximum amount awarded is $6,895 for the 2022-23 award year (July 1, 2022, through June 30, 2023). The Pell Grant could be increased to $7,395 for the 2023-24 award year.
7. Federal Perkins Loan
This federal loan is offered through the recipient’s college, and is reserved for undergraduate and graduate students who demonstrate financial need.
8. Federal Work-Study
This work-study program allows students to work part-time and earn money to help pay for their education related expenses. Some colleges might offer this option.
However, you are expected to find the job on your own and the work-study forms part of a student’s financial aid package.
9. Financial Need
Financial Need is the difference between the Cost of Attendance (COA) and your Expected Family Contribution (EFC). Some colleges will provide a financial aid package that meets 100% of your financial need, while others will not.
Keep in mind, some colleges claim to meet 100% financial need; however, the financial aid package could include loans. The most generous colleges will meet 100% of need without loans.
>>RELATED POST: WHAT IS DEMONSTRATED FINANCIAL NEED?
10. Grant
Grants are money a student receives either from the college, state or federal government to pay for college. These funds do not have to be repaid.
11. Loans (Student Loans)
Student loans often make up part of financial aid packages. A loan, subsidized or unsubsidized by the federal government, has to be repaid with interest (see subsidized and unsubsidized loans below). Students loans are also available through private banks or organizations. However, the federal student loans generally offer lower interest rates and have more flexible repayment terms.
12. Net Price Calculator
If you would like to get estimate for college before you apply, then the Net Price Calculator is the perfect tool for you. Each college is required by law to have one on their website.
The calculator, usually found on the Financial Aid page, calculates your costs (Net Price) after any eligible grants and scholarships are deducted from the cost of attendance. Net Price is unique to each individual. It is the Cost of Attendance (COA) minus any scholarships and grants you might be eligible to receive.
13. PROFILE (CSS PROFILE)
The College Board's College Scholarship Service Profile (CSS Profile) is used by private colleges to allow families to apply for institutional financial aid. This is money from the college's own funds (non-federal financial aid). Students applying for financial aid at these institutions must often submit both the CSS PROFILE and the FAFSA (for federal financial aid). Approximately 250 colleges use the CSS PROFILE.
14. Parent PLUS Loan
A PLUS Loan is available to parents of undergraduate dependent students. Parents have to pass a credit check and repay the loan amount borrowed with interest. If parents are unable to pass a credit check, they might be able to use a co-signer. Additionally, students could qualify for a higher amount in unsubsidized loans if their parents were denied a Parent PLUS Loan.
15. Student Aid Report (SAR)
This report, generated from the FAFSA or CSS PROFILE, includes the family’s EFC. Both the college and student/parent will receive a copy. Colleges use these reports as a basis for making financial aid awards. Here is a link to a sample SAR.
16. Unsubsidized and subsidized loans
Unsubsidized loans are offered by the federal government, but issued through the colleges. The federal government pays the interest for the subsidized loan while you are in school. Subsidized loans are awarded based on need to dependent undergraduate students.
However, unsubsidized loans are available to all students with or without need. Students must complete the FAFSA to become eligible for these loans.
Final Thoughts
One look at all these terms and you might immediately think "this is a foreign language". But, don't despair. With time, you too can master these terms. Well, okay, if not master them then become very familiar with them so that you are a more savvy consumer.
