Around two-thirds of today's college students rely on loans to fund their education. By graduation day, an individual will owe an average of $30,100 in student loans. While accruing some level of debt is unavoidable for most college students, there are plenty of overlooked financing options that savvy students can use to reduce the costs of their education. In this guide, we identify and explore the categories of financial aid to help you find the best fit for you. Let's start with the all-important FAFSA.
An Introduction to the FAFSA
All need-based forms of financial aid, except scholarships and certain private grants, revolve around the Free Application for Federal Student Aid (FAFSA). Individual states also use the application to determine eligibility for resident students. Note that all federal and state financial aid awards are contingent upon attendance at an accredited institution.
Accreditation refers to a voluntary system where schools and other institutions submit information about their programs to accrediting organizations, such as the agencies listed here. If an accrediting body verifies that a school meets certain educational standards, that qualifies the school's students for state and federal financial aid.
It's important to note that because most awards are paid directly to the school, failure to attend classes will typically result in revocation of financial aid. Students who have lost funding this way may be required to pay all of their tuition for a defined period of time or an agreed upon cancellation fee. This serves as an example of why it's crucial to fully understand the terms of a loan and anticipate the consequences of certain actions (or inactions).
Most students qualify for some form of need-based financial aid. Financial aid assessments depend on the income and resources available to the student, or to their parent or guardian if the student is under the age of 24. There are exceptions to the age requirement, including instances where both parents are deceased or the individual can demonstrate that they are emancipated. Grounds for emancipation include:
- Joining the military
- Getting married
- Obtaining permission from a court
You can learn more about state-specific emancipation laws and circumstances through Cornell Law's emancipation table.
UNDERSTANDING YOUR OPTIONS
In order to fully comprehend the particulars of need-based financial aid, let's first establish the three types of aid available: federal, state, and private.
Federal aid is applied for automatically when you submit your FAFSA application. The FAFSA also covers many, but not all, state aid programs. Although state financial aid programs vary, most have two award levels for state residents. Commonly, states will grant higher awards for students attending schools within their home state and lower awards to students enrolling out of state. It is also important to remember that many state colleges and universities offer lower tuition rates for state residents. Generally, to qualify as a state resident, a student (or the parent of a dependent student) must have lived in the state for 1-2 years before matriculation. However, eligibility requirements for residency status vary from state to state.
Private colleges and universities often provide different amounts of tuition assistance, and occasionally direct student aid. Certain private organizations also offer some degree of financial aid, often in support of a particular field or community of people, such as a racial minority or students with a certain religious background. These awards are usually based on the student's FAFSA application, and may or may not have annual limits. Check with your particular school's financial aid office for information specific to that institution.
In general, private loans should become part of your financial aid package only after you have exhausted your other available options. At their best, these loans are an expensive solution; at their worst, they're millstones around the neck of borrowers for decades. But before you consider the possibility of private loans, you should come up with a rough estimate of major costs for a given program (ideally per term).
DETERMINE YOUR NEEDS
Note: While the figure you settle on will be inexact, it's important to have an estimate. Projecting costs for the entirety of your program gives you perspective on the scope of school debt you'll incur, meaning you won't be blindsided when it comes time to pay.
- Tuition and Room & Board
These will likely be your biggest expenses, so it's a good idea to determine what kind of costs you'll be dealing with as early as possible. Your school should tell you upfront exactly how much each term's tuition and room and board will cost. Consider that most 4-year schools require freshmen to live on campus, but look into local rental rates when considering your expenses beyond the first year.
- Books and Supplies
Of course, the cost of books and supplies will vary for each student, depending on the courses they take and their professors' preferences. The College Board reports the average annual textbook costs for 2016-17 as $1,250 at a public school and $1,230 at a private school. Some majors – students in fine arts or architecture, for instance – may have higher supply costs because of the consumable nature of materials involved. While you can typically recover a portion of each term's investment in books by selling your used books, it's wisest not to calculate this into your net expense.
- Cost of Living
This general category, which should include expenses like groceries, clothing, and entertainment, will differ drastically from person to person. A simple method for keeping these costs in check is to establish a limit on your expenses each term and then track your total as you go. In a sense, cost of living is the real indicator of a student's financial responsibility, as there is plenty of room for excess or thrift; every student must decide for themselves how to manage their money.
- Travel Expenses
Travel expenses for students living on or close to campus will vary. Out-of-state students will need to account for probable trips home, for the holidays or just a weekend. Planning ahead and booking refundable trips early will help keep travel costs low and stress at a minimum.
Once you have added up all your anticipated expenses, be they for a term, a year, or your entire program, you can then take that total and subtract your expected income during the same period, including any expected scholarships, grants, or stipends. The difference will be your anticipated deficit – the remaining costs you must consider addressing through loans.
While loans will likely cover many of the expenses mentioned above, unforeseen costs and expensive tastes may require you to seek extra sources of income. You can deal with such expenses with part-time jobs, work study (which is essentially financial aid), or even personal savings. Remember that your budget should not simply set your loans and scholarships against your debts. As a student, you have the ability to raise your own funds and proactively deal with debt.
A DEEPER LOOK AT YOUR FAFSA
As stated above, the world of financial aid revolves around FAFSA. Information on the federal financial aid application is used by most state and private aid providers to determine how much aid a student is qualified to receive. In order to apply for federal financial aid through FAFSA, applicants must meet all of the following criteria:
- Status as a citizen, permanent legal resident, or eligible noncitizen
- A valid Social Security number (students from certain U.S. Pacific territories are exempt from this requirement)
- A valid high school diploma, GED certificate, or evidence of completed homeschooling
- Enrollment in an eligible school or program that issues degrees or certificates
- Maintain satisfactory academic progress
- Must not owe a refund on a federal student grant or be in default on a federal student loan
- Males must be registered with the Selective Service if not currently on active duty (students from certain U.S. Pacific territories are exempt from this requirement)
Note that these are only basic eligibility criteria and that some students (e.g., those who are incarcerated) might have to meet separate or additional criteria to be eligible for limited federal aid.
FAFSA Application Deadlines
FAFSA applications are due on a rolling basis depending on your desired start date. Fall term FAFSA applications are generally due in the winter or spring before the coming fall term. Since filing deadlines can differ from state to state and depend upon your desired start date, you should consult the FAFSA Student Aid Deadline tool. Enter your state of residence and the school year you are applying for and the tool will return your deadline.
The FAFSA4Caster walks you through a series of questions that will ultimately generate an estimate of your financial award. The tool works by generating subsequent questions based on your responses to previous questions.
Completing and Filing Your FAFSA Application
There are three basic ways to complete and file your FAFSA paperwork:
- Online via the FAFSA website
- Screen-fill or print and manually fill out a PDF application, then mail it to
Federal Student Aid Programs
P.O. Box 7650
London, KY 40742-7650
- Request a paper application over the phone (1-800-4-FED-AID or 334-523-2691; hearing-impaired individuals should call 1-800-730-8913), then manually fill it out and mail it to the address above
FAFSA recommends the online option as it allows you to access features like the IRS Data Retrieval Tool, which automatically gathers relevant information from filed tax returns for students and parents and then autofills that information into the application.
If you need assistance filling out your FAFSA application, there is a series of helpful videos available on YouTube that covers the entire process. Alternatively, you can contact your school's financial aid office with specific questions.
Navigating student loans can be a confusing process, especially with so many programs using similar terminology to describe their products. At their core, there are two basic types of student loans: federal and private. Within each of these, there are different subtypes of loan products, each with advantages and disadvantages.
Let's begin by looking at the fundamental distinction between federal loans: subsidized vs. unsubsidized.
- SUBSIDIZED FEDERAL LOANS
- Available to undergraduate students with demonstrated financial need
- The amount you are eligible to borrow is determined by your school, but the total may not be greater than your financial need (school expenses only)
- The interest that accumulates on the loan while you're in school is paid by the federal government (this is known as the subsidy), so when you graduate your initial debt is equal to the amount you borrowed
- There's a grace period following graduation, roughly 6 months, during which interest accumulates but no payments are due
- UNSUBSIDIZED FEDERAL LOANS
- You do not need to demonstrate financial need, so these loans are available to students from all economic backgrounds
- Available to both undergraduate and graduate students
- Each school determines how much a student can borrow, but loans accumulate interest from the moment the funds are disbursed
- You may elect to pay the interest as it accumulates while you're in school or it can capitalize (be added to the principal of the loan)
- DIRECT PLUS LOANS
- Intended to service different groups of borrowers: graduate students, professional degree students, and the parents of dependent undergraduates
- In the parent's name and do not add to the personal debt of the student
- Funded directly by the U.S. Department of Education
- Borrowers must have an acceptable credit history to qualify
- The amount you can borrow is determined by your school and cannot exceed the cost of attendance (less any other financial aid awards)
- The current interest rate is 7%, and there is an origination fee of 4.276% on loans disbursed on or after October 1, 2017
- DIRECT CONSOLIDATION LOANS
- Intended to allow borrowers to consolidate multiple federal loans into a single loan, resulting in one monthly payment
- While the process of consolidation will simplify your monthly bookkeeping, it can also extend your repayment period (which could mean higher interest overall)
- A borrower must have at least one Direct or FFEL program loan in either a grace period or repayment
- Interest rate is based on the weighted average of the rates of the loans you are consolidating, rounded up to the nearest eighth of a percent
- Interest rate is fixed for the term of the loan
- FEDERAL PERKINS LOANS
- Available to undergraduate, graduate, and professional students (full- and part-time) with exceptional financial need
- Eligibility is determined by your school's financial aid department
- Funded by individual schools
- Undergraduate students may borrow up to $5,500 per year with a maximum of $27,500 for undergraduate study
- Professional and graduate students may borrow up to $8,000 per year, with a cap of $60,000, also including any undergraduate loans
- Current interest rate is 5% (no other fees)
UNDERSTAND BEFORE YOU BORROW
In an effort to help students and families better manage student debt, the Department of Education requires borrowers to participate in Entrance Counseling. The program introduces parents and students to the terminology, processes, and rules pertaining to all types of federal loans. Entrance counseling must be completed before the first disbursement (payment) can be made to the institution. Entrance counseling can be completed in about 30 minutes on the Student Loans site, but be sure to first consult with your school's financial aid department as requirements will vary from school to school.
Master Promissory Note — All federal loans require borrowers to sign a Master Promissory Note (MPN), a legal document that indicates the borrower will repay loan principal amounts, accrued interest, and fees to the United States Department of Education. Generally speaking, a single MPN can be used for multiple loans for up to 10 years.
FEDERAL STUDENT LOAN REPAYMENT OPTIONS
Student loans are no different than car loans or mortgages in that you must repay them even if doing so requires you to make sacrifices elsewhere in your budget. A misconception is that borrowers do not have to repay student loans if they do not complete their education. The truth is that student loans must be repaid regardless of whether or not you graduate, and whether or not you get a job in your chosen field.
Grace Period — This refers to a predetermined amount of time between the time you complete your education (or fall below the minimum number of credits required per term) and when you have to begin repaying your loan. Not all federal student loans have a grace period — Direct PLUS loans, for example, do not. Read your loan documents or check with your loan originator (usually your school) to determine your grace period (if any).
Note that there are some conditions that can cause a grace period to be changed:
- Active-duty Military
Students called to active military duty for a period of more than 30 days before the end of their grace period are granted a full 6-month grace period upon their return from active duty.
- Returning Students
This rule applies to borrowers who either stop taking classes or fall below the required minimum for credits and then return to half- or full-time status before the end of their grace period. Such students will be given a new 6-month grace period when they stop attending school.
- Loan Consolidation
If you elect to consolidate your loans before the end of your grace period, any remaining grace period will be forfeited and repayment will begin upon disbursement of your previous loans in about 2 months.
DEFERMENT AND FORBEARANCE
There are certain circumstances that may allow your student loan repayment to be temporarily halted or your repayment amount to be reduced. This is referred to as deferment or forbearance, intended to help you avoid default on your obligation.
This is a period of time that the repayment of principal on your loan is suspended. During a deferment, you will not have to make payments. Depending on the type of loan and your circumstances, you may also have interest deferred. Interest deferment is only available for subsidized loans, such as Federal Perkins Loans. Eligibility for deferment can come from a variety of circumstances, including:
- Economic hardship, including service in the Peace Corps
- Active-duty military service
Requests for a deferment must be made through your loan servicer. Additionally note that deferment is not guaranteed even if you meet the eligibility requirements.
Similar to deferment in that, when it is granted, payments are suspended or reduced for a period of up to 12 months. But unlike a deferment, with forbearance interest continues to accrue regardless of what type of loan is involved. There are two types of forbearance that may be granted: discretionary and mandatory.
- Discretionary Forbearance
This is granted at the discretion of the lender and may be granted for reasons such as financial hardship or illness.
- Mandatory Forbearance
In cases where the borrower meets certain eligibility requirements, the lender is required to grant forbearance. Grounds for mandatory forbearance include:
- Serving in a medical or dental internship or residency
- Your total owed each month is more than 20% of your monthly gross income
- You are serving in a national service corps (e.g., AmeriCorps)
- You qualify for partial repayment under the Department of Defense Student Loan Repayment Program
- You are a National Guard member, have been activated, and are not otherwise eligible for a military deferment
Requests for forbearance can apply to all loan types and must be made through your loan servicer. Note that interest will continue to accrue on outstanding balances while your forbearance is in effect.
FORGIVENESS — DISCHARGE — CANCELLATION
Although you are obligated to repay your loans, there are some circumstances where you may be absolved of your debts. Below are some reasons student loans may be forgiven or discharged:
- Total and Permanent Disability
If you can prove to the Department of Education (DoE) that you are totally and permanently disabled, you may receive a discharge of debt. Here are some ways to communicate disabilities to the DoE:
- A Department of Veteran's Affairs document indicating you are unemployable due to a service-connected disability
- If you receive Social Security Disability Insurance (SSDI) or Supplemental Security Insurance (SSI) benefits, provide your Social Security Administration (SSA) notice of award of such insurance or benefits
- A physician's certification that you are unable to work due to a medically verifiable physical or mental condition
- Death Discharge
Student loan debt will be discharged if the student borrower is deceased, or, in the case of parent PLUS loans, if the student on whose behalf the loan was obtained dies.
- Closed School Discharge
You may be entitled to a discharge of your student loan debt if the school you are enrolled in closes before you complete your program and you are unable to complete your program at a comparable institution.
- False Certification of Student Eligibility
If the school falsely certifies your eligibility for a loan, or if a school authorized a loan without your consent, you may be eligible to have the debt discharged.
- Unpaid Refund Discharge
This discharge applies to loans that were not refunded by the school when a student withdraws from classes within established deadlines.
- Teacher Loan Forgiveness
This applies to teachers who are new borrowers (no debt originating before October 1, 1998) and have been working in a low-income school or agency for 5 consecutive years.
- Public Service Forgiveness
If you are employed in certain public service professions and have made at least 120 payments on your direct loans, the outstanding balance may be forgiven.
- Perkins Loan Cancellation and Discharge
Individuals working in certain types of public service and other select occupations may have a portion of their debt forgiven for each year of service.
PRIVATE AND PERSONAL STUDENT LOANS
Private loans differ from federal loans in that they are funded by private institutions like banks and non-governmental agencies (e.g., SallieMae). Because private institutions are for-profit enterprises, their rates are generally higher and their terms are less friendly to borrowers. Consider private loans only after your federal options have been completely exhausted.
Private loans should be a student borrower's last resort, primarily due to their higher costs. The increased cost of borrowing from private sources can manifest itself in two ways: higher interest rates and higher fees. Some private loans will offer what appear to be low or reasonable interest rates while masking fees that ultimately make the eventual total cost of the loan very steep.
Another significant difference between federal and private loans is the repayment schedule. Private loans almost always require some form of near-immediate repayment, usually in the form of interest-only payments that begin within a month or two of disbursement. The interest rates on private loans can vary greatly from borrower to borrower, even within the same lender, because they are tied to the borrower's credit score.
Borrowers with the best credit scores can find private student loans with a rate tied to LIBOR +2%, although this can increase as credit scores decrease. An important consideration when it comes to private student loans is the loan term, which is generally shorter than federal student loans, resulting in higher monthly payments. Most private loans have a term from 5 to 15 years, with a few offering up to 20 years.
Grants - Scholarships - Fellowships
Public funding for education often takes the form of grants or educational gifts. The term "public" in this context refers to the source of the funding: federal, state, and sometimes municipal governments provide grants to help defer the cost of higher education. The term "private," on the other hand, refers to funding opportunities that are either wholly or partially funded by non-governmental parties — be they corporations, fraternal organizations, private organizations, non-profits, or even individuals.
Need-based funding opportunities come from either public or private sources and are awarded based largely on the applicant's financial need. Merit-based awards are usually, but not always, awarded by private sources. They reward applicants for meeting or exceeding preset standards, such as grades, test scores, or community service hours.
Of course, not all public and private funding will be available to every student; many loans are decidedly restrictive. These include municipal or county grants available only to applicants who reside in those particular areas. Sometimes funding from an organization, like a fraternal lodge, requires applicants or their parents to be members of the given society. Another form of restrictive funding occurs within specific institutions that grant awards to students who pursue a particular field, such as accounting or physics.
A grant is a type of educational gift that generally comes without strings (beyond requirements for attendance and passing grades). Grants are usually offered by federal or state governments and are almost always need-based. Some well-known federal grant programs are:
Primarily catering to low-income undergraduates, Pell grants are also available to a limited number of graduate students. Grant amounts vary, with a maximum of $5,815 per academic year. They are awarded based on the FAFSA application.
Federal Supplemental Educational Opportunity Grants are need-based grants for undergraduate students with awards ranging from $100 to $4,000 per year. Administered by schools, FSEOG funds are available to students with the greatest need.
As the name implies, these grants are for students who intend to become teachers and who plan to work in low-income schools for a specified period of time after graduation. Awards vary but cap out at $4,000 per year.
- Iraq and Afghanistan Service Grants
These grants are for students whose parent or guardian was killed while performing military service in Iraq or Afghanistan, and who do not otherwise qualify for a federal Pell grant because their family contribution exceeds Pell's limits.
Like grants, scholarships are awarded by organizations and individuals to students to help defer the cost of postsecondary education. Where grants tend to be long-term (often recurring) support, scholarships are typically a single amount awarded in one lump sum.
Scholarships can be need-based, merit-based, or a combination of the two. Beyond the scholarships offered by your school, there are also awards given out by corporations, individuals (often memorial funds), nonprofits, and occupational societies. Each scholarship will have its own terms of eligibility, award amount, and deadline.
If you're seeking scholarships, create a short list of scholarships you believe you can win and dedicate some time before or between terms to perfect your applications.
Fellowships are almost always for graduate and postgraduate individuals. Fellowships provide a stipend or salary to participants while they work and continue their education. They are often given to doctoral students while they work on their dissertation in exchange for providing research assistance or teaching services for a college or university.
Visiting Fellows – This type of fellowship generally refers to a postdoctoral individual working at an institution on a temporary basis, often for the purpose of conducting research or to gain highly specialized experience.
Resident Fellows – Sometimes referred to as resident scholars, these individuals are working on completing dissertations or postgraduate research, and require time and resources to complete their work.
Research Fellows – These are doctoral or postdoctoral students who work under a more senior researcher and provide assistance in their ongoing research.
This is a form of federal financial aid that provides a specific amount of aid in exchange for work. These are federally subsidized part-time jobs that pay their benefits directly to students, rather than to the school they are attending. These funds may be used by the student on any expenses, such as books, classroom materials, or personal needs.