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Financial Aid Essentials

The increase in university and college tuition has heightened the financial concern of parents and guardians looking to navigate the best way to send their child to school. Although a seemingly daunting task, many avenues are available to help raise the funds necessary to pay for any type of secondary education. Here are some basics to help you understand all things financial aid.

What is Financial Aid?

Financial aid is money distributed primarily by the federal government and colleges in the form of loans, grants, scholarships, or work-study jobs. A student can receive both federal and college aid. An ideal financial aid package will contain more grants and scholarships (which do not need to be repaid) and fewer loans.

Financial aid can be broken down into two categories: need-based and merit-based. Need-based is given through the college and also the government as a reflection of the need of the student. Need-based aid is typically applied for, and given in the form of grants and scholarships. Merit-based financial aid is given to students who demonstrate exemplary academic, athletic, or artistic talent which generally is not repaid, but raises the credibility of the school by incentivizing the brightest and most talented students to attend that institution.

Not all colleges offer the same amount of money so it is important to do your due diligence and determine the average amount of aid given at particular schools. Aid budgets depend on the school’s endowment and objectives as an institution making some of them more generous than others. It is also worth noting that scholarships can come from places other than the colleges themselves. Many organizations, businesses, foundations, and individuals offer opportunities to apply for various scholarships.

How Do I Apply for Financial Aid?

The starting point for calculating financial need is the Free Application for Federal Student Aid (FAFSA). Any aid given by the federal government is determined by the evaluation of a FAFSA application. Some schools use a second form of aid evaluation, but all colleges and universities use FAFSA to determine need-based aid. Once a FAFSA is submitted, your current income and assets and your child’s income and assets are run through a formula. You are allowed certain deductions and allowances against your income, and you are able to exclude certain assets from consideration. The result is a figure known as the expected family contribution, or EFC. This is the amount of money that you will be expected to contribute to college costs before you are eligible for aid. FAFSA provides the option for choosing up to 10 schools to submit with the application to determine exact cost once the EFC is subtracted from the sticker price of the institution. FAFSA does a thorough analysis of the entire financial situation with current income being the most important factor, but also including aspects such as total assets, number of children you will have in college at the same time, and how close you are to retirement age.

Which Forms of Aid Need to Be Repaid and What Are the Differences?

Grants and Scholarships – Gifts or “free” money that do not need to be repaid. Made available by the colleges and universities as well as federal and state governments.

  • College and University Grants/Scholarships – Funds given directly from the institution.
  • Federal Pell Grant – Generally given to students that have an exceptional financial need and have not yet obtained a degree.
  • Federal Supplemental Educational Opportunity Grant (FSEOG) – Given to students with the most financial need.
  • Teacher Education Assistance for College and Higher Education (TEACH) Grant – A federal grant that provides up to $4,000 to students who agree to four years of teaching service following education.
  • Private Scholarships – Financial aid awards funded by companies, service groups, non-profits, foundations, and sometimes individuals Federal Loans – Funds to help students pay for their college expenses which must be repaid at a later date.
  • Direct Subsidized Loans – Financial aid determined based on the information provided from FAFSA submission. These loans are viewed as a preferred option because the interest is covered by the federal government while you are enrolled in school, for six months after graduation, and during periods of deferment.
  • Direct Unsubsidized Loans – Financial aid not based on financial need in which the interest accrued must be repaid at a later date. There are no grace periods for active education, or deferment.
    • The total maximum amount of subsidized and unsubsidized loans for undergraduate students is between $5,500 and $12,500 per academic year depending on dependency status.
    • Graduate students are able to borrow up to $20,500 in unsubsidized loans.
  • Direct PLUS Loans – Given to graduate/professional students or parents with a current undergraduate dependent. These loans fill the gap between the money from subsidized/unsubsidized loans and the total cost of education.
  • Direct Consolidation Loan – Allows the combination of multiple federal education loans into one loan which results in a single monthly payment. These loans generally carry additional repayment plans and forgiveness programs.

In some cases, federal student loans are either forgiven or discharged – both resulting in the loan being canceled. Although rare, circumstances such as permanent disability or school closure can allow a borrower to get out of their debt. Public service forgiveness also relieves the debt for those that spend time as employees of U.S. federal, state, local, or non-profit government agencies. The PSLF application is available on the student aid government website for those looking to seek loan payment reduction.

Big Picture

Although there are plenty of avenues towards compiling the funds necessary to send a child through college, it is important to remember that not all aid is created equally. Loans that seem attractive and payable at the time can handcuff families for years due to interest rates and the amount of years payments need to be made before the loan is paid off. Encouraging your child to apply for scholarships through various organizations usually only costs time and is a great way to minimize future loan payments.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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