Paying for School Costs in the US

What is Financial Aid?

Grants

Grants are typically awarded by the federal government, state education agencies, and educational institutions. Grants are awards of cash that can offset the cost of tuition. Unlike loans, grants do not have to be repaid.

Scholarships

Scholarships are generally administered by schools or by private foundations. Many scholarships are contingent upon qualifying criteria, such as financial need, academic achievement, athletic prowess, or successful participation in a community program. Like grants, scholarships do not have to be repaid, but some awards may carry certain obligations. For instance, scholarship winners may be required to volunteer time for a community organization or pledge to work in a specific geographic area.

Federal Perkins Loans

Federal Perkins Loans are funds that colleges and universities lend directly to qualifying students to help cover the cost of tuition. After graduation, alumni repay their colleges over the course of ten years at a low, fixed interest rate.

Subsidized Stafford Loans

Subsidized Stafford Loans are offered to students who demonstrate financial need. These loans help bridge the gap between a student's tuition and their other financial resources, including scholarships and grants. The Department of Education pays all of the interest charges that accrue during a student's degree program, saving them hundreds or even thousands of dollars in interest.

Unsubsidized Stafford Loans

Unsubsidized Stafford Loans are offered to most American students who need a little extra help to cover the cost of tuition and living expenses. The Department of Education facilitates these loans, which are offered at favorable interest rates with highly flexible repayment schedules.

PLUS Loans

PLUS Loans are loans that colleges and universities can facilitate between parents of qualifying students and private lenders. Parents can borrow any amount of money to cover the difference between other financial aid awards and the total cost of attending college.

Workstudy Grants

Work-study awards are funds earmarked for qualifying students who work in community-oriented or campus-based part-time jobs during their degree programs.

529 Plans or Coverdell Accounts

529 Plans or Coverdell Accounts allow students to invest money for college in sheltered stock market or money market funds. Congress has waived all taxes on interest generated by Coverdell accounts, making them an attractive, if indirect, source of financial aid.

Who is eligible for financial aid in the United States?

"Many students from middle class families can easily qualify for standard federal loans."

Students from low-income families can qualify for the most government tuition assistance. In addition to federal grants, low-income students often qualify for subsidized federal loans that significantly reduce the amount of interest due during the repayment period. Colleges and universities can also assist low income students by providing internal aid.

Many students from middle class families can easily qualify for standard federal loans. The federal government either lends money directly to students or facilitates a loan guarantee for a private lender. And nearly every American family can take advantage of PLUS Loans to parents and interest-free Coverdell savings accounts.

Steps to Applying

To complete the FAFSA, gather the following documents:

• Your Social Security Card.
• W-2 forms from work conducted during the last calendar year.
• Current pay stubs from employers for whom you presently work.
• Any other receipts or records of income earned this year or last year.
• Your previous year's income tax return. If you are married, include your spouse's return.
• Your parents' previous year's income tax returns, if you are a dependent.
• Your bank statements from this year and last year.
• Records of any current investments or business holdings.

Make photocopies of all your documentation and store them in a secure file along with a printout or a photocopy of your completed FAFSA. You will need to reference this information quickly if a Department of Education auditor or a school official needs to verify any of your information. If you cannot provide copies of these documents at the request of an auditor, you may jeopardize your chances to receive financial aid.

"Remember that any interest you earn on your college savings account is tax-free, but you will need to provide documentation of your enrollment to your bank or your brokerage to enjoy that benefit.

Admissions counselors recommend that you file your FAFSA as early as possible, so they can use your Student Aid Report to generate a competitive financial aid package. Admissions counselors increasingly compete for your business using private scholarships and grants to level the playing field. Without the Student Aid Report, they cannot make accurate bids.

Private scholarships may require their own submission forms, or they could also use the FAFSA. Check with your prospective school's financial aid counselor for details on opportunities to apply for local or regional scholarships.

PLUS Loans require a different set of forms to be completed by your parents. Admissions counselors recommend that you wait to apply for PLUS Loans until after receiving an offer of admission and a financial aid package from your chosen school. This way, your parents can apply only for the difference between your financial aid package and your expected cost of attendance. Financial aid counselors can connect your parents to a school's preferred lender, where they can usually arrange a preferential interest rate.

Anyone can open a Coverdell savings account at any time. Depending on how far in the future you expect to send yourself or a child through college, you may select investment options with varying degrees of risk. If college is far off, stock market mutual funds may provide the most long-term growth. If you're preparing college application forms, stash your college savings in less risky money market funds. Remember that any interest you earn on your college savings account is tax-free, but you will need to provide documentation of your enrollment to your bank or your brokerage to enjoy that benefit.

How to Determine If You Are A Dependent

• Will you be at least 24 years old by December 31st of the award year covered by the FAFSA?
• During the current school year, will you be working on a master's or doctorate program?
• As of today, are you married?
• Do you have children who receive more than half their support from you?
• Do you have other dependents (other than children or spouse) who live with you and who receive more than half their support from you?
• Are you an orphan or ward/dependent of the court?
• Are you a veteran of the U.S. armed forces?

In addition, check with your parents to find out whether they are claiming you as a dependent on their taxes. If you are living on your own, their creative accounting might earn them some tax breaks, but it could cost you a significant amount of student aid. Many financial aid officers tell stories of counseling shocked students who did not realize their parents were still reporting them as dependents to the Internal Revenue Service.

Tax Benefits for Parents

For More Information

• Free Application for Financial Student Aid - complete your FAFSA online, for free.
• United States Department of Education - comprehensive resource guide for understanding federal grants and loan programs.
• Sallie Mae - leading provider of education loans to students and parents.