Financial Aid Basics

Paying for college -- your financial aid options and how to get started.

The financial aid system is meant to ensure that anyone who wants to attend college is able to, regardless of their financial circumstances. This doesn't mean that college will be free, but it does mean that if students and families do enough research and choose the school and financial aid package that best suits their needs, a higher education can be affordable. Although certain factors change depending on whether you are applying for an undergraduate degree, graduate program, or post-grad degree, the process is similar overall. Read on to learn the basics of financial aid, including the kinds of aid that may be available to you.

What Is Financial Aid?

"Financial aid" refers to the various forms of monetary assistance that are available to students to help them pay for the costs of attending college. Students (or their families) are expected to contribute as much as they are able to the cost of their education. Financial aid is then available to fill in the remaining gap. Over half of all incoming freshmen at the nation's colleges ordinarily qualify for -- and receive some form of -- financial aid.

Common Types of Financial Aid

Student loans. The majority of financial aid, especially at public institutions, comes in the form of a loan. Loans are awarded based on financial need, and many are backed by the federal government and have substantially lower interest rates than non-educational loans. If your loan is subsidized by the government (as many educational loans are), no interest will accrue on it until after graduation. And most educational loans allow for a six- to nine-month grace period after graduation. After the grace period following graduation is up, loans can also be deferred if a student pursues graduate school (in law, medicine, etc.) or if he or she is involved in a qualifying activity (such as the Peace Corps, certain teaching positions, and so forth).

Because loans are the most expensive form of financial aid, some colleges try to ensure that students have to borrow as little as possible or that they replace loan money with work-study where possible (discussed below). Other schools try to ensure that low-income students do not need to borrow, by providing these students with more grants than higher-income students (grants are also discussed below).

But some colleges do allow for a large part of a student's financial aid package to consist of loans. Larger public schools often fall into the latter category. Ask a college what its policy on student loans is to get an idea of whether you will have to borrow to finance your education. (To learn more about student loans and their financial impact on you after graduation, check out Nolo's Student Loan Debt topic.)

Grants. Grants are essentially free money. Along with scholarships, grants are one of the few types of aid that do not have to be repaid. Unlike most scholarships, grants do not have to be "earned" with qualifying prior activities and experiences. Grant amounts vary significantly depending upon the financial ability of the school, the amount of money the state or federal government has contributed to grant programs that year, whether the school is a public or a private institution, and the student's own financial need.

Scholarships. Like a grant, a scholarship is aid that does not have to be repaid. Scholarships are in many ways gifts, awarded to students for their past activities -- such as community service, leadership roles, sports, or life experiences. They can be need-based (taking financial need into account) or merit-based (not considering financial need among their criteria).

Scholarship policies vary significantly from school to school. For example, those that offer merit scholarships usually do not consider the student's need, but offer a scholarship for a particular activity to students with both high and low need. Some colleges do not offer merit scholarships at all. Still other schools assess merit based on the student's application, without asking them to separately apply for the scholarship -- in other words, every student who applies for admission is considered equally for the available scholarships.

The more scholarships you apply for, the better your chances of receiving one. If a student receives an "outside" scholarship (one not sponsored by the school), that may also affect the school's aid calculation. It is always good to know what scholarships a school offers, whether and how to apply for them, and how receiving a non-school sponsored scholarship will affect the school's aid calculation.

Work-study. Work-study is a federal program that contributes part of the salary of a student who works part-time. To qualify for work-study, a student must usually have some form of financial need and must work in a qualifying job. Most work-study jobs will be on campus, although schools also use work-study funds to help students who apply for certain government or non-profit sector jobs as well.

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