The Smartest Way to Pay for College: A Comprehensive Guide to Financial Planning and Budgeting

by Melissa Brock | Oct 14, 2024 | Financial aid and scholarships | 0 comments

College is an exciting journey filled with opportunities for growth, learning and self-discovery. However, the financial aspect of higher education can often feel overwhelming. Understanding the ins and outs of college funding is crucial. 

When asked, “What is the smartest way to pay for college?” Matt Mayerle, personal finance editor at CreditNinja, suggests, “The smartest approach is to plan early and explore all available financial aid options. Focus on scholarships and grants first since your child doesn’t need to repay them. Then consider federal student loans, as they offer lower interest rates and flexible repayment plans. Finally, create a realistic budget to manage your expenses and minimize the need for additional loans.”

This comprehensive guide will walk you through the various aspects of financing your child’s education, from scholarships and grants to loans and budgeting strategies. By the end, you’ll be equipped with the knowledge to make informed decisions about your child’s college finances.

The Importance of Early Planning

The path to college financial success begins long before your child sets foot on campus. Early planning can significantly impact their ability to fund their education and minimize debt. As soon as your child starts considering college, it’s time to think about how to pay for it.

Mayerle says, “Starting the financial planning process early gives students more options to explore scholarships, grants, and aid packages. It’s crucial to discuss college costs with your family and set realistic goals for minimizing debt.”

Start by having honest conversations with your child about college costs and expectations. Discuss what you as a parent can realistically contribute. Doing so will help you set realistic goals and narrow down your child’s college choices based on affordability.

Research potential schools early and look into their financial aid policies. Some colleges offer generous aid packages, while others may have limited resources. Understanding these differences can help you make more informed decisions when it comes time to apply.

Consider having your child take Advanced Placement (AP) or dual enrollment courses in high school. These can earn them college credits, potentially reducing the time and money they’ll need to spend on their degree.

Learn more: Why is College so Expensive in the United States?

Financial aid is a crucial component of college funding for many students. It comes in various forms, each with its own set of rules and benefits.

Grants and Scholarships

Grants and scholarships are often referred to as “gift aid” because they don’t need to be repaid. Grants are typically need-based, while scholarships can be awarded based on merit, specific talents, or other criteria.

• Federal grants: Pell Grants are provided to students based on their financial need, as assessed through the Free Application for Federal Student Aid (FAFSA). Additionally, state grants may be accessible, varying by your state of residence and the school your child chooses to attend.
• Scholarships: These can come from a wide variety of sources, including colleges themselves, private organizations, and local community groups. Don’t limit yourself to just the well-known national scholarships. Many local scholarships have less competition and can be easier to win.

Start the scholarship search early and apply for as many as your child qualifies for. Even small awards can add up and make a difference in their overall college costs.

Federal Student Loans

Federal student loans are often a necessary part of college financing for many students. These loans offer several advantages over private loans, including fixed interest rates, income-driven repayment plans, and potential loan forgiveness programs.

• Direct Subsidized loans: Need-based loans that don’t accrue interest while they’re in school.
• Direct Unsubsidized loans: Available to all students, regardless of financial need, but they do accrue interest from the time they’re disbursed.

Remember, while loans can help your child achieve their educational goals, they do need to be repaid. At College Money Tips, our goal is to guide your child through the college journey without loans.

Work-Study and Part-Time Jobs

Federal work-study is a program that provides part-time jobs for students with financial need. These jobs are often on campus and can provide valuable work experience while helping your child earn money for college expenses.

Even if your child doesn’t qualify for work-study, consider taking on a part-time job during college. This can help cover living expenses and reduce the amount they need to borrow. Just be sure to balance work with their studies to maintain good academic performance.

Balancing school and work can be challenging for students, but online jobs offer the flexibility needed to fit employment around a busy academic schedule. From virtual tutoring to freelance writing or managing social media accounts, students can gain valuable experience while earning extra income. To explore diverse opportunities, find online jobs on Jooble that align with your skills and availability. These roles can help ease the financial strain of college life while boosting your resume.

Navigating the FAFSA

The Free Application for Federal Student Aid (FAFSA) is a crucial step in accessing many forms of financial aid, including federal grants, loans, and work-study opportunities. Many states and colleges also use the FAFSA to determine eligibility for their aid programs.

Fill out the FAFSA as early as possible each year. The form usually becomes available on October 1 for the following academic year. Some aid is awarded on a first-come, first-served basis, so submitting early can increase your chances of receiving more aid.

Be prepared to provide detailed financial information about you and your child. This includes tax returns, bank statements and information about investments and assets.

Don’t rule yourself out from receiving financial aid. Even if you believe your family’s income is too high, it’s still beneficial to complete the FAFSA. You may be surprised by the aid your child can qualify for, and some institutions require the FAFSA for merit-based scholarships as well.

Understanding Your Financial Aid Award Letter

Once your child has been accepted to a college and submitted the FAFSA, they’ll receive a financial aid award letter. This document outlines the types and amounts of aid offered.

It’s important to carefully review and compare award letters from different schools. Look beyond the total aid amount and consider the types of aid offered. A package with more grants and scholarships is generally better than one with more loans.

Don’t be afraid to reach out to the financial aid office if you have questions or if your financial situation has changed since you submitted your FAFSA. They may be able to adjust your child’s aid package based on new information.

Private Student Loans

If, after exhausting all other options, you still need additional funding, private student loans can help fill the gap. These loans are offered by banks, credit unions and online lenders.

Private loans typically require a credit check and often have higher interest rates than federal loans. They also lack many of the benefits of federal loans, such as income-driven repayment plans and loan forgiveness options.

If you do need to take out private loans, shop around to find the best rates and terms. Your child may need a cosigner, or a creditworthy individual to cosign the loan, which could help your child qualify for better rates.

Mayerle advises, “When considering private loans, compare multiple lenders and carefully review interest rates and repayment terms. Remember, federal loans often have more favorable terms, so nly consider private loans after exploring all other financial aid options.”

Toward the middle of your college journey, you may find yourself needing to reassess your financial situation and explore additional funding options. This is where understanding various credit ranges becomes important, as they can affect your ability to secure private loans or other forms of credit if needed.

Creating and sticking to a budget is a crucial skill for college students. It can help your child make the most of their financial aid and avoid unnecessary debt.

Start by listing all sources of income, including financial aid, part-time job earnings and any contribution from parents. Then, help your child list all expenses, both fixed (like tuition and rent) and variable expenses (like food and entertainment).

Identify opportunities to reduce expenses for best money management practice. For instance, purchasing used textbooks or renting them can save significant amounts each semester. Make sure to utilize student discounts and seek out free or low-cost activities on campus for entertainment.

Consider using budgeting apps to help track spending and stay on top of finances. Many of these apps are free and can provide valuable insights into your child’s spending habits.

Exploring Alternative Funding Options 

While traditional financial aid and loans are the most common ways to fund a college education, there are several alternative options worth exploring. These methods can help reduce your overall costs or provide additional funds for your child’s education and get college paid for. 

• Income share agreements (ISAs): Some schools and private companies offer ISAs, where you receive funding for your child’s education in exchange for a percentage of future income for a set period after graduation. This can be an attractive option if you’re confident in your child’s future earning potential, but carefully review the terms before committing. 
• Crowdfunding: Platforms like GoFundMe allow you to create campaigns to raise money for your child’s education. While it may not cover all expenses, crowdfunding can be a way to engage your network and potentially receive contributions from family, friends and even strangers who support your child’s educational goals. 
• Employer tuition assistance: If your child plans to work while attending school, find out if your child can take advantage of tuition reimbursement programs. Many companies provide this benefit to encourage employees to further their education, which can be a significant help in managing college costs. 
• Military Benefits: If you’re a veteran or currently serving in the military, your child may be eligible for education benefits through programs like the GI Bill. These can cover a significant portion of your child’s education expenses. 
• Cooperative education programs: Some colleges offer co-op programs where your child will alternate between periods of full-time study and full-time paid work in their field. This can provide valuable work experience and help offset their education costs. 

Remember, while these alternative options can be helpful, they should be considered alongside traditional funding methods. Always carefully evaluate the terms and potential long-term implications of any funding arrangement.

Saving Money on College Expenses

There are many ways to reduce college costs beyond just securing financial aid. Here are some strategies to consider:

• Choose a college wisely: In-state public universities are often significantly cheaper than out-of-state or private schools. However, don’t rule out private colleges entirely, as they sometimes offer generous aid packages that can make them competitive with public schools.
• Consider community college: Starting at a community college and then transferring to a four-year school can save your child thousands of dollars on tuition.
• Look into accelerated degree programs: Some schools offer programs where your child can earn a degree in less time, reducing overall costs.
• Take advantage of campus resources: Many colleges offer free tutoring, health services and other resources that can save you child money.
• Be smart about housing: Living off-campus with roommates can often be cheaper than on-campus housing. If your child does live on campus, consider becoming a resident assistant (RA) to reduce or eliminate housing costs.

Building Credit Responsibly

While in college, it’s a good time to start building a positive credit history. Doing so can help your child in the future when they need to rent an apartment, buy a car or even refinance their student loans.

Consider getting a student credit card with a low limit. Use it for small, regular expenses that they can pay off in full each month. Encourage them to pay their bills on time, as payment history is the most important factor in their credit score.

Talk to your child about being cautious with credit, though. It’s easy to overspend when you’re not using cash. Only charge what they can afford to pay off each month to avoid high-interest debt.

Learn more: How a Tuition Payment Plan Can Help You

Planning for Loan Repayment

If your child has taken out student loans, it’s never too early to start thinking about repayment. Understanding repayment options can help them make informed decisions and avoid default.

Federal student loans provide a range of repayment plans tailored to suit different financial needs. One option is income-driven repayment plans, which modify your monthly payments based on your income and family size. It’s important to investigate these plans to find the one that fits your child’s financial situation once they graduate.

Consider making interest payments on unsubsidized loans while your child is still in school. This can prevent their balance from growing due to accrued interest and make repayment easier after graduation. 

Seeking Additional Resources and Support

Remember, you’re not alone in navigating the complex world of college financing. There are many resources available to help you and your child make informed decisions. If you need help, reach out to Melissa at College Money Tips. I email every week with more information about how to get a debt-free degree, and I also work with families one-on-one to support them through the process.

Your child’s high school guidance counselor can be a valuable resource for scholarship information and general college planning advice. Once in college, the financial aid office should be your go-to source for questions about aid and managing college costs.

Look for financial literacy programs offered by your school or local community organizations. These can provide valuable education on budgeting, credit management and other important financial skills.

Online resources like the Department of Education’s Federal Student Aid website offer a wealth of information on financial aid and loan repayment options.

Paying for College: You Can Do This!

Financing a college education is a significant challenge, but with careful planning, smart decision-making, and a good understanding of your options, it’s a challenge you can meet. Remember, the choices you make now about college financing can have long-lasting impacts on your financial future.

Start planning early, explore all your aid options, and don’t be afraid to ask for help when you need it. Be proactive about managing your money while in school, and always keep your long-term financial health in mind.

By mastering the college money maze, you’re not just funding your education—you’re investing in your future. With the right approach, you can minimize debt, maximize your college experience, and set yourself up for financial success after graduation.

What is Financial Aid? Everything You Need to Know About College Financial Aid

by Melissa Brock | Sep 25, 2024 | Financial aid and scholarships | 0 comments

What is financial aid for college?

The meaning of financial aid isn’t always clear to all families. In fact, many people believe that financial aid will cover the cost of college, but that’s not the cost for all. In my years of admission, I’ve seen situations where financial aid covered the cost of college in full, and I’ve seen situations where the only thing offered to students is $5,500 in student loans. 

However, as a whole, undergraduates and graduate students received $240.7 billion in 2022-23 from all grants, federal loans, federal education tax benefits and federal work-study. The average aid per full-time equivalent (FTE) student in 2022-23 was $15,480 per undergraduate student and $28,300 per graduate student, according to the College Board.

Financial aid can seem like the most daunting hump in the getting-your-kid-to-college process. But what is financial aid, anyway? What does it entail? Don’t worry, it’s normal to be confused. 

Let’s compare financial aid to baking a cake. The ingredients — scholarships, grants, loans, work-study and out-of-pocket funds — are combined to create a finished product: Your child’s final financial aid award.  

Hang in there! Let’s dive in and learn more.

What is Financial Aid? 

Financial aid, which you may understand, is aid provided to help cover the cost of your child’s education. Scholarships are a part of financial aid. 

Financial aid can include both money that needs to be repaid and money that doesn’t need to be repaid. Financial aid can come from various sources, including federal and state governments, colleges or universities, private organizations and banks. Financial aid helps make education more affordable by reducing out-of-pocket costs for students and their families. It’s a wonderful thing and one of the best ways to pay for college!

What are the different types of financial aid? Let’s take a look at the definition, eligibility and some popular types of financial aid.

Grants 

Grants are money that your child does not need to repay. Eligibility for grants varies, but they are often need-based and might come from your state or the federal government.

Popular grants from the federal government include the Pell Grant and the FSEOG Grant.

Scholarships 

Scholarships differ from grants because they are typically based on merit or other specific criteria. However, like grants, your child does not have to repay scholarships. Scholarships are not necessarily awarded based on need (but they might be).

Loans 

Your child must repay loans with interest. There are two different types of loans: federal vs. private loans, and the terms, interest rates and repayment plans depend on the type of loans your child takes on.

• Direct Subsidized and Unsubsidized loans: The U.S. Department of Education (through the federal government) offers two kinds of Direct loans to students: Direct Subsidized loans, which are based on need. The government pays the interest on subsidized loans while your child is in school as long as they attend college at least part-time as well as after the first six months after they leave school. Direct Unsubsidized loans are not based on financial need, and interest accumulates right away on Direct Unsubsidized loans. Students can borrow anywhere from $5,500 and $12,500 in Subsidized or Unsubsidized loans depending on their year in school. 
• Direct PLUS loans: Parents, this one’s for you! Parents of undergraduate students can get Direct PLUS loans (also commonly called Parent PLUS loans) for students, but those pursuing a graduate degree can also get a PLUS loan. This is a federal loan that requires a credit check.
• Private student loans: Private student loans come from private companies, like banks and credit unions. Private loans might have variable interest rates and cannot be consolidated with Direct loans. These loans (which are typically more expensive than federal student loans) include terms and conditions set by the lender. Private lenders want to see a credit score to qualify. Private loans may only come in a variable interest rate (instead of a fixed rate).

When deciding between federal and private student loans, learn as much as you can, and if your child can do so, avoid them. Learn about repayment fees, interest rates (such as variable or fixed), when repayment starts and the total cost of the loan, including interest. Learn about any interest rate reductions as well.

Learn more: What is Need-Based Financial Aid?

Work-Study Programs

Work-study programs are federal programs. Money comes from the federal government and goes directly into your student’s wallet. Students must apply for a work-study job on campus, and jobs might include working in the cafeteria, admission office, academic office or more on campus. However, note that work-study programs are not automatic — students must proactively apply for a job and go to work in order to receive a paycheck. 

Of the above options, grants and scholarships are free money. Work-study is not technically free money, because your child must put forth the effort to earn it. It also typically does not go directly toward tuition — most colleges and universities pay your child. They must put it toward tuition and fees themselves.

Anyone can qualify for financial aid, which is why it’s important to apply for it, even if you don’t think your child will “get anything.” 

Factors that affect financial aid for students include financial and other general eligibility for financial aid requirements, including: 

• Financial need, including income 
• U.S. citizenship or eligible noncitizenship
• Enrollment status
• Special circumstances (such as for independent students and veterans)

Your student will eventually receive a financial aid award letter from all colleges they applied to. When the letter will arrive depends on the school.

Learn more: What is Room and Board? and Costs of Room and Board

How is Financial Aid Awarded? 

This is the confusing part for many families, and rightfully so. Each school follows a unique process in terms of dates, deadlines, procedures and awards. They even follow a different process for how they display your child’s aid! Your child might receive a financial aid award letter from various schools at different times of the year.

The amount of aid offered can cover up to the full cost of attending college. It will be broken down into three categories: free money they don’t have to pay back, earned money (typically work-study) and borrowed money (either from federal or private student loans).

It’s important to understand every aspect of the various financial aid awards and how they’re packaged, because it might be different compared to other financial aid awards your child receives. 

Learn more: 6 Ways to Handle a Disappointing Financial Aid Award

How to Get Financial Aid

There are several steps your child can take to get need-based or merit-based aid.

1. Apply for admission.

Your child can’t get scholarships from colleges until he or she applies. What type of admission does each college have? Rolling admission? Early decision? Early action? 

It’s important to know each admission type, ensure your child follows all directions and applies well ahead of the deadline. Applying incorrectly (or late) could also directly affect your child’s financial aid opportunities. 

2. Ask colleges about scholarships.

All colleges post information about scholarships on their websites. To get a full understanding of what a school offers, it’s a good idea to make contact with the admission office at each school. Colleges and universities can’t post every single scholarship they offer on their websites. Those lists are long!

For example, an alumna could have donated a scholarship for red-headed students education majors who like to knit. (Okay, that could be an exaggeration.) But there are dozens of scholarships that you might not know about unless you take the time to turn over every single stone at a particular college. 

Just ask!

Learn more: Do You Get Extra Financial Aid for Off-Campus Housing?

3. Apply for outside scholarships.

You probably want your child to apply for every bit of scholarship money possible. That means doing some extensive research online, in your community and through your school counselor’s office. There’s no one way to piece together the scholarship opportunities available to your kiddo. You can search in the following places, according to the U.S. Department of Education:

• The financial aid office at the colleges your child plans to attend
• Your child’s school counselor 
• Scholarship search tools — but make sure they’re valid
• State grant agencies
• Library reference section
• Foundations, religious or community organizations, local businesses, civic groups
• Organizations related to field of interest
• Ethnicity-based organizations
• Your employer or your kids’ employers

Pro tip: Ask colleges whether they offer scholarship competitions. Many do, and it’s a great way to earn more scholarship money.

4. File the FAFSA and (if required) the CSS Profile.

It’s important to file the FAFSA even if you think your child won’t qualify for anything. If the college requires the CSS Profile, complete that as well. 

Two of the best ways to receive financial aid include filing the Free Application for Federal Student Aid (FAFSA), and if the schools your child is considering require it, the CSS Profile.

FAFSA Overview

The FAFSA is just like it sounds — a free application you file to determine whether your child can receive federal financial aid in the form of federal grants, loans and work-study. Colleges and universities also use the FAFSA to determine how much aid to award your child. 

To complete the FAFSA form, all contributors (your student, you and your spouse if you are no longer married to your child’s other parent) must create a StudentAid.gov account using their FSA ID, ensuring their name and Social Security number match exactly. Once you gather necessary documents like tax returns and financial records, dependent students must include parent information, and you must accurately reflect marital or financial status changes. You and your child can sign and submit the form only after all contributors have completed their sections, with confirmation provided via email.

You can typically file the FAFSA on October 1, but recent lags in the new FAFSA simplification (which made the FAFSA shorter) have pushed out the FAFSA to December 1. You can still sign up for an account prior to December 1. 

Should you file the FAFSA, even if you think your child won’t “get” any aid from it?

Yes! You must also file the FAFSA every academic year your child is in school or they won’t qualify for additional federal financial aid (including renewable aid they received the previous year). It’s usually easier to renew the FAFSA because the FAFSA stores your personal and demographic information. 

CSS Profile Overview

The CSS Profile is also a free application, but it differs from the FAFSA. The CSS Profile is for institutional aid, not federal aid, and it asks more detailed questions, such as the net worth of small family businesses, home equity, medical expenses and more. It also asks you questions that do a deeper dive into your child’s income and assets.

You won’t pay anything for the CSS Profile if you make under $100,000 per year, if your child qualifies for an SAT waiver or if a student is an orphan or ward of the court under age 24. If you don’t qualify, submitting your CSS Profile to one college costs $25, and additional reports cost $16 each.

Not every school requires the CSS Profile, so check the list of participating institutions to learn more about whether the schools your child is interested in require the CSS Profile. The financial aid application process definitely lengthens when you file both the FAFSA and CSS Profile, but they can both help your child qualify for both federal and institutional aid.

5. Compare financial aid awards.

You’ve applied to several schools, filed the FAFSA, auditioned or interviewed for scholarships and attended scholarship events. Next, you’ll receive financial aid awards from schools. Sit down and compare them. 

Be sure you do an apples-to-apples comparison. What does that mean? Let’s say you’re getting a $19,000 merit-based scholarship from College X and a $17,000 merit-based scholarship from College Y. That doesn’t mean that it’s necessarily cheaper to go to College Y. 

What’s the full price for each? Figure that out, then subtract the amount of financial aid you’re awarded from each college to see which is cheaper.

Learn more: How to Get In-State Tuition When You Live Out of State

Many families wonder if they’re doing “the right things” when they look into financial aid, so here are some of the most common financial aid mistakes to keep in mind: 

• Not applying early enough: Your child can start applying for financial aid early. In fact, it’s never too early to apply for scholarships! (My daughter received scholarships in fifth and sixth grade and I still look for opportunities all the time.) 
• Believing the FAFSA will cover everything: One of the most common FAFSA mistakes is thinking filing the FAFSA will take care of the full college bill. Filing the FAFSA does not mean it will cover all your child’s college bills. In some cases, the FAFSA will only offer federal loans. Don’t make the mistake of thinking that your ticket to financial aid involves filing the FAFSA, because it likely won’t take care of everything.
• Not exploring all available aid options: Leave no stone unturned in your quest to look for available aid. This means creating a robust plan to look for scholarships, looking into merit-based scholarships and more.
• Overlooking school-specific aid: Ensure you understand everything you need to do to apply for school-specific scholarships and other types of aid at each institution your child’s considering. For example, if a school offers a presidential scholarship, ensure your child knows how to apply for it if they qualify.

Learning how to avoid financial aid errors is one of the most beneficial things you can do for your student, and it can seem tricky because every school does things just a little differently. 

Financial Aid Myths Debunked

You’ve heard the financial aid myths, like “only low-income students qualify for financial aid,” (ridiculous!) so let’s go over some of those. Steer clear of these dangerous ideas!

1. Only low-income students qualify for financial aid. 

REALITY: Students of all income levels qualify for financial aid, whether it is merit-based, financial-based or other types of aid. Financial aid eligibility is based on various factors, not just income. Many families with higher incomes still qualify for aid due to their specific financial circumstances, especially due to the cost of attendance at different schools.

2. Only students with excellent grades get financial aid. 

REALITY: While good grades can help with merit-based scholarships, financial aid is primarily need-based. Students from various academic backgrounds can qualify for grants, loans, and work-study programs.My family earns too much money, so I won’t qualify for financial aid.

3. Private colleges are always more expensive. 

REALITY: While private schools often have higher sticker prices, they also tend to offer more generous financial aid packages. In some cases, attending a private school can be more affordable than a public university.

4. Applying for financial aid is a one-time process. 

REALITY: You need to reapply for financial aid every year because financial situations can change.

5. Financial aid only comes in the form of loans. 

REALITY: Financial aid can come in various forms, such as grants, scholarships, work-study and loans. Not all aid has to be repaid. 

Learn more: How to Get Rid of Student Loans

6. You should wait until you’re accepted to a college to apply for financial aid. 

REALITY: It’s important to apply for financial aid as soon as possible. Most schools have deadlines, and aid is often distributed on a first-come, first-served basis. 

7. Only U.S. citizens can receive financial aid. 

REALITY: Many non-citizens, including permanent residents and eligible non-citizens, can qualify for financial aid. Some states and colleges also offer aid to undocumented students. 

8. Scholarships are only for star athletes or high academic achievers.

REALITY: Scholarships are available for a wide range of criteria, including community service, hobbies, unique experiences or even being left-handed! Opportunities exist for so many different types of students!

9. Parent savings in a 529 plan will prevent financial aid eligibility.

REALITY: While savings in a 529 plan are considered in financial aid calculations, they have a relatively small impact compared to income. Most families are better off saving for college than relying solely on financial aid.

10. Financial aid packages are non-negotiable. 

REALITY: In some cases, you can appeal a financial aid decision. If your family’s financial situation changes or if you receive a better offer from another school, you may be able to negotiate for more aid.

Understanding how this process works is the best way to establish as much control and your choices for financing college.

Most importantly, financial aid can come from a variety of sources: federal and state agencies, colleges, high schools, community organizations, foundations, corporations and more. Do everything you can to learn more about all your child’s opportunities and how it will help them in the future.

FAQs

What is financial aid and what does it do?

Financial aid can help your child tackle the costs of college. It comes in a wide variety of forms, and it’s truthfully like a puzzle you can put together to help pay for college. Whether it comes in the form of scholarships, grants or a small amount of loans, when put with the money that comes out of your pocket, it can make a huge difference in your child’s life.

Do you pay back financial aid?

Financial aid in the form of a loan must be paid back. You must repay federal loans after you graduate or stop attending school, with a grace period of six months after finishing school. Your child must also repay private student loans. Your child doesn’t need to repay other forms of financial aid, such as scholarships and grants.

Is all financial aid free money?

No, financial aid is not all free money. It includes loans, which your child must repay. For example, if your child receives federal student loans, they will have to repay them typically within six months after graduation.

How to Get Rid of Student Loans

by Melissa Brock | Sep 11, 2024 | Financial aid and scholarships | 0 comments

Here’s how to get rid of student loans: Repay them yourself. No “magic plan” will make them go away faster than you can actively repay them on your own — not even government plans. 

The average student loan debt was $29,400 among bachelor’s degree recipients for the 2021-2022 school year, and among all borrowers, the average debt balance is $38,787.

Naturally, you might be in a hurry to get rid of this debt as soon as possible. But what’s the best way to get the job done? Let’s discuss.

Why Income-Driven Repayment or Federal Programs Aren’t the Answer

Many people assume they can take on loans as part of financial aid and wait to enter into a repayment plan after graduation. They assume they’ll sit happy until everything gets forgiven at the end, as in the example of income-driven payment plans. (Your payment is based on your income, and you’ll continue to pay on them for 20 or 25 years until forgiveness swoops in to save the day.)

But ultimately, you may pay more over time if you rely on federal forgiveness programs, so those programs aren’t the answer, because the standard repayment plan is just 10 years. Why wait for 20 to 25 years? (Note that it’s completely understandable that many people have situations that cause them to need to have one job only — circumstances might prevent them from hustling or handling a second job.)

However, we need to keep the end goal in mind: getting rid of student loan debt. And note that learning how to get rid of student loan debt without paying doesn’t work. You can’t shake off student loans, and you might find yourself in a position of having your wages garnished to pay for student loans. You don’t want to be in that position, do you?

No! So pay attention to what’s going on with your loans and make a plan to pay them off. No more regrets about how you spent way too much money on room and board, how you spent so much on pizza when you lived in off-campus housing, or that you should have gotten in-state tuition. No more regrets. Now it’s time to focus on paying it off.

Learn more: What is Need-Based Financial Aid?

How to Get Rid of Student Debt

Here are the real ways to learn how to get rid of student debt. If you’re at the beginning of your journey, look into how student loans work.

Pay Extra Toward the Principal

There are a few parts that make up your student loans: the principal balance, or the amount you borrowed. It also includes interest, or what you’ll pay for borrowing the loan, and the fees the lender charges as well. You must make at least the minimum amount payment on your student loans. 

Paying extra toward the principal will help you pay off your loans faster. The more you pay, the less interest you’ll owe. A student loan payoff calculator can tell you how quickly you’ll pay off your student loans and how much overall interest you’ll save over the life of your loan.

Here’s an example of how paying off student loans early can save you money with a $30,000 student loan and a fictitious interest rate of 5% per year:

• Loan Amount: $30,000
• Interest Rate: 5% per year
• Loan Term: 10 years (120 months)
• Monthly Payment: $318.20

Regular Repayment (10 Years):

• Total Interest Paid: $8,184.24
• Total Amount Paid: $38,184.24

Early Repayment (5 Years):

• Monthly Payment: $566.14
• Total Interest Paid: $3,968.08
• Total Amount Paid: $33,968.08

Savings by Paying Off Early:

• Interest Savings: $4,216.16
• Time Saved: 5 years

By increasing your monthly payment and paying off the loan in five years instead of 10, you could save over $4,000 in interest. This example shows how even small extra payments can lead to significant savings and financial freedom sooner.

Make More than the Minimum Payment

One of the best ways to pay off your student loans is to make more than the minimum payment. Once you determine your budget (how much money you have coming in and going out) you’ll know exactly how much extra money you have in cash at the end of the month. If you can kick in just $50 extra at the end of the month, that’s okay — it’s better than nothing! If you can double your student loan payment, that’s amazing. 

Don’t worry about how little you’ve increased it as long as you do something to increase your payment each month. As you receive raises and bonuses, you can consider upping your minimum payment. Some people also elect to get a side hustle to raise your minimum payment. 

Here are some ideas: 

• Round up payments to the nearest $10 or $50
• Make bi-weekly payments instead of monthly
• Use windfalls like tax refunds or bonuses for extra payments
• Allocate a portion of any pay raise towards extra payments
• Apply extra income from side gigs or overtime
• Cut discretionary spending and redirect savings to payments
• Pay extra towards the highest-interest debt first
• Use cashback rewards or rebates to make additional payments
• Avoid adding new debt to maximize repayment efforts
• Make additional payments directly after receiving your paycheck

Get on a Budget

Get on a budget. If there isn’t another phrase greeted by a louder round of groans, I don’t know what it is. Budgeting might seem like a huge bummer to a lot of people, but it doesn’t have to be, especially if you’re meeting your goals at the end of the month. 

One of the best ways to get on a budget is to consider using a budgeting app. However, you don’t have to do that — if you’re disciplined, you can create a budget all on your own and stick to it, even if it’s in a simple spreadsheet.

There are five main steps to getting on a budget: 

• List your income. Tally up everything you make, including any side hustle money that you earn. 
• List your expenses. How much are you spending per month relative to the amount you earn? If you’re spending more than you earn, that’s a quick sign that you need to start watching your money. 
• Subtract your expenses from your income. What’s left over? How much money do you have left? Are you spending more than you earn?
• Track everything coming and going. Keep track of your transactions so you know exactly how much you can budget per month. You may even have different budget categories, like groceries, clothing, etc. Keep in mind the important things on your list, like setting aside money for retirement and an emergency fund.
• Make a new budget each month. Budgets can be fluid, which is a beautiful thing. You may want to challenge yourself to save more than you had last month, or put more toward your student loans than you did the month before. 

Cut Spending

Can you cut your spending? Chances are, there’s something that you don’t need. Here are some ideas you can cut out: 

• Extended warranties
• Gym memberships
• Premium cable packages
• Bottled water
• Designer clothing
• Name-brand medications
• Banking fees
• Luxury car features
• Subscription boxes
• Fancy coffee

After you get on a budget, you might consider searching for these items that you regularly spend money on. Who needs ’em? You don’t, especially when you’re trying to get rid of student loans.

Pay While in College 

Paying on your loans while in college: Is it possible? Yes, and you may want to consider that approach if you have an unsubsidized federal loan. Unsubsidized loans means the government doesn’t pay for your loan while you’re in school, unlike subsidized loans. If you can tackle some of your costs while you’re a student, you can consider this possibility. Doing so may help you reduce your overall debt, reduce stress after graduation and give you a head start on paying for college. 

If you’re still in school, look into a tuition payment plan to help you — it can break up the costs.

Increase Income

How might you increase your income? Can you get a side gig in the very popular gig economy? You might consider: 

• Freelance writing
• Rideshare driving
• Pet sitting/dog walking
• Virtual assistant
• Graphic design
• Tutoring
• Photography
• Delivery driving
• Social media management
• Handyman services
• House cleaning
• Online surveys
• Event planning
• Blogging
• Babysitting
• Transcription services
• Dropshipping
• Personal fitness training
• Freelance web development
• Selling handmade crafts

Or what about a second job? If you have the energy to work two (or even three) jobs, it would be well worth it to pay off your student loans faster. Consider the following:

• Retail associate
• Bartender
• Restaurant server
• Call center representative
• Delivery driver
• Warehouse worker
• Customer service representative
• Administrative assistant
• Security guard
• Hotel receptionist
• Uber/Lyft driver
• Bank teller
• Personal care aide
• Janitor
• Cashier
• Night auditor
• Fitness instructor
• Receptionist
• Freelance designer
• Landscaping assistant

Or you can ask for a raise at your existing job, of course. Once you make a decision about how you’ll increase your income, you can put any extra hard-earned money toward your debt. It’s a fantastic way to get out of debt much more quickly than you might have been able to do previously.

Refinance Only if it Makes Sense

Refinancing means replacing your existing loans (federal, private or both) with a private loan. Refinancing doesn’t reduce the amount you owe — it changes your loan in some way so you owe less over your loan term. These are the ways it can change your loan positively:

• Give you a shorter repayment period: Refinancing a loan can result in a shorter repayment period, which allows you to pay less interest over time. However, it’s important to note that with a shorter repayment period, it’s likely that you’ll have to make higher monthly payments on your student loan debt.
• Lower your interest rate: Getting a lower interest rate is one of the biggest benefits of refinancing, because you can save money over your loan term if you have a lower interest rate. For example, if you owe $30,000 on your student loans at 7% and a term length of 20 years, you’ll pay more than $26,000 in total interest over the course of the loan. If you refinance to a 5% interest rate and keep the same 20-year term, you’ll save around $8,000 in interest.
• Reduce your monthly payments: You can also lower your monthly payment through a refinance. However, it also increases your loan term, and a longer loan term means you’ll end up paying more in interest over time. 

The borrower requirements generally vary by lender, but you generally must have good credit with an established credit history, stable income, a degree from an accredited college or university, and a certain amount in student loans.

Shop around with a few different private loan lenders to see if a refinance makes sense for you. 

Don’t Bank on Government Plans

So much has been said about the benefits of sticking to government plans, like loan forgiveness programs or deferment or forbearance options. However, it’s a much better option to simply pay off your student loans yourself, as we’ve discussed. But why, exactly?

Here’s exactly why: Let’s take Public Service Loan Forgiveness (PSLF) as an example. You must make 120 qualifying monthly payments on your student loans and work for a qualifying employer (such as a government or nonprofit organization) to qualify for PSLF.

In other words, you must continue making payments for 10 years, plus you might give up on more beneficial routes of employment, including more lucrative job opportunities. (However, it is important to note that you can get certain forgiveness benefits if you work as a teacher, for the military or as a health care worker.) 

Why drag out your student loans longer if you could finish paying them off in five years instead of 10? You’ll save money by not dragging them out. Income-driven repayment plans can also affect you in the long run as well because you pay based on your earnings and family size.

Federal loans also allow you to temporarily pause your payments through deferment or forbearance if you face financial hardship, unemployment, or if you’re returning to school. You will still accrue interest while your loans are in forbearance, so you’ll owe even more money over your loan term while they’re in forbearance.

Need an example? Let’s break down an example of how an income-driven repayment plan can end up costing a student more money over time with actual numbers:

• Loan amount: $50,000
• Interest rate: 5%
• Annual income: $40,000 to start, increasing by 5% per year
• Family size: 1

With the Standard Repayment Plan:

• Repayment term: 10 years
• Monthly payment: $530 (fixed)
• Total payments over 10 years: $530 x 120 months = $63,600
• Amount added to original loan amount: $13,600

With PAYE Repayment Plan:

1. Years one through three: Monthly payments are income-driven. Let’s say the payments start at $200 per month.
   • Total for first 3 years: $200 x 12 months x 3 years = $7,200
2. Years four through six: As income increases, the payments rise to $350 per month.
   • Total for next 3 years: $350 x 12 months x 3 years = $12,600
3. Years seven through 10: Payments continue to rise as income increases further, say to $450 per month.
   • Total for final 4 years: $450 x 12 months x 4 years = $21,600

Total payments over 10 years (before forgiveness at 20 years) = $7,200 + $12,600 + $21,600 = $41,400

But here are the hidden costs. During the 10 years, interest accrues on the loan balance. In this example, the borrower’s monthly payments early on ($200, $350) may not cover the full interest on the loan, leading to the loan balance increasing over time (negative amortization).

Even though the borrower only paid $41,400 over 10 years, which seems like a savings compared to the standard repayment plan, here’s where the cost comes in: They could have paid off the loan faster under a standard repayment plan and avoided the extra accrued interest. By the time year 20 rolls around, how much would you have paid under the income-driven plan versus the standard repayment plan, or better yet, paying your loans off early?

It’s quite possible that you feel like you don’t make enough to pay off your loans, but consider getting a second job or side hustle instead of believing you have to get on one of the income-based plans.

Watch Out for Consolidation

Consolidation means taking all of your federal student loans and turning them into one loan with one interest rate. It may not be a good idea to consolidate your federal student loans because what happens if some of your federal loans have a lower interest rate? 

Consolidation can also lengthen your repayment period, so you’ll likely pay more in interest over the years. In addition to that, outstanding interest on your consolidated loans becomes part of the original principal balance on your new consolidation loan, meaning interest might accrue on a higher principal balance than if you’d kept your loans divided.

Consolidation might also mean lower interest loans might become higher when you put them all together. Ask questions about what it’ll mean for your loans before you opt to consolidate.

Consider All Angles When Getting Rid of Student Loans

The message: You and only you have the power to learn how to get rid of student loan debt. Student loans won’t magically disappear, unfortunately!

Wondering how to get rid of private student loans, including how to get rid of Navient private student loans or private loans from another provider? The same principles above can apply to private student loans as well. 

The biggest thing is to plug away at them, and even if you have a low interest rate, consider what having student loans hanging over your head will do for you. If you owe money, that entity will control your life until you pay it back.

Learn more: How to Apply for a Parent PLUS Loan and private vs. federal student loans for college

FAQs

We’ll take a look at a few frequently asked questions about getting rid of student loans below.

Can you get student loans wiped out?

Yes, in very rare situations, you can have your student loans discharged, but that doesn’t happen very often. But what does that mean, exactly? When your student loans are discharged, you won’t have to pay back some or all of your loans. You may also qualify for forgiveness after successfully participating in a government plan, such as PSLF. 

However, in many situations, these programs prolong your student loan debt and cause you to pay more over time. And if you’re waiting for a fairy godmother to come and wipe out your student loans, dream on!

What happens if I don’t pay my student loans?

After a 30-day-late payment, your loan servicer will charge you a late fee up to 6% of the amount due. After 90 days of no payments, your servicer will report your loan as delinquent to the credit bureaus. You don’t want that, because it can affect your credit score, potentially preventing you from buying a house or even affecting your ability to get a job (some employers check your credit!).

How do you pay off student loans when you’re broke?

I get it — it’s so difficult to understand how you’ll even put food on the table sometimes. However, consider getting a side hustle or part-time job to set aside money for paying off loans. Ask your buddy if he needs extra help in his junk hauling business, or use your skills you learned in college to create a side hustle that you and only you can do. The sky’s the limit, so use your imagination.

Debt-Free College Dream: How One Family Earned Thousands of Dollars in Scholarships and Transformed Their Kids’ Futures

by Melissa Brock | May 2, 2024 | Financial aid and scholarships | 0 comments

Are you worried your child will graduate with crippling student loan debt? 

Meet the family who cracked the code to debt-free college education and transformed their kids’ futures forever! With determination and strategic planning, they embarked on a dedicated scholarship hunt. From meticulous essay-crafting sessions to scouring for scholarship opportunities, they left no stone unturned. 

And the results were staggering.

LaWanda Hanes mentors first-time single moms in Waxahatchee, Texas, and at her church. 

“Nobody can afford college, but everyone can go,” LaWanda often says.

It’s one of her favorite phrases, and she repeats it often with the single moms she mentors, many of whom believe they can’t make college happen for themselves. 

She, of course, mentors her own kids as well. Hanes and her husband, Thomas, vowed that their two children, Jasmine and Tre, wouldn’t face the same student loan burdens that they encountered after their own graduations. 

“We decided our kids would not borrow for school,” LaWanda said emphatically. 

No ifs, ands or buts.

The dream is coming true. 

LaWanda and Thomas’ daughter, Jasmine, graduated with no debt. Jasmine went to college at University of North Texas for interior design and graduated in two and a half years. She went into the university with an associate’s degree through a dual-degree program. 

Their son, Tre, is on his way to graduating debt-free with an engineering degree through the University of Oklahoma’s merit program. He’s currently in his third year of college.

The Spark for a Debt-Free Degree

The Haneses’ desire for their children to achieve a debt-free education grew out due to their own student loans.

“Our journey with our kids started with our journey to get out of debt ourselves. We have five degrees. [Thomas] has a bachelor’s and a master’s degree and I have a bachelor’s degree and two master’s degrees,” LaWanda said. “Fast forward 10 years, and we are 30 years old, with two young kids and $110,000 in student loan debt.” 

They started with less debt, with about $75,000 to $78,000 to their names out of college. Some twists and turns required them to take deferment and unemployment, and they found themselves $110,000 in debt in no time, with both subsidized and unsubsidized loans. (The interest that built on itself didn’t help, either.)

The Payoff Day: The Very Best Christmas Present

LaWanda said her kids sacrificed just as much as she and her husband did. LaWanda said Tre and Jasmine had grown up understanding that there wasn’t a lot of money available to purchase “extra” things at the store. “They understood how hard it was for us to get out from under these student loans,” LaWanda said.

After one Christmas with few gifts, LaWanda said she and Thomas took their kids to the bank and gave each child $500. Both kids turned the money over to a loan officer. 

The whole family felt like screaming with happiness. They were finally out from under their student loan debt burden.

Immediately after, LaWanda and Thomas took them to dinner at Red Robin, where everything the kids had asked for Christmas sat under the table. The excitement bubbled over so much that they actually did need to scream. 

Their waitress heard the commotion and said, “I just want to know what’s going on here. It sounds like something amazing.” When she heard their story, the waitress almost jumped up and down alongside them — their excitement was infectious.

The Panic Moment

Early in high school, however, Jasmine worried that she wouldn’t be able to pay for college.

Turns out, Jasmine thought it was a money problem.

A worried LaWanda reassured her, but was firm. She told her daughter, “You have to go to college or have a skill set.” She added that the family had a 529 but said that the savings wouldn’t take care of everything. She informed Jasmine that the less they would have to pay out of pocket, the better.

Two Debt-Free Degrees: How They Did It

“We started junior year. Nobody told us we should start looking for scholarships earlier,” LaWanda said. If she knew she needed to look earlier, she would have. 

Jasmine and LaWanda had a system — they met every Sunday about the scholarship plan for the week. LaWanda paid her kids $5 for every scholarship application they completed, but they had to write the essay. LaWanda agreed to put the packages together for them. 

Jasmine put about 60 to 70 scholarships on her list, and Tre had about 30. 

Jasmine had an interest in the hobby space, danced, sang and competed in softball. She was also a cheerleader. She looked into scholarships in all those areas, as well as local sorority and fraternity chapters, local banks, mom’s clubs and the chamber of commerce. 

At a certain point, Jasmine had a system down so that all she had to do was tweak her essays to fit the scholarship. They had a color coding method on a spreadsheet — green was for anything not submitted, yellow indicated scholarships “in process” and red indicated “in danger of missing the deadline” or “denied.”

“Both of them got merit scholarships. People were just throwing things at us. Jasmine’s story was she got so much money in scholarships that the school ws sending us checks back!” LaWanda even said that the pastor of their church called Jasmine the “rich kid.” 

“A lot of wins were local wins. We didn’t get a lot of national scholarship.We kept things more local and at church, people would send us stuff and just want to help us,” said LaWanda. She added that they both received $10,000 to $12,000 every year from churches in Dallas-Fort Worth and Oklahoma., which helped make up the bulk of their awards.

Their son’s path to engineering scholarships wasn’t quite as easy, but with perseverance and a little help from diversity and inclusion programs, he secured the funds needed to take care of college.

By the time it was all said and done, Jasmine went to college for free.

Financial Discipline for a Lifetime

But it wasn’t just about scholarships. LaWanda and Thomas instilled financial discipline from a young age, teaching their kids the value of budgeting and saving. Jasmine now has a paid-for car (in cash!) and the freedom to pursue her passions without the shackles of student loans.

From prioritizing scholarship applications to leveraging local resources, the Haneses prove that it’s possible to graduate without student debt.

Now that she’s out of school, Jasmine has noticed how her peers have begun paying back their student loans and struggle to make ends meet. 

“She thanks us all the time that we helped her go to college without student loans,” LaWanda said.

So, if you’re ready to say hello to a debt-free future, join the debt-free revolution today! Get the exact steps in the College Money Tips debt-free degree checklist so your child can avoid loans.

What is Need-Based Financial Aid?

by Melissa Brock | Feb 23, 2024 | Financial aid and scholarships | 3 comments

Need-based financial aid: It’s one of these mystifying terms that admission offices throw around when you visit colleges. I can vouch for that — I worked in college admissions for 12 years.

There are many ways you can take care of college costs. You can pay for it all out of pocket; your child might earn a scholarship because of her violin-playing talents or other skills. Or your child might get need-based financial aid.

What is need based financial aid, exactly? It’s exactly like it sounds — it’s aid you receive based on your family’s financial situation. Or, in rare cases, it’s based on your financial situation if you are an independent student. Your grades, test scores or extracurricular achievements don’t factor in. 

Key Takeaway

Colleges award need-based financial aid, determined by your family’s financial situation, upon filing the Free Application for Federal Student Aid (FAFSA). Colleges assess income-related answers to grant your child a financial aid award, comprising grants, scholarships, work-study and loans. Per the National Center for Education Statistics, over 85% of students receive financial aid, including need-based assistance. 

Simple enough, right? 

Right!

Need based financial aid depends on several factors, such as income, assets and the cost of attendance at a particular institution. Examples of need-based financial aid include grants, scholarships, work-study programs and subsidized loans. 

Types of Need-Based Financial Aid

Need-based financial aid comes in various forms, each designed to help students meet those. What qualifies for need based financial aid? Here are some common types:

• Grants: Grants are financial awards your child doesn’t have to repay — yay! The government, colleges or private organizations often provide them. Need based grants examples include the Federal Pell Grant, Federal Supplemental Educational Opportunity Grant (FSEOG) and state-based grants. In other words, always say “yes” to grants if your child receives them on the financial aid award! However, check into the requirements for the grant. For example, your child may stop receiving it if they drop out of school.
• Scholarships: Like grants, your child does not need to repay scholarships. (Scholarships should always prompt your family to celebrate!) Now, the tricky thing with scholarships is that your child may receive them due to financial need. Still, they can also earn them for non-scholarship reasons, including due to academic achievement, athletic ability, talents or other criteria. Many colleges and universities offer scholarships to help students afford tuition and other expenses.
• Work-study programs: Students can work part-time jobs, called work-study, typically on campus, to earn money to help pay for educational expenses. Many people don’t realize that work-study is need-based, but it is! Your child’s wages earned through work-study are often subsidized, meaning the employer (usually the college or university) pays a portion of your student’s wages. (Note that your child will not receive the work-study money if they don’t sign up to work a job on campus!)
• Subsidized loans: Subsidized loans are a type of federal student loan where the government pays the interest. In contrast, the student is in school at least half-time, during the grace period after leaving school and during deferment periods. They differ from unsubsidized loans because unsubsidized loans are not based on need. If you have to choose between subsidized and unsubsidized loans, choose subsidized!
• Tuition waivers and discounts: Some colleges and universities offer need-based tuition waivers or discounts to students who demonstrate financial need. These waivers and discounts can significantly reduce the cost of tuition for eligible students.
• Fee waivers: Fee waivers may be available for standardized tests such as the SAT or ACT and for college application fees. Students from low-income families may qualify for fee waivers to reduce or eliminate the costs associated with these tests and applications.

These are just a few examples of the types of need-based financial aid available to students. It’s a great idea to research all options and work closely with your child’s college’s financial aid office to determine the best package for their needs.

You may have heard about something called “merit-based aid,” and it’s different from need-based aid, but how?

Merit aid (which can come in the form of scholarships, grants, tuition waivers or other awards) is awarded based on the student’s academic, athletic, artistic or other achievements rather than financial need. The merit aid awarded is determined by the student’s performance in standardized test scores, GPA, extracurricular activities, talents or leadership qualities.

Students may be automatically considered for merit aid based on their application for admission to the college or university, or they may need to submit additional materials or applications to be considered.

Who Qualifies for Need-Based Financial Aid?

Qualifying for need-based aid includes a few important requirements. Your child must demonstrate financial need, be a U.S. citizen or eligible noncitizen, and enroll in an eligible degree or certificate program at a qualified college or career/trade school. 

Check out the other eligibility requirements.

How to Qualify for Need-Based Financial Aid for College

Students typically qualify for need-based aid by completing the FAFSA. However, they may qualify for need-based aid by filing the CSS Profile, another online application colleges and scholarship programs use to award non-federal institutional aid to students. 

The FAFSA will ask questions such as:

• What is your tax filing status?
• What was your adjusted gross income?
• How much did you earn from working?
• What is the total current balance of your cash, savings and checking accounts?
• What is the net worth of your investments?
• What is the net worth of your current businesses and/or investment farms?
• What were your total tax-deferred pension payments?
• How much did you pay to your IRA or Keogh?
• How much total child support did you receive?
• What was your total tax-exempt interest income?
• What were your total untaxed portions of IRA distributions?
• What were your total untaxed portions of pensions?
• What were your total allowances received?
• What were your total veterans noneducation benefits?
• What was the total of your other untaxed income or benefits?
• What other money has been paid on your behalf?

This is just a short list of questions it asks (and yes, they are kind of a snooze-fest). However, the great news is that it takes less time than it has in the past due to the FAFSA Simplification Act put in place, which overhauled the processes and systems used to award federal student aid, starting with the 2024–25 award year. 

This is a common question, by the way: Is FAFSA need based financial aid? The answer is no, it is the tool you use to get need-based financial aid.

How is Need-Based Financial Aid Calculated?

Yep, common question: How is need based aid determined? 

Here’s how financial aid works: Submitting the FAFSA collects information about your family’s income and assets (as seen above). The information provided on the FAFSA is used to calculate your Student Aid Index (SAI), which is the amount the federal government believes you as a family can contribute toward education expenses.

The FAFSA now uses the SAI to measure your family’s ability to pay for college. It has done a few new things, including removing the number of family members in college from the calculation and allowing a minimum SAI of -1500. 

With the introduction of the SAI, allowing a minimum of -1500 means that some students may have a negative SAI, indicating that they have very high financial need and may be eligible for additional financial aid beyond what was previously calculated using the EFC.

The SAI also signals separate eligibility criteria for Federal Pell Grants. The Federal Pell Grant should now reach more students with financial need.

Note: The SAI should have consequences for families with a small business. For the first time, parents who own companies with less than 100 employees will have to count the value of their business toward the financial aid calculation. You can find your child’s SAI on the FAFSA Submission Summary after you complete the form.

How Financial Aid Offices Use the SAI

The financial aid office at each college or university uses your child’s SAI to determine your child’s eligibility for need-based financial aid. They subtract SAI from the total cost of attendance to determine your financial need. The financial aid package includes grants, scholarships, work-study opportunities and federal student loans, all designed to help cover your financial need.

Each college or university may have its policies and procedures for awarding need-based financial aid, so the specific calculation methods and available aid may vary from institution to institution.

Does Your Child Have to Pay Back Need-Based Aid? 

You’ll pay back financial aid if it’s a loan, but your child won’t have to repay grants, scholarships or work-study money. (Note that some grants may require repayment if your child doesn’t finish their degree or drops out midway through the semester.)

You don’t have to begin repaying most federal student loans until after you leave college or drop below half-time enrollment. 

A repayment schedule will explain when your first payment is due, how many payments you’ll make, the frequency and payment amounts.

You might get a grace period, a set period after you graduate, leave school or go below half-time enrollment. You don’t have to repay your loan until after the grace period. The grace period gives you time to select your repayment plan. Not all federal student loans have a grace period. Interest will build during the grace period in all cases. Understanding the different types of bank accounts you might use to manage your finances can be helpful during this process.

How Does Need-Based Aid Affect College Affordability?

Need-based aid is crucial in making college more affordable for students from lower-income families and those with demonstrated financial need. Here’s how it affects college affordability:

• Reduce costs: Need-based aid, such as federal Pell Grants and institutional grants, can significantly reduce out-of-pocket college costs. This can make higher education more accessible to students who might otherwise struggle to afford it.
• Expand options: With need-based aid, your child has more options when it comes to choosing which colleges to attend. They are not limited solely to schools with lower tuition fees but can consider a broader range of institutions that may offer the programs and environment they desire.
• Minimizing debt: By providing financial assistance upfront, need-based aid helps students avoid excessive student loan debt. This is particularly important for students from lower-income backgrounds who may be more vulnerable to financial challenges after graduation.
• Early financial stability: Need-based aid enables students to focus more on their studies and less on financial concerns. Always a great bonus for parents, right? By minimizing the financial burden of attending college, students can start their careers on a more stable footing and work toward achieving other financial goals, such as homeownership, at an earlier stage in life.
• Universal application: You must apply for financial aid, regardless of your perceived income level. Need-based aid programs often have eligibility criteria that extend beyond poverty lines. Many factors beyond income are considered when determining financial need. 

How to Get the Most Need-Based Financial Aid Possible 

Filing the FAFSA is the best way to get the most need-based aid possible. Be sure you know how much need-based financial aid you’re taking out and plan to pay it back when you’re through school.

• Be intentional: Make less during the preceding years you know you’ll be filing the FAFSA
• Don’t realize capital gains or take retirement distributions
• Defer work bonuses
• Decrease reportable assets

What to Do if Need-Based Financial Aid Isn’t Enough

Did you know you can get your child’s financial aid awards reevaluated if need based aid isn’t enough?

The process for requesting a reevaluation of aid packages varies among institutions but typically involves submitting a formal appeal letter to the financial aid office. 

This letter should clearly outline the changes in financial circumstances and provide supporting documentation. You should: 

1. Adhere to the institution’s deadlines and procedures for appeals, as missing deadlines could result in missed opportunities for additional aid. 
2. Some schools may also require students to complete specific forms or participate in interviews as part of the appeal process. 
3. Your child should follow up with the financial aid office to ensure their appeal is processed and to inquire about the expected timeline for a decision.

Documenting special circumstances is a critical aspect of the appeal process. It involves gathering relevant documentation to support the claims of financial hardship or unusual circumstances. 

This documentation may include tax returns, pay stubs, medical records, statements from employers or any other paperwork that provides evidence of the changes in financial circumstances. 

Students and their families should thoroughly document their situation and be prepared to provide additional information or clarification if requested by the financial aid office. Clear and comprehensive documentation strengthens the appeal and the likelihood of a favorable outcome.

Your Child Can Get Need-Based Financial Aid — Just Apply!

Now that you understand the need based financial aid meaning, do you intend to apply for need-based financial aid or are you asking, “Should I apply for need based financial aid?”

Yes, you absolutely should.

Even if you don’t think you’ll demonstrate financial need or meet the qualifications for need based financial aid, you should file the FAFSA anyway.

Though it’s financial aid based on income, you may be surprised at how the institutional aid equation comes through for your child. If you’re “just on the bubble” from one aid category to another, it is possible to benefit.

Still have questions? Take a look at these questions and answers.

What is the difference between financial aid and need-based aid?

Financial aid encompasses all types of financial assistance available to students to help cover the cost of education, including scholarships, grants, loans and work-study programs. 

Need-based aid refers to financial assistance awarded based on a student’s demonstrated financial need, including income, assets and the cost of attendance at a particular institution. While financial aid encompasses a broader range of assistance, need-based aid is specifically awarded based on financial need.

For example, merit-based aid is also financial aid but isn’t need-based. Need-based aid typically comes from filing the FAFSA, while you can get other types of need-based aid without filing the FAFSA.

What is a need-based financial aid example?

A subsidized loan is an excellent example of need-based financial aid because it is awarded to students based on financial need, as the FAFSA determines. Unlike unsubsidized loans where interest accrues while the student is in school, the government pays the interest on subsidized loans. In contrast, the student is enrolled at least half-time, during the grace period after leaving school and during periods of deferment. 

Should I put “Yes” for need-based financial aid?

When you receive your child’s financial aid award, it’s up to you and your child whether you choose to “accept” need-based financial aid. You may have a hard policy of not taking loans, while you accept grants and scholarships. However, you may need subsidized loans to get through your child’s school years. Talk about it together.