Financial Aid Basics
Acceptances may be rolling in, but now is the tough time to figure out the best financial fit for your family. The most prestigious colleges and universities aren’t typically the most affordable. Families need to balance the academic and social “fit” with their financial capabilities and willingness to take on debt.
Here’s a mini Financial Aid Glossary that is a good first step in understanding your financial commitment:
GRANTS – Free money that DOES NOT need to be paid back. This can be aid provided by the federal government, state, or college or university. They are typically awarded based on a family’s financial circumstances as determined by forms like the FAFSA or CSS Profile. Because they don’t require repayment, grants are considered one of the most valuable forms of financial aid.
SCHOLARSHIPS – Free money that DOES NOT need to be paid back. Unlike grants, scholarships are often merit-based—awarded for academic achievement, athletic ability, artistic talent, leadership, community service, or other accomplishments. Some scholarships also consider financial need. Scholarships can be offered by colleges, private organizations, foundations, employers, religious institutions, and community groups.
LOANS – Funds provided by the federal government, a private lending agency, or a bank that DO need to be repaid. Loans are borrowed money that must be repaid with interest. Students (and sometimes parents) take out loans to help cover the cost of attendance. Repayment typically begins after graduation, although interest may begin accruing earlier, depending on the loan type. Loans should be approached carefully, as the amount borrowed can significantly impact a student’s financial future.
INSTITUTIONAL AID – Money provided by the college or university, frequently as loans or a campus job. This can include both need-based grants and merit scholarships funded by the institution itself. Institutional aid policies vary widely from school to school. Some colleges meet 100% of demonstrated financial need, while others do not. This is often the largest variable in a student’s financial aid package.
FEDERAL AID – Federal aid is financial assistance provided by the U.S. government. It includes federal grants (such as Pell Grants), federal student loans, and work-study opportunities. Eligibility is determined primarily through the FAFSA (Free Application for Federal Student Aid). Federal loans typically offer more favorable terms and protections than private loans.
PRIVATE LOANS – Private loans are education loans offered by banks, credit unions, and other private lenders. They require repayment with interest and often depend on credit history and income (a parent or co-signer is frequently required). Interest rates and repayment terms vary and are generally less flexible than federal student loans. Private loans are usually considered after federal aid options have been exhausted.
Financial Aid at a Glance: Comparison Chart
| Type of Aid | Needs to Be Repaid? | Based on Financial Need? | Who Provides It? | Interest? | Key Things to Know |
|---|---|---|---|---|---|
| Grants | No | Usually yes | Federal, state, colleges | No | “Free money” awarded primarily based on financial need. |
| Scholarships | No | Sometimes | Colleges, private organizations, employers, foundations | No | Often merit-based; can also consider talent, leadership, or community service. |
| Federal Loans | Yes | Not always | U.S. government | Yes (often lower, fixed rates) | More flexible repayment options and borrower protections. |
| Private Loans | Yes | No | Banks, credit unions, private lenders | Yes (variable or fixed) | Credit-based; fewer protections; often require a co-signer. |
| Institutional Aid | No (if grant/scholarship) | Varies by college | Individual colleges | No | Policies vary widely; can significantly change net cost. |
| Federal Work-Study | No (earned wages) | Yes | Federal government via colleges | No | Student earns money through a campus job. |
Financial Aid Vocabulary Parents Must Know
Cost of Attendance (COA): The total estimated yearly cost, including tuition, housing, meals, books, fees, transportation, and personal expenses.
EFC (Expected Family Contribution): The former federal term for what a family was expected to pay. Now replaced by the Student Aid Index (SAI), though many families still hear “EFC.”
Student Aid Index (SAI): The number calculated from the FAFSA that determines eligibility for federal need-based aid.
Demonstrated Need: The difference between a college’s cost of attendance and the family’s calculated ability to pay.
Net Price: What a family actually pays after grants and scholarships are subtracted from the sticker price.
Unmet Need: The portion of demonstrated need a college does not cover in its financial aid offer.
Merit Aid: Scholarships awarded for achievement rather than financial need.
NEXT COLUMN: Misconceptions about financial aid.
Bierer is an independent college adviser based in Charlotte. Send questions to: lee@bierercollegeconsulting.com; www.bierercollegeconsulting.com