Most college financial aid and loans are based on federal grants, funds, and subsidies provided by the U.S. Department of Education.
There are a total of five types of federal financial aid, and it’s important to understand each one, whether it will be available to your family, and what it might mean for you.
With this in mind, I want to talk about the 5 Types of Federal Financial Aid and give you a quick rundown of all the important details, including who can qualify, how much aid you can expect, and what might be best options for you.
1. Pell Grants
Pell grants are gift aid that you don’t need to pay back, but they are very need-based. Your income and assets must be low in order to qualify.
Families of middle income and up probably aren’t going to qualify unless you’re retired, a business owner, or you’re unemployed or otherwise have a sudden drop in income.
If your family income is over $50,000, unless you have a lot of kids in school, you’re probably not going to qualify.
In some divorce cases, however, choosing the right parent for income purposes may qualify you for need-based aid and specifically Pell grants.
If you qualify, the current maximum amount you can receive is $6,345 for the 2020-21 academic year. The minimum is equal to 10% of the maximum, or around $634.
Even if your income is below the $50,000 threshold and as low as $35,000 or $40,000, you may not qualify for a full grant and may only receive a partial award.
Your estimated family contribution (EFC) has to be below $5,712 to qualify, and your eligibility and Pell grant amount also depends on the total cost of attendance at your college. To qualify for the maximum Pell grant amount, your EFC must be zero. To check out a complete EFC reference table for Pell grants, the U.S. Department of Education has a downloadable PDF at ifap.ed.gov.
You can also find the latest information on Pell Grants from the U.S. Department of Education at its Federal Pell Grants page.
2. Supplemental Grants
Similar to a Pell grant, a federal supplemental education opportunity grant (SEOG) is aid for students with exceptional need, and you don’t need to pay it back.
However, just as with a Pell grant, you are unlikely to qualify with a family income above $50,000 unless you’re retired, you own a business, are between jobs, or have another extenuating circumstance.
Supplemental grants are first-come, first-served, and the available aid ranges from $100 to $4,000 per year. It depends on your financial need, when you apply, the amount of other aid you receive, and the available funds at your school.
These grants are administered directly by the financial aid office at your school, so they are “campus-based” aid. Not all schools participate, so check with your school to find out if it offers supplemental grants.
They were need-based and skewed toward those with higher need. But they weren’t as need-based as a Pell grant or supplemental grant.
3. Work Study
In some ways, work study programs are not much different than working in fast food job or another part-time job to help pay for college. Your student will work at a job on campus, earning money in the form of financial aid.
The typical work study award is between $1,000 and $3,000.
However, work study offers a number of unique benefits compared to a typical college job.
Typically, a work study position is a job on campus, so it’s easy for your student to go to work. It’s college-friendly, so many work study jobs will allow students to work around their class schedules and adjust their hours for exams.
These jobs are usually conveniently located on campus, making them relatively easy to get to for your student.
Work study is also financial aid you don’t have to pay back, and it doesn’t count as financial aid received when it’s time for your student to apply for aid again next year.
4. Direct Student Loans
Direct student loans fall into two types: subsidized loans and unsubsidized loans.
Subsidized Direct Student Loans
You must show a need to qualify for a subsidized direct student loan. It’s probably the best loan you can get in terms of interest rates and features.
Interest rates are fixed for the life of the loan, although the rate for new loans changes from year to year. The federal government pays the interest on the loan while your student is in school, and no payments are due during that time. Repayment begins after college ends.
These are some great features, but, unfortunately, the maximum amounts are not very high.
As a freshman, you can borrow a total of up to $5,500 in direct student loans, but only $3,500 of that amount can be in the form of subsidized loans. The rate for direct loans dispersed on or after July 1, 2019 has increased to 4.53%.
So, if you qualify for the maximum of $5,500 in loans, you’ll get $3,500 of it at lower interest rates and potentially better terms and options, but the remaining $2,000 will be unsubsidized and involve higher rates.
The maximum loan amounts increase each year you’re enrolled, up to, up to $7,500 in direct student loans (including $5,500 in subsidized loans) by your student’s third year and beyond.
There is an excellent chart at the U.S. Department of Education’s Federal Student Aid website, which shows the maximum borrowing amounts for subsidized and unsubsidized loans in each year.
Unsubsidized Direct Student Loans
If you don’t have enough need to qualify for a subsidized loan, or you’ve maxed out on your available subsidized funds, you may be offered an unsubsidized direct student loan.
If you don’t qualify based on need, your entire direct loan borrowing may be unsubsidized.
Terms won’t be as attractive as a subsidized loan. Like a subsidized loan, the interest rate is fixed for the life of the loan, although rates change for new loans each year.
The interest rate for unsubsidized direct loans has increased to 4.53% for loans dispersed on or after July 1, 2019. No payments are due while your student is in school, and repayment begins after college ends.
However, interest accrues while your student is in school.
Nonetheless, this may be the best loan for families that don’t show enough need to qualify for other forms of aid.
Just keep in mind that unsubsidized loan amounts are limited, with a maximum of $5,500 per year as a freshman and $7,500 by the third year and beyond.
5. PLUS Loans
A PLUS loan is a loan to parents that does not involve your student.
All you need is to qualify on credit and have a willingness to be responsible for the loans. These are loans to parents that are paid back by the parents.
PLUS loans are not need-based, so anyone can qualify with good enough credit. The maximum you can receive in a PLUS loan is the total cost of your school minus any other aid you receive.
This is how many parents can fill the gap in financial aid, although there are some drawbacks. While no payments are due while you’re student is enrolled in college and repayments begin only after college ends, interest accrues during that time.
However, many families with home equity or super-strong credit can borrow at a better rate, so this may offset some of the potential impact of interest accrual.
Under current law, PLUS loan interest rates will always be 2.55% higher than those of direct student loans. That means there will be a 7.08% interest rate for PLUS loans disbursed on or after July 1, 2019.
Now that you know more about the 5 Types of Federal Financial Aid, you can start calculating your expected family contribution (EFC).
On my EFC page, you’ll find an easy-to-use calculator to estimate your expected family contribution, along with more information, tips, and quick links to great videos and resources to help you with your college planning.
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