This article is one I have been so anxious to write. Student loans are a huge burden on many people. I believe there needs to be better education surrounding the financial aid system and the basics of financial aid; a lot of students have no ideas what loans they have or how they work, even while paying them back. This post will walk through the basics of federal financial aid and discuss some of the big issues surrounding them.

I’m guessing you are probably still working on paying those student loans you have from college. Even if you’ve already graduated and are just paying them off, understanding the basics of financial aid can help you make better-educated decisions about your payoff options.

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What Are the Types of Financial Aid?

There are two main types of federal financial aid for students: grants and loans.

Grants are money that the student receives and is NOT required to pay back. A grant is like a gift. If the student meets the qualifications to receive the grant, the grant is applied to the student’s need before any other type of aid is applied.

Loans are required to be paid back. Student loans work like any other loans in that they are for a certain amount of time, have minimum monthly payments, and accrue interest.

There are different types of grants and loans a student is eligible for based on different criteria. Let’s look more in-depth about how financial aid is determined for each student and each different type of aid offered.

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    Need-Based vs. Non-Need Based Aid

    All types of federal aid are classified into two different categories. Need-based aid is based on how much need the student has. Non-need based is not based on how much need the student has. Simple right?

    The Department of Education calculates a student’s need based on the information provided by the student and their parents on the Free Application for Federal Student Aid (FAFSA). The student’s need is the difference between the school’s Cost of Attendance (COA) and their Expected Family Contribution (EFC).

    So basically, it’s how much your school costs minus how much the government thinks your family can afford to pay.

    EFC will not change between schools, but the COA will. COA includes tuition, room, board, books, meal plans, travel, and any other education-related expenses. The Department of Education calculates the EFC based on the information provided on the FAFSA.

    Need-based aid is awarded to a student based on their calculated need. This includes the Pell grant, FSEOG, Federal Work Study, and subsidized direct loans (we’ll discuss these in a minute).

    Non-need based aid can be used by any student that falls within the limits and criteria. This includes the TEACH grant, unsubsidized loans, and PLUS loans.

    How is Financial Aid Awarded?

    There are two types of financial aid that can be awarded. Campus-based funds are awarded directly to a school. Schools award these funds to students based on need and other factors. The campus-based awards a student receives at one school could be completely different at another school.

    Student-based funds are awarded directly to the student and can be carried to any school. They are awarded to the student by the Department of Education based on the information provided through the FAFSA.

    Students are awarded financial aid based on their need. A student cannot have any need-based aid that exceeds their need as calculated by the Department of Education. A student is awarded as much need-based aid as they are eligible for. If the student still has need after all need-based aid has been awarded, then non-need based aid is awarded to the student.

    A student may also be eligible for additional non-need based aid if they are an independent student or if their parent is not eligible for a parent PLUS loan. Non-federal, need-based aid is also taken into consideration before non-need based federal aid is applied.

    TEACH Grant

    The TEACH grant is given to students who plan on going into a teaching career. It provides up to $4,000 to the student each year. The student must sign a service agreement to receive the grant, and if the student does not meet the terms of the service agreement after graduation the grant converts to an unsubsidized loan that accrues interest from the time of the first grant award.

    The basics of the service agreement require the student to teach at a school that serves low-income families, teach in a high-need subject, and teach for 4 out of the 8 years following graduation (or leaving school). You can find out the full requirements on the Department of Education website.

    I honestly believe this is one of the worst forms of financial aid. You could go from getting $16,000 in grants you don’t have to pay back to having $30,000 plus in loans that do have to be paid back and continue to accrue interest if you don’t meet the terms of the service agreement. Many students just see “grant” and sign up without knowing the specifics of this grant.

    It doesn’t matter why you didn’t meet the terms of the service contract if you don’t meet the requirements your grants turn into loans. If you change your major halfway through college you might not even end up teaching. You may not be able to find a job that meets all the requirements needed. It’s hard enough to predict the future when it comes to navigating your career right out of college without having to worry about a service agreement you signed when you were 18.

    Pell Grant

    The Federal Pell Grant is awarded to undergraduate students with exceptional financial need. It does not have to be repaid and is awarded directly to the student based on the information provided on the FAFSA.

    Each year there is a limit for the amount of Pell money that can be awarded to each student for that year. The actual amount received by each student is based on a table created by the department of education. Award amounts are affected by the student’s grade, full-time or part-time status, and COA.

    Pell is a true grant because it very rarely has to be paid back and can make a decent impact on a student’s financial need. The Pell limit for the 2019-2020 school year is $6,195 and it usually increases a small amount each year.


    FSEOG (Federal Supplementary Educational Opportunity Grant) is awarded by each school based on a student’s financial need. A student can receive between $400 and $1,000 a year. This grant is generally awarded to students that have the most financial need.

    This award is a true grant; there are not many situations where FSEOG would need to be paid back. Since this is a campus-based award, it is important to apply for financial aid early if you think you are eligible. Schools have to award campus-based awards on a first-come, first-serve basis.

    FSEOG isn’t a bad deal for students. It is meant to help the students that have the most need and it doesn’t need to be paid back. The only downside is it is usually awarded in small amounts that don’t make much impact on the total amount of need a student has.

    Perkins Loans

    Perkins loans are no longer being awarded, but if you’ve already graduated from college you might have these. They were awarded to both undergraduate and graduate students with “exceptional financial need“. Repayment on Perkins loans is not required until 9 months after graduation. Schools can no longer award any funds under the Perkins program.

    Direct Loans

    Direct loans are what most people are talking about when they say “student loans.” There are two types. Subsidized student loans do not accrue interest while you are still in school. So if you get a $3,000 subsidized loan as a freshman, that loan will stay at $3,000 until you graduate.

    Unsubsidized loans do accrue interest while you’re in school. Say you’re awarded $2,000 in unsub loans when you’re a freshman and don’t pay on the loan at all while you’re in school. You’ll owe that $2,000 plus all the interest that added up for the 4 years until you graduate. Subsidized loans are considered need-based and are awarded before unsubsidized loans.

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    How Direct Loans are Awarded

    There are quite a few different restrictions on subsidized vs. unsub loans. There are limits on the amount of subsidized and unsubsidized funds that can be awarded in a single year based on the student’s grade level and full-time or part-time status. These limits are on the Department of Ed’s website.

    Check out the Department of Ed’s website to get more information on your specific situation. The amount of direct loan funds you could be awarded is affected by dependent vs. independent student status, grade level, full-time or part-time status, and how long you’ve been working on your degree. There’s also a cap on the total amount you can borrow.

    In general, a dependent student with financial need is awarded between $3,500 and $5,500 in subsidized loans based on what grade they are (how many credit hours they have). If they still have need they can receive the additional $2,000 amount in unsubsidized loans. This is what most students receive each year. It can change based on all those factors I mentioned before.

    Parent PLUS Loans

    PLUS loans are additional unsubsidized direct loans that can be awarded to a graduate student or the parent of a student. These are generally known as either “Parent PLUS loans” or “Grad PLUS loans”.

    Parent PLUS loans are available to the biological or adoptive parents of a student. A credit check is done for Parent PLUS eligibility and it is a fixed interest rate loan. The maximum amount that can be taken out for Parent PLUS is the total cost of attendance for the child minus any other aid the student receives.

    Parents can make payments on the loan immediately after it is disbursed, or they can request a deferment. If the parent requests a deferment they will not have to start making payments until 6 months after the student graduates, but interest will accrue while the student is in school. If a parent is denied a parent PLUS loan, a student can be eligible to receive additional unsubsidized loans.

    Grad PLUS Loans

    Grad PLUS loans are available to graduate students that are at least half-time enrolled. A credit check is done for a Grad PLUS loan. The maximum amount that can be borrowed is the maximum COA minus any other financial aid received by the student. This is also a fixed interest rate loan. The loan does not have to be paid on until 6 months after graduation, but interest will accrue while the student is in school.

    Federal Work Study

    Federal Work Study is a program that lets students work part-time to help pay for their education. It is awarded directly to students that have financial need. Generally, work study jobs focus on community service or education program related experience.

    Students must make at least the federal minimum wage, but the award is based on the student’s need as determined by the FAFSA. Jobs can be on-campus or off-campus and the type of job has restrictions. Schools usually have programs already set up to get students into eligible work study jobs. The student can also authorize the school to credit their work study income directly to their student account to pay for educational expenses, or they can be paid by check like any other job.

    Federal Work Study can be helpful to students that need additional financial aid, while also helping them gain work experience for after graduation. The only downside to work study can be limited hours. A student cannot work unlimited hours because they cannot be paid more than the amount of work study funds awarded to them.

    Now that we’ve covered the basic types of financial aid and how it is awarded, I want to talk a little bit about some issues surrounding the financial aid system.

    Major Issues with Financial Aid

    The biggest issue with federal financial aid, in my opinion, is the lack of education offered by both the government and schools about what all the options are and how they work. Making smart financial decisions is the responsibility of the individual, but we are talking about fresh out of high school eighteen-year-olds.

    Students are allowed to take out $100,000 plus in student loans before they even have a job. These same students would not be given a loan for literally anything else. Not a car, not a house, not a business loan. Because they don’t have a way of repaying it!

    The cost of education rising each year aside, most students (and parents!) just know they have to fill out the FAFSA and the school will tell them what financial aid they’re eligible for. The majority of students never look into their financial aid packaging any more than that. Understanding what your aid options are and how they will have to be repaid can help you make much smarter decisions about how you really want to pay for college.

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      Don’t Take Out More Than You Need

      My biggest piece of advice to someone getting ready to go into college would be to not take out more in student loans than you actually need. Students absolutely get refunded for financial aid that isn’t needed to pay tuition and other education expenses. If you take the $3,000 student loan refund for “living expenses” you will have to pay that amount back plus interest!

      As much as you possibly can, pay for your education in cash. Unless you are in a super high-stress program and don’t have any free time outside of schoolwork, it’s not unreasonable to get a part-time job. Every little bit you won’t have to pay back in loans and interest later will save you stress and money.

      But I Already Have Student Loans!

      It’s ok! I have student loans too. We can fix it!

      Just stop for a second and think about something with me. Some people don’t pay their student loans off until they’re in the ’60s. Some people never pay their student loans off! Don’t let that be you!

      Some of my friends have student loans with balances that increase every month even though they make payments. Doing the income-based repayment plans offered and only making minimum payments is not in your best interest if you actually want to get your loans paid off.

      If you have multiple direct loans, your minimum payment likely just covers the interest. If you are doing the income-based repayment plan it likely doesn’t cover all of the interest on all the loans. You are making payments but you end up with a loan balance that continues to increase.

      This is where I think the Department of Education and universities could do a better job at educating students and parents on what they’re taking out. Most people I talk to don’t know which of their loans accrued interest while they were in school or why they have so many separate student loan amounts. Entrance and exit counseling is part of the direct loan awarding process for schools, but the majority of students do not complete their exit counseling. There’s no good way for schools to force students to do exit counseling once the student has graduated.

      Letting your student loans stick around is stealing so much money from your future. Getting on a budget and working out a plan to get your student loans paid off will save you money on interest and enable you to use that money to reach your other financial goals.

      You can read more about the specifics of federal financial aid on the Department of Education’s website.

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      The Basics of Federal Financial Aid