Here at NextStudent, we know that the world of student loans and college financing can be overwhelming and confusing, especially when all the financial aid literature throws around terms like “consolidation” and “subsidized,” and alphabet soups like FWS, EFC, PLUS and FAFSA. We always want our customers to feel comfortable with their education financing decisions, and we believe you should be informed about all your financial aid options. So to help you decipher your financial aid award letters and understand your school financing options, NextStudent, a leading Phoenix-based education funding company, offers this quick guide to the different types of financial aid.
Financial Need: Need-Based vs. Non–Need-Based Aid
Financial aid can be classified into two main categories: need-based and non–need-based.
Need-based aid —financial aid that’s awarded on the basis of financial need—is given out according to a student’s financial situation.
Financial need is determined by the U.S. Department of Education using a standard formula, established by Congress, that evaluates the financial information you provide each year on the FAFSA (Free Application for Federal Student Aid). The fundamental elements in this formula are the student’s income (and assets, if the student is independent), the parents’ income and assets (if the student is dependent), the number of people in the household, and the number of family members (excluding parents) attending college or graduate school.
If your FAFSA shows that you demonstrate financial need, you could qualify for need-based aid. Federal need-based aid includes the Federal Work-Study Program, Pell grants, Perkins loans and subsidized Stafford loans.
Non–need-based aid is awarded without consideration given to the student’s financial situation. If you meet program eligibility requirements, you can qualify for non–need-based aid, regardless of your or your parents’ income.
Merit-based scholarships, athletic scholarships and credit-based loans (which require a review of the borrower’s credit history) are all examples of non–need-based aid. Non–need-based federal aid programs include unsubsidized Stafford loans, PLUS loans for parents and Grad PLUS loans for graduate students. Private student loans, like NextStudent’s Private Student Loans, are also a form of non–need-based aid.
For non–need-based student loans that are credit-based (like PLUS, Grad PLUS, and NextStudent Private Student Loans), although borrowers won’t be disqualified for earning too much income, they may need to meet minimum income requirements to qualify.
Financial Aid Awards: Scholarships, Loans and Work-Study
Financial aid can take three main forms: scholarships (or grants), student loans, and work-study.
Scholarships or grants can be either need-based or non–need-based. Scholarships and grants, unlike student loans, do not need to be repaid. Scholarship money may come directly to you, to be used for school; other scholarships are paid directly to your school.
Some scholarships, whether academic or need-based, may be awarded to you automatically by your school with your admission. Others are awarded competitively, as prizes (like the National Merit Scholarships based on your PSAT scores, or the $10,000 given to the first-place finisher in the annual Ayn Rand essay contest). Scholarship competitions can be national, state-wide, or local. Some scholarships are targeted toward specific groups—athletes, for example, or members of 4-H. Grants are often awarded to graduate students to help fund their research or dissertation.
There are millions of dollars in scholarships available each year for almost every type of student. The NextStudent Scholarship Search Engine, a database of over 5.9 million scholarships worth over $16 billion, offers an excellent starting point if you’re on the hunt for free scholarship money.
Student Loans can also be either need-based or non–need-based. The money you receive in student loans will need to be repaid. You’ll also be charged interest on the amount of money you borrow. There are federal student loans, state loans, institutional loans and private student loans available to undergraduate and graduate students and to the parents of dependent students. Federal student loans usually have more attractive terms than private student loans, so you should always look into your federal financing options first.
Some student loans, like Federal PLUS Loans, Federal Grad PLUS Loans and private student loans, are credit-based loans and require a determination that the borrower is “creditworthy” under the program guidelines. Other student loans, like Federal Perkins Loans, Federal Stafford Loans and Federal Consolidation Loans, are non–credit-based and don’t require a borrower credit check.
Federal student loans can be either subsidized or unsubsidized. With a subsidized loan, you won’t be charged interest while you’re in a grace period, in deferment or in school at least half-time. Subsidized student loans, which include Perkins loans and subsidized Stafford loans, are awarded on the basis of financial need.
With an unsubsidized loan, you’ll be responsible for all interest charges. Interest will accrue on an unsubsidized loan even if you’re temporarily not making payments because you’re in an authorized postponement period (such as a grace period, deferment or forbearance). Unsubsidized Stafford loans, PLUS loans, Grad PLUS loans and NextStudent Private Student Loans are all unsubsidized loans. Unsubsidized loans are typically non–need-based loans.
Work-study is a federal program that provides funds to schools to award to students through part-time employment. Work-study earnings do not need to be repaid.
Approximately 3,400 postsecondary institutions participate in the Federal Work-Study (FWS) Program, which is a need-based program. Work-study jobs can be on- or off-campus and can range from lab assistant to museum docent to elementary school tutor.
Your work-study job is required, by federal law, to pay you at least the federal minimum wage—as of July 24, 2007, that’s $5.85 an hour. You might get paychecks for your earned work-study funds, or your earnings could be deposited into your student account. Consult your financial aid office for details.
Student Loan Consolidation
A consolidation loan is a specific type of student loan available to you once you’ve left school or dropped below half-time enrollment. Student loan consolidation allows you to bundle all your eligible student loans into one single loan with one lender and one monthly payment. Consolidation offers the convenience of one easy-to-manage loan, with the added bonus that it could substantially reduce your monthly payments and give you more time to repay.
Once you’ve left school or dropped below half-time enrollment, a federal student loan consolidation allows you to consolidate all your eligible federal student loans, such as Stafford loans and Grad PLUS loans. Parents are also eligible to consolidate their PLUS loans as soon as those loans go into repayment. By consolidating your student loans, you could cut your monthly student loan payments nearly in half and get up to 20 more years to repay.
NextStudent believes that getting an education is the best investment you can make, and we’re dedicated to helping you pursue your education dreams by making college funding simple. Learn more about Student Loans, Private Student Loans and Student Loan Consolidation.
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