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What Students should know about Financial Aid
by Roshan Tolani

What Students should know about Financial Aid

For students who are attending college or planning to do so, the rising costs of education can be frustrating. Students may even begin to wonder how they will pay for the costs of obtaining an education. Financial aid is one solution. It is designed to bridge the gap between the funds that you have and the amount that you need in order to meet your educational expenses.

It is important for applicants to develop a basic understanding of financial aid. In absence of such knowledge, you may have trouble in appreciating the form, the process, the application requirements, and the responsibilities of taking out student loans. Here is some of the basic information that will help you explore the option of financial aid and create a financial aid strategy.

Types of financial aid
Financial aid is available in the form of:
  1. Grants
  2. Scholarships
  3. Loans
  4. Work- study jobs
Lenders of federal financial aid
  1. Federal government
  2. State governments
  3. Colleges
  4. Private organizations
Qualifying for federal financial aid
To apply for federal financial aid, students must complete the Free Application for Federal Student Aid (FAFSA) for each and every academic year. When you apply for federal financial aid by completing the FAFSA, the financial information you provid is keyed into a formula. This formula takes into account your household income, assets, family size (if dependent), number of children in college (if dependent), and other factors. It also calculates the amount you and/or your family will be expected to contribute toward your educational costs. If this amount is less than the total cost of attendance, you have demonstrated a need and you will be considered eligible for aid.

Grants are financial awards that do not have to be repaid. Grants can be awarded from state or federal governments or from individual colleges or independent organizations. Also known as gift aids, they are usually based on the student's financial need.

Scholarships are financial awards based on merit or merit plus need. Students receive scholarships from government or private sources, such as local community groups or corporate donors. Like grants, scholarships are not required to be repaid. Scholarships are awarded for several reasons, such as for academic achievement or financial need. Scholarship are typically awarded on an annual basis and they may have to be re-qualified for every year.

Educational loans
Loans constitute a major portion of financial aid. Loans are financial aid that must be repaid. Most loans are based on financial need and carry a relatively low interest rate. These are sponsored by the federal government. For subsidized loans, no interest accrues until you begin repayment after you graduate. Federal student loans do not have to be repaid while you are enrolled at least half-time in school. Loans can also be given to the parents of college students in the form of federal PLUS loans. These loans are non-need based and can come with a higher interest rate. Usually they have fewer restrictions than loans made directly to students. Repayment of student loans may be delayed or temporarily suspended for certain reasons without penalty by using deferment and forbearance options.

Forms of educational loans
Education loans come in two forms: federal and private loans.

Federal Loans:
Federal Perkins loans carry a fixed 5% interest rate and are funded by the federal government and are executed by the school. Federal Stafford loans are for students enrolled in a college at least half-time. They come with a low, fixed interest rate of 6.8% as of July 1, 2006. The loans can generally be repaid over a ten year period. Subsidized Stafford loans are available to students with demonstrated financial need. While the student is in school or deferment, the federal government pays the accrued interest. Payments begin six months after you graduate or drop below half-time enrollment. Unsubsidized Stafford loans are available to most students irrespective of family income. Payments are not required while in school, but interest does accrue and is integrated into your monthly payments, which begin six months after you graduate or drop below half-time enrollment. Federal Parent PLUS loans give an opportunity to parents to borrow up to the full cost of education minus other aid received. The loan is for students enrolled at least half-time. The interest is fixed at 8.5% since July 1, 2006. Federal Graduate PLUS loans allow graduate students enrolled at least half time to borrow up to the full cost of education less other aid received. The interest is fixed at 8.5% since July 1, 2006.

Private loans
Private loans are provided to students by banks and loan companies. Each provider devises its own loan characteristics and eligibility parameters. Loans from different sources differ a lot in view of payment deferment, high credit approval rates and flexible repayment options. Institutional loans are another form of private loans that are made available by individual colleges. Each college formulates its own loan characteristics and eligibility requirements.

Selecting a lender
Some lenders offer certain incentives that can drastically reduce borrowing costs. Look for lenders who offer benefits for on-time payments and provide strong customer service.

Work-study aid
Work-study is a federal program that enables students to pay for their schooling by working at part-time jobs. It provides them work experience while they serve their campuses and surrounding communities. Students must qualify for work-study by completing the FAFSA and demonstrating financial need. Work-study aid helps students pay towards their education costs, supplies, and personal expenses. Some jobs may be related to a student's subject of study, others may not. Work-study jobs are usually flexible and work is set as per the student's class schedule. Students usually work 10 to 15 hours a week. Most colleges have student employment listings to help students locate job opportunities both on- and off-campus.

Need-based aid
Some financial aid is based on need, such as grants, federal loans or work-study. The federal government has set policies to measure need. According to the federal government's definition of financial need, the student's income and savings are compared to the cost of the college he or she plans to attend.

Providers of need-based financial aid
The main provider of need-based financial aid is the federal government, followed by colleges. States stand a distant third. The amount of federal aid available in any given year depends on the federal and state budgets. College policies may differ from year to year, resulting in an uneven availability of funds.

Merit -based aid
Merit-based aid is awarded to students for special skills, talents, or academic abilities. Scholarships are an example of merit-based aid. Merit-based aid is awarded not only for excellence in study but also in various fields like community service, leadership, athletics, ethnicity, or religion. Normally, students are not required to demonstrate their financial need.

Providers of merit aid
Colleges give the most merit-based aid. It is possible for the amount that each college is allotted to give away to fluctuate from year to year. In addition to colleges, a wide range of private and public companies, associations, and foundations offer merit-based aid through scholarships and grants. Many of them have specific eligibility criteria. This avenue is certainly worth exploring, as scholarships and grants are free to the recipients and never have to be repaid.

Applying for financial aid can sometimes be intimidating, but like your education, applying for financial aid is well worth the time and effort that you spend, and will pay off in the long run.

Disclaimer: This article is only for informational purposes and should not be construed or relied upon as legal advice. We do not make any claims, promises, or guarantees about the accuracy, completeness, or adequacy of any of the information provided in this article.


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Education is one of the most basic right of any human, but with the increase in prices and the costs involved in education this has made these rights turn into a privilege which very few can enjoy. Any normal person today in the whole of United States has to take an education loan at one point of time to pay for their education fees.

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