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How Does Financial Aid Work?

Abigail Endsley
Abigail Endsley

January 27, 2018

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Man filling out Financial Aid form

A week ago, I thought financial aid was akin to black magic. All I knew was it helped cover the cost of college, but I didn’t know how or even who qualified for it. And I had a feeling I wasn’t the only one living in ignorance.

Given it’s my job to demystify confusing college topics so you can make well-informed decisions, I figured it was time to answer this question.

So I called an expert.

Rebecca Decker is an Admissions Counselor for Lumerit (Unbound’s parent company), and has been using her expertise to help hundreds of college students make good financial decisions for the past 6 years. Not to mention the 4 years she spent learning about and managing her own financial aid in college.

She had a lot to say on this topic. Our conversation lasted an hour and a half. But don’t worry—I’ve condensed the whole thing into this single post to help you quickly understand what financial aid is, how it works, and what it means for you.

What is FAFSA?

FAFSA (Free Application for Federal Student Aid) is the first step to applying for financial aid. It’s your one-stop application that tells you exactly what kind of federal aid you qualify for.

“The first thing students should know is that completing your FAFSA is not a commitment.” Rebecca said. By applying, you’re not signing up for aid. You’re just submitting your information for evaluation.

What you qualify for is based almost solely on your tax information (for minors, that means your parents’ tax information). This is the broad measuring stick the government uses to determine your eligibility for various levels of financial aid. While your state, school choice, and a few other factors are factored in the decision, they’re all secondary to your yearly taxes.

What is Financial Aid?

When I asked Rebecca this question, the first things she started talking about were federal student loans.

“Wait,” I said, interrupting her like the rude interviewer I am. “Is most financial aid actually loans? I thought it was grants. You know… free money?”

“It’s absolutely possible to qualify for grants, which are essentially free money,” she replied, “but most of the time accepting financial aid means taking out federal loans.

Having been raised to live debt free myself, the idea that student debt may be masquerading under a friendlier title didn’t sit well with me.

Federal Student Loans

“If financial aid is just a loan,” I asked, “how is it any better than getting a private loan to pay for college?”

Turns out there are a few differences between a federal student loan and a private loan:

  • Most federal loans don’t require a credit check
  • Federal loans often have low, fixed interest rates (for the 2017 year, that rate is 4.45% for direct loans. A private loan could easily exceed 18%)
  • Federal loans are tax deductible
  • Federal loans can also be deferred—most commonly, students will defer their loan for up to 6 months after they graduate (allowing time to get a job)
  • Lastly, federal loans are eligible for loan forgiveness in some special cases

While this list may make federal student loans look kind of amazing, it should be noted that student loans are still debt. Taking out a student loan means spending money you don’t have and that you will have to pay back… with interest.

Taking out a multi-thousand dollar loan at 18, with no career or even the guarantee of a good job once you graduate, is something of a financial gamble. For better or worse, it will impact your life long after college.

Given that, let’s talk about the different kinds of federal student loans you could apply for and the impact they can have on your financial future.

Direct Loans: Subsidized and Unsubsidized

Both subsidized loans and unsubsidized loans are granted at the beginning of a semester, and neither are required the be paid back until after you graduate (or otherwise disenroll from your school). No matter which year the loan covers, once you’re out of school, your payments begin.

The big difference between subsidized and unsubsidized loans is when you start paying interest.

An unsubsidized loan gains interest just like a private loan would: starting the day you take it out. The don’t-pay-until-you-graduate grace period only applies for your loan payments. Interest payments are still required throughout your time in school.

However, if you take out a subsidized loan, the government pays interest for you while you’re in school. Your interest payments will begin only after you graduate, along with the rest of your loan payments.

If you’re going to take out a federal student loan, Rebecca recommends pursuing a subsidized one.

“I remember the difference by saying ‘unsubsidized is uncool,’” Rebecca said. “Paying off the interest on an unsubsidized loan can be very stressful for students, especially if they aren’t earning much on the side while they’re in school.”

Plus, she mentioned, if you are earning an income while in school, you would be better served by putting that money toward paying for your next semester upfront and skipping the loans altogether.

The fewer loans you take out, the less interest you pay. The less interest you pay, the cheaper your college will be.

Direct PLUS Loans

If you’ve already accepted what grants you qualify for (which we’ll cover in the next section), and have taken out as many subsidized and unsubsidized loans as you can, but you still need extra money to cover your final college costs, there is a third option. But in Rebecca’s opinion, it’s a very poor one and should be avoided if at all possible.

Direct PLUS loans work a little differently than both subsidized and unsubsidized loans:

  • First, PLUS loans require a credit check. So if you don’t have credit, your parent must act as a cosigner. This means if you fail to pay it back, the loan burden will default to your parents.
  • Second, at 7%, the interest rate for PLUS loans is almost double that of a subsidized or unsubsidized loan.
  • Third, not only do PLUS loans gain interest from the day they’re borrowed, just like an unsubsidized loan, you’re also required to pay an extra fee on top. Currently, the loan fee is equal to a little over 4% of the amount you borrow.

Bottom line: this loan is available, but it’s expensive and possibly harmful to not just you, but your parents too.

“When I was applying for school, my parents wouldn’t co-sign this loan for me simply on principle,” Rebecca said. Her family was one of the many who decide the dangers of applying for one outweighed the benefits of college.


Okay, let’s move on to some happier news. We spent the bulk of our conversation discussing the loans portion of financial aid because it’s what you’re most likely to qualify for. But loans aren’t everything financial aid has to offer!

By completing a FAFSA, you may also qualify for grants.

A grant is a free gift of money that the recipient is not required to pay back except under certain conditions (like if you disenroll early or make a similar change that alters your eligibility). If you qualify for a grant, we recommend you take it before considering student debt.

The Federal Pell Grant

“Think of the Federal Pell Grant as a collective pool of money set aside by the government to help students pay for college. Each year, this money is distributed among applicants based on their need.”

For the 2017-18 school year, the maximum you can receive from the Pell Grant is $5,920. This amount will change yearly, and how much of it you actually get is dependent on your financial need, the cost of your school, whether you’re attending part or full time, and how many semesters you’re paying for.

State Grants

Rebecca wanted go into detail about state grants and what kind of money you may or may not qualify for. Unfortunately, she told me, state grants aren’t standardized. In fact, not every state even has a grant. If yours does, you’ll find out by filling out a FAFSA.

You can also contact your state grant agency to ask about possible grants.

School Grants and Scholarships

Like with state grants, this is another area Rebecca wasn’t able to offer solid estimations for. If you’re accepted to a university, that school will put together a financial aid award letter based on your FAFSA. You’ll get it along with your acceptance to the school. If you qualify for any of the school’s grants or scholarships, this letter will tell you.

Of course, if you’d like to contact the school directly to ask about possible scholarships or grants you may qualify for, that’s a good idea too. You might be able to find out about scholarships offered for specific majors.

My conversation with Rebecca was more helpful than I could have hoped for, but it left me perturbed. When grant money is so difficult to come by and loans are so easy, it can be tempting to assume student loans are the best way to pay for college.

But that’s not true.

At Unbound, we believe college shouldn’t be a debt sentence. We make it our mission to ensure students are equipped with the knowledge and resources they need to lower their college costs and graduate debt free.

If you complete your FAFSA and don’t qualify for grants, you have other options.

First, you can meet with one of our academic counselors (like Rebecca!) They’ll help you find an affordable college option that fits with your goals and your budget. (And the process is 100% free.)

Or you can check out some of our other resources on the topic, which can help you start lowering your college costs on your own.

When it comes to financial aid, just be cautious. The most important thing you can do for your future is be informed.

By knowing how your choices now will affect your future, you can make your financial decisions with confidence.

Special thanks to Rebecca Decker, one of our amazing Admissions Counselors, for taking the time out to chat with me about this topic.

Abigail Endsley
Abigail Endsley

A former student counselor and Unbound student, Abigail is passionate about empowering others to achieve their goals. When she’s not dreaming with her friends, you can find her reading or singing Broadway songs. Loudly.

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