Budgeting, Loans

How does fafsa work

Modified on May 12, 2023

By Sarah R
December 26, 2022

Are you looking to attend college or university and unsure how you are going to pay for everything? Private loans and poor credit installment loans are available, but are there other options? Thankfully, the U.S. Department of Education may be able to help you pay for college. The federal government offers students the Free Application for Federal Student Aid, also known as the FAFSA. The FAFSA helps connect students in financial need to federal loans and grants based on their eligibility criteria. But, how does FAFSA work?

Since many schools require FAFSA documents before they will consider a student for any other type of financial aid or scholarship, it’s a good idea to fill out the FAFSA application regardless of your financial status. Filling out the FAFSA form should only take a few hours or less.

Here, you’ll learn everything you need to know about the FAFSA, the difference between subsidized and unsubsidized loans, and more!

What You Need To Know About the Free Application for Federal Student Aid (FAFSA)

Most community colleges, universities, and other institutions of higher education accept the FAFSA. Usually, awards for FAFSA are distributed on a first-served basis, so the sooner you complete your FAFSA application, the better.

It’s also important to keep in mind that the FAFSA does not always grant students free money. While there are grants and scholarships that don’t need to be repaid, other loans do.

The amount of financial aid awards students receive after they complete the FAFSA form will depend on financial circumstances like:

Income of both the student and their family.
How many children or dependents are in the student’s immediate family.
The cost of attendance at the college or university the student plans to attend.
Any outstanding financial circumstances the student deems necessary to explain on their FAFSA student aid report, such as homelessness.

Qualification for Federal Financial Aid

How do students qualify for a financial aid package? Most students will need to meet the following basic requirements to be eligible for federal financial aid:

Since the FAFSA is used to help students pay for higher education at a college or university, applicants will need to have a high school diploma or equivalent. Completing a high school education under the guidelines of the student’s state homeschooling programs is also acceptable.
The applying student must also have received acceptance to a college or university that accepts the FAFSA form. The student may be enrolled in a regular undergraduate program or an eligible degree or certificate program.
The student must also have a valid Social Security number, unless that student is from the Republic of Marshall Islands, Federated States of Micronesia, or the Republic of Palau.
In some circumstances, students may also have to maintain a satisfactory academic progress in order to hold onto any federal or state-based financial aid they may receive.

What Determines Eligibility for Financial Aid?

How does a student loan work? The amount of financial aid awarded to a student will depend on factors like their Expected Family Contribution (EFC), Cost of Attendance (COA) which determines school-based aid, as well as their general financial situation. The financial aid office will ultimately determine a student’s eligibility for financial assistance. To finalize how much money a student will receive on their award letter, the office of financial assistance will take the COA and subtract the EFC. This comparison will help the financial aid department determine the federal need-based grants, loans, and/or scholarships a student may be eligible for.

Next, a financial aid counselor will then take the COA again and subtract the amount of need-based aid awarded. This comparison will determine if the student is eligible for any non-need-based aid.

If you are unhappy with the amount of financial support the financial aid office plans to grant you, you can always try talking with them to negotiate your student loan debt.

Parent and Student Income Explained

The first piece of financial information required on FAFSA forms is the income of both the applying student as well as the family’s income. Generally, low-income families are eligible for more financial assistance than students from higher-income families.

Usually, the federal government will expect at least 20% of a student’s income to contribute to their higher education. For parents and guardians, they are expected to contribute approximately 5.64% of their total income.

How Many Children Are in Your Immediate Family/Household

When you fill out your financial aid form, there will be a space to mark how many children are in your family. This information will help determine what is called your Expected Family Contribution, also known as your EFC. While this name may sound misleading, your EFC is not how much your family is expected to contribute towards your education expenses but rather how much money the government may grant you based on how many dependent students or individuals are in your immediate family or household.

To clarify the name, the Expected Family Contribution will be changed to the Student Aid Index as of July 2023.

Cost of Attendance (COA) Explained

The cost of attendance will help determine how much school-based financial aid a student will receive. Factors that contribute to a student’s COA are:

General tuition expenses and other college costs.
Expenses for room and board or other living expenses for students not using the room and board program on their college campus.
Costs of education supplies such as books, supplies, transportation, and other school expenses.
Allowance for childcare if the student has a child or another dependent to care for.
Costs and expenses related to a pre-existing disability
Reasonable costs for students who qualify for a study-abroad program.

Types of Federal Student Loans and Grants

Based on the information filled out on your federal student aid form, you may be eligible for one or more federal financial aid packages. Below is more information on some of the financial aid programs and federal grants you may be eligible for after filling out the FAFSA form.

Need-based Financial Aid

The first type of federal student aid distributed is need-based financial aid.

Federal Pell Grant

One of the most sought-after types of financial aid is the Federal Pell Grant. This federal grant does not need to be repaid, making it a very alluring option for most students. Pell Federal Grants are designated for students with “exceptional financial need,” meaning they either come from extremely low-income families or are dealing with extreme circumstances that make paying for college difficult or impossible.

Furthermore, the Pell Grant is typically awarded to students looking to earn their undergraduate degree.

Federal Supplemental Educational Opportunity Grants

Similar to the Federal Pell Grant, a Federal Supplemental Educational Opportunity Grant also does not need to be repaid and is meant for students with “exceptional financial need.” However, this specific grant type is only available at certain colleges and universities.

Subsidized Federal Student Loans

A subsidized loan means the student does not have to pay interest on the loan while they are in school. Also, there is a grace period after graduation that exempts former students from having to pay back interest on their federal student aid. But, after that grace period ends after graduating, the student will have to start making payments on their loan.

Subsidized loans may range anywhere from $3,400 – $12,500 a year depending on factors like:

If you are an independent or dependent student.
Your COA.
Your EFC.
Income.

Subsidized student loans are only for undergraduate students, and they are not available for students going to graduate school.

Federal Work-Study

Another type of need-based federal student aid is the Work-Study program. Under this program, students may get a job on campus where their earnings can go directly towards their tuition costs. Some Work-Study programs even allow students to keep a portion of their wages and have the rest go straight to the school for tuition payments.

Non-need-Based Federal Student Loans

After students have been awarded their need-based financial aid package, financial aid offices will then decide how much non-need-based funding students are eligible for.

Unsubsidized Federal Student Loans

Unsubsidized loans are loans students have to pay interest on while they are in school. While this may seem like a bit of an inconvenience, unsubsidized loans may have a lower interest rate than subsidized loans, making them a slightly more affordable option.

Federal PLUS Loan

Federal PLUS loans are meant for parents going back to school or graduate students. This type of loan is not subsidized, so interest accrues while the parent or graduate student is in school. Students can either choose to have the interest added to their principal or pay it off while in school.

Teacher Education Access for College and Higher Education (TEACH) Grants

The Teacher Education Access for College and Higher Education Grant is designed for students who are working toward becoming a teacher. To qualify for this aid, students must be enrolled in certain classes and have worked for at least four years in an elementary or secondary school or educational service agency geared toward lower-income students and families.

If these requirements are fulfilled, the TEACH grant does not need to be repaid. If a student fails to meet the requirements of a TEACH grant, their funding will be converted to a direct unsubsidized loan.

The Bottom Line: Financial Aid

To get the best student loans, it’s essential to fill out your FAFSA before the financial aid deadlines. If you don’t, you may have to wait until the following academic year until you can utilize this government funding.

Remember, you can always refinance your student loan debt should you find it too difficult to handle in the future.