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Exactly What Is Financial Aid And Where Does It Come From?

Category: Financial Aid Process, Must Read Posts
0 comments What Is financial aid

This is a great question but too few ask it? I think it’s because people assume they know. Most believe you have to be dirt poor to get any financial aid. But before you can go a step further in this process of finding cash for college it’s critical that you understand this. It’s critical because unless you know exactly what financial aid is you are likely to miss out on great opportunities. So I consider this step one and I promise that by the time you are finished reading this you will thoroughly understanding what financial aid is!

What Is Financial Aid?

Financial aid is any money you receive that is intended to pay for college costs. Please read that one more time before continuing…… That’s right, any aid!

Here come the gritty details. There are two types of aid:

  • Need based aid – You will need to show a financial need to receive this type of aid
  • Merit based aid – This will be based on either academics or a demonstrated skill ( i.e. athletic, musical, etc.)

Yes, yes, yes money you get for great academics or some awesome talent is considered student financial aid. As you work on getting student aid you will see need based and merit based aid blended or combined over and over again. For example, you will need to complete the FAFSA (which is designed to award need based aid) for many merit aid opportunities. You see this many times for state or college specific scholarships based on academics.  It’s important to understand this. Parent’s listen…….  Student’s lose thousands of dollars in free college money every year because families don’t think they qualify.

Let me say it another way that drives the point home. I know of only one student profile that will probably not get any….or very little… student financial aid. Ready for it?  A student from a wealthy family who has poor academics and low ACT/SAT scores with no talent that will appeal to a college. There you go. Does that describe you and your student? Probably not which means there is money out there for you.

Let’s dig a little deeper into this.

What Are The Types Of Financial Aid?

There are 2 types of financial aid. Here they are:

  • Gift aid – money that does not have to be paid back
    • Scholarships and
    • Grants
  • Self help aid – Money you must work for or needs to be repaid.
    • Loans
    • Work study

Where Does It Come From?

Financial aid comes from a variety of sources

  • The Federal Government
  • State Governments
  • Colleges and Universities
  • Outside sources
    • Scholarships not awarded by any of the above
    • Family, other than parents (grandparents are a perfect example)

The Federal Government

The Feds award need based aid which is mostly self help aid such as loans and work study. Very little is scholarship or free money. You have to have very low income to qualify for free money in the form of a pell grant.

State Government

Many states also award need based aid. Many also award merit aid based on academics. The Following states are ones that offer merit aid scholarships that are funded by state lotteries.

Arkansas, Florida, Georgia, Kentucky, New Mexico, South Carolina, West Virginia, and Tennessee. Check out this comparison.

Colleges and Universities

Colleges are the best source for free money. Many offer need based and merit based college specific scholarships. Some are more “financial aid friendly” than others. in my experience medium sized private colleges are the most generous.

Outside Sources

Why do I say that money from outside sources is considered financial aid? This is important to understand! YOU MAY LOSE FREE COLLEGE MONEY if you don’t. Any money from outside the immediate family that is used for college costs is considered untaxed income. Untaxed income needs to be listed on the FAFSA form and will reduce your need dollar for dollar. Ok some of you just read that and your eyes glazed over. Let me give you an example. If a college costs $30000 and your expected family contribution (EFC) is $12000 then your financial need is $18000. Your financial need is the amount financial aid will be based on.

College Cost of Attendance                    $30,000

Expected Family Contribution (EFC)     – 12,000

Financial Need                                          $18,000

If grandparents decide to give $5000 to your child for college and you report that as untaxed income when you file your FAFSA or your student gets a rotary scholarship for the same amount then the $5000 is not applied to your EFC. It is subtracted from the cost of attendance. You are still expected to pay your EFC of $12,000. The only change is your financial need which dropped from $18,000 to $13,000.

College Cost of Attendance                            $30,000

Grandparent gift or outside scholarship     –   5,000

Expected Family Contribution (EFC)             – 12,000

Financial Need                                                  $13,000

You will likely always accept any aid that you get but you must understand how it affects your financial aid.

The Recap

So financial aid is any money you receive to pay for college costs. You qualify for aid based on either having a financial need (need based aid) or having great academics or special skill (merit based aid). You can be awarded free money in the form of scholarships and grants or money that needs to be worked for or repaid like loans and work study. These sources of aid are awarded by Federal and State governments as well as colleges themselves. Any money you get from outside of these three areas is still considered aid but may reduce your financial need substantially.

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