This post is a modification of a guest post that I originally wrote for Green Panda Treehouse titled: College Life: Managing Your Financial Aid. I wanted to sum up the original article here while introducing you to Green Panda because she will be posting a guest post for me tomorrow!

College is a very expensive decision that many of us get to make at the young age of 17 or 18. At the same time, borrowing money has become easier and easier. This is a recipe for disaster and has led to students letting their debt dictate a less than optimal career.

This article was written to help college students and parents navigate through the financial aid maze. Whether it was constructed to be a maze or not, it can cause quite the headache figuring it out.

You must fill out a FAFSA, which is the Free Application for Federal Student Aid, to be eligible for the following aid. They have taken great strides to making it easier to fill out your FAFSA in the past few years. Do not opt out of filling it out for any reasons, ask help from a guidance counselor or school advisor.

Popular Forms of Federal Assistance Available

• Federal Pell Grants [Info] – Capped at $4,860 per year for the 2009-2010 school year. Grants designed to promote low-income student attendance so they do not need to be paid back. 90% of the grants are given to to families who earn less than $40,000 per year.
• Federal Supplemental Educational Opportunity Grants [Info] – For low-income families, much like the Federal Pell Grant. The grant is between $100 and $4,000 a year depending on circumstances such as your need, what you are already getting in terms of financial aid, and when you submit your FAFSA. Like the Federal Pell Grant, these do not need to be paid back.

Did You Know?

Private student loan activity is growing much faster than federal student loans in terms of volume according to FinAid.

• Federal Perkins Loans [Info] – A Federal Perkins loan has a ten year repayment period and a fixed interest rate of 5%. A nice advantage is that you have 10 months after graduation/leaving school to begin paying off the loan. Interest won’t accrue until this point. The maximum benefit for an undergrad is $4,000/year and $20,000/lifetime. For grad students, the maximum rises to $6,000/year and $40,000/lifetime (including undergrad). Some jobs will actually forgive your FPL debt, which is why a lot of teachers choose to teach in low income areas. This is just as good as a salary increase!
• Stafford Loans (subsidized and unsubsidized) [Info] – Stafford loans are typically offered at interest rates above 6%, higher than FPL’s. The difference between subsidized and unsubsidized? Subsidized Stafford Loans defer interest from accruing until 6 months after you graduate, at which point you must start paying off your loans, just like with a FPL. Unsubsidized Stafford Loans, however, do not defer interest from accruing while you are in school! You may choose to defer the payments but the interest will be added to your principal once you graduate. You should try to pay it off as you can while you are still in school. You may need to reduce your costs, but it is worth it.
• Federal Work-Study Programs [Info] – FWS Programs provide part-time jobs for undergraduate and graduate students. Like all of the others, they are need-based. The jobs encourage people to find jobs within their majors and are guaranteed to be federal minimum wage or greater.Technical jobs will usually pay more. This can be a great way to get experience and test the waters of the industry. One of the large advantages of the FWS program over a normal job? The FWS administrator will work with you on your class schedule.

Expected Family Contribution: How is it Calculated?

As stated above, a lot of financial aid is “need-based.” But what does this mean? Depending on income levels and assets owned for you and your parents, you may or may not qualify to receive financial aid. This does not mean that you should not apply because you think you are too wealthy, though. The ceiling is higher than you probably suspect. What other factors may be considered in the formula for financial aid?

• income and assets of the parents and student
• family size
• the number of children attending college
• and certain other factors which this Brown.edu website goes over quite thoroughly

And in the end this formula spits out a value you may or may not have heard of: the expected family contribution.

Why is the expected family contribution important?

The amount of your financial aid that you are now eligible for is the cost of attending the college of your choice for one year minus the expected family contribution.

Cost of attending college for one year – Expected family contribution = Amount of financial aid

That is the magic number that may throw you into debt. Hopefully this post has gone over the different types of need-based financial aid to give you a good idea on what to look forward to when applying for FAFSA or putting a child through college. If you plan ahead and take advantage of the FAFSA, you could ensure you minimize debt.

Conclusion

Fill out your FAFSA early NO MATTER WHAT. Whether you think you qualify or not you should fill it out and submit it. As I said, the ceilings are higher than you probably suspect. The grants are absolutely free money and I cannot think of any reasons to not take them (any readers have any idea why you wouldn’t?!). The loans should be looked at carefully. If you definitely need a loan these are very attractive based on their interest rates and interest deferral options. One thing many people don’t know, though, is that student loans NEVER leave you. You cannot get rid of them with a bankruptcy. So be smart about your decision and only take what you need, a basic finance principle!