Federal programs are uniform across the nation, but
state and private funding (including scholarships and
aid offered by the colleges themselves) may differ
slightly from place to place.
The first important point to understand is the differences among
a scholarship, a grant, and a loan. The key difference? A loan has to be
repaid, sooner or later. After that simple distinction, things get a bit more
complex. Any of the three types of aid can be offered by governments, private
individuals, companies, associations, or by colleges and universities.
The fourth category is work-study, which is a subsidized program that
provides paid jobs to students to help with college expenses.
SCHOLARSHIPS
Some schools and programs define a scholarship as a sum of money—from a
small portion of the bill to a completely free ride—given to recognize academic
achievement, personal achievements, athletic ability, or in furtherance of
certain goals of the college, such as diversity.
An academic scholarship may be awarded for all four years of an
undergraduate career or may be offered one year at a time with an opportunity
for renewal. A scholarship does not have to be paid back, but many colleges
require that students maintain a particular grade point average and a good
conduct record for renewal each year. Typically, scholarship programs demand
a minimum GPA of 2.5; some insist on a more difficult 3.0 average, and a
handful set an even higher academic bar.
At colleges, scholarships may be offered by academic departments
during the review of applications for admission, or students may have to
apply for a scholarship. Scholarships offered by government and private
organizations usually involve a formal application.
Depending on the size of the school and its membership in national
or regional athletic associations such as the NCAA, sports scholarships may
have other strings. A scholarship cannot be taken away because a football
player turns out to have two left feet; the student does, though, have to
show up for practices and competitions and otherwise meet the reasonable
requirements of the athletic department. In addition, student athletes are
generally required to maintain an acceptable grade point average.
For information about NCAA scholarship rules, consult the organization’s
home page at www.ncaa.org or burrow a bit deeper by searching for a copy of
the Guide for the College-Bound Student-Athlete.
GRANTS
A grant is a need-based scholarship. Colleges that offer grants to students
usually do so on the basis of information gathered from the Free Application
for Federal Student Aid (FAFSA) form, sometimes with additional information
from CSS/Financial Aid Profile (see Chapter 14) and other data requested of
the student or the family.
The student and parents generally have to file a current FAFSA each
year, and need-based grants can be adjusted up or down based on changes in
finances and the availability of funds at the school.
Need-based grants may also be offered by state and federal governments
and from private sources. The best-known federal need-based scholarship is
the Federal Pell Grant. Another is the Federal Supplemental Educational
Opportunity Grant (FSEOG). These programs, which I discuss in Chapter 6,
disburse funds based on federal criteria.
Many states have their own grant programs. Examples include the New
York State Tuition Assistance Program (TAP), which provides need-based
grants of as much as several thousand dollars per year.
LOANS
As I’ve noted, a loan has to be paid back. Though all loans have that fact
in common, they can come in many different flavors. The three best-known
national programs are Federal Perkins Loans, Federal Stafford Loans, and
Federal PLUS Loans.
A Perkins loan is a low-interest loan based on need; there’s not a huge
amount of money available under that program, but it can be combined with
other offerings.
A Stafford loan can be subsidized (based on need; the interest rate is
reduced and no interest is charged until after the student leaves school), or
unsubsidized (not based on need; interest is charged as soon as funds are
disbursed, although the loan can be written up so that payment of the principal
and accrued interest does not begin until the student leaves school).
The Parent Loan for Undergraduate Students (PLUS) program is
a straightforward loan that is not based on the student’s or the parent’s
financial situation but is instead offered to anyone. Parents can borrow as
much as they need, up to the full out-of-pocket cost of college (expenses
minus any financial aid received). The interest rate on the loan is variable,
but as of 2006 cannot exceed 9 percent; repayment begins sixty days after
the loan is made. There is a built-in fee for the loan as well; a 4 percent fee
is subtracted from the amount borrowed before it is disbursed to the college.
(If you borrow $10,000, for example, the school will receive $9,600 but you
will be responsible for repaying $10,000 plus interest on the outstanding
balance.)
Many states offer subsidized or unsubsidized loans that can also be used
to pay for a portion of the college bill. One example is the Massachusetts
Educational Financing Authority (MEFA), which makes available student
loans at reduced interest rates; borrowers may be able to claim some or all of
the interest and fees paid on this sort of loan as an education tax deduction
within federal income guidelines. And MEFA also has a program that allows
borrowers to secure their education loan with the equity in the family home,
allowing for deductibility of interest without any income restrictions.
Alternative loan programs from private sources can help bridge the
gap between need-based financial aid and the bottom line. Loans vary on
interest rates and fees, and students must have a creditworthy cosigner who
guarantees repayment if the student is unable to pay off the note.
A personal or secured loan taken out by parents or the student may
include a payback schedule that begins immediately, although some
arrangements call for payments that only cover accrued interest while others
require payment of a portion of the outstanding principal as well as interest.
Examples of this sort of loan include an equity loan or line of credit that taps
into the value of a home.
FEDERAL WORK-STUDY
This fourth category of “aid” is actually a need-based program that
offers the student the opportunity for a paid job during the school year. The
financial aid letter lists the amount of money that the student can earn under
the program; the funds do not appear as a credit on the tuition bill.
The student receives a paycheck (with taxable income) during the
school year; it is up to the family to determine how that money is applied—
as partial repayment of college expenses, as repayment of student loans, or for
week-to-week expenses such as books, food, and travel.
Read More: FINANCIAL AID: A Definition of Terms
