How Student Aid Works

Every year, millions of students rely on student aid to help pay for their college education. With 9 federal, 605 state, and nearly 8,000 college aid programs - not to mention all of the various military aid programs, including the Post-9/11 GI Bill, the Montgomery GI Bill, and the Yellow Ribbon Program - the process can seem a little confusing. However, nearly all students are eligible for some type of aid, so it pays to have a general understanding of how student aid works and how to apply.

In addition, if you have not yet decided which college or university to attend, understanding the types and amounts of student aid for which you are eligible can help you make a more informed decision on which school best meets both your education goals and financial needs. For tips on choosing the right school, click here.

Before getting started, it is important to remember that all students are expected to contribute towards the cost of their college education. How much you and your family will be expected to contribute depends on your financial situation.

Here's a quick overview to help you understand how student aid works:

1. You prepare and submit a student aid application. This application is called the Free Application for Federal Student Aid (FAFSA). The FAFSA is the form used by federal and state agencies and most colleges to determine student aid awards. (Some state and college programs also require additional application forms, such as a CSS Profile. Check with your school financial aid office to determine any additional student aid application requirements.)

   The FAFSA asks many household income, asset, and dependency questions. If you are a dependent student, your parents will probably want to answer most of the questions. You don't have to file your income taxes before you complete your FAFSA. It's okay to estimate earnings based on the previous year's income in order to get your FAFSA into the system early - that way, your place in the student aid line is secure. Later, when you file your federal income taxes, you can go back and revise your FAFSA.

   Each college determines your aid eligibility and award amount based on the information you provide on your FAFSA. Competition for aid is fierce, and most of it is awarded on a first-come, first-served basis. Submit your FAFSA as soon as possible after January 1 so you don't miss out on any student aid.

   IMPORTANT NOTE FOR VETERANS, SERVICE MEMBERS, AND THEIR FAMILIES: You should complete and submit a FAFSA application IN ADDITION to applying for the various forms of military aid available. Doing so helps ensure that you are offered the maximum amount of student aid for which you are eligible. See additional information in steps 6 and 7 below.

2. The federal government calculates your EFC. The U.S. Department of Education calculates what's called your Expected Family Contribution (EFC), which is the amount it determines you (and your family, if you are a dependent) are expected to pay toward your education expenses based on the information you provided on your FAFSA. Your EFC and each college's published Cost of Attendance (COA) determine your financial "need" for eligibility and award amounts.

   Your EFC is not necessarily the amount of money you must come up with immediately to pay for college. Student aid sources, such as grants, student loans, and work-study, can offset your net "out-of-pocket" cost. Of course, loans must be repaid after you leave college.

   Once your FAFSA is processed by the U.S. Department of Education, you will receive a Student Aid Report (SAR) that summarizes the information you submitted and includes your EFC.

3. Your need is determined. Some aid is based on merit (grades and accomplishments), but most aid is based on "need," which means that you must demonstrate financial need to be eligible. Your financial need is calculated by subtracting your EFC from the published cost of attendance for the colleges you apply to (COA - EFC = Need).

4. Colleges access your information. The federal government doesn't determine how much aid you will receive - colleges do. Once your student aid application has been processed, the colleges to which you have been accepted will access your processed FAFSA data. They will use the information to determine your student aid eligibility and then assemble a financial aid award package for you.

5. Colleges determine your eligibility and award amounts. Colleges decide aid awards (grants, scholarships, loans, work-study programs, etc.) based on your need and how much aid they have to offer. You will receive a financial aid award letter or electronic notification from each college that accepts you (generally in March or April), and it will outline the financial aid award package you have been offered. Colleges are often open to reconsidering your award if something about your financial status changes for the worse (e.g., a job layoff).

6. You decide on an award package and accept the student aid offered. After carefully reviewing the financial aid award packages offered to you by each college to which you have been accepted and making a final determination on which school you will attend, you will need to formally accept your aid awards by following the instructions outlined in the award notification.

   If your aid package includes student loans (e.g., Stafford, Perkins, PLUS), you will need to sign a Master Promissory Note (MPN). The MPN is a binding legal contract between a borrower and lender that outlines the terms and conditions of a loan and secures the borrower's promise to repay it. Schools may have additional forms that you need to complete, depending on the type of aid awarded, so be sure to follow instructions carefully.

   IMPORTANT NOTE FOR VETERANS, SERVICE MEMBERS, AND THEIR FAMILIES: You should also apply for any military aid programs for which you may be eligible, such as the Post-9/11 GI Bill, the Montgomery GI Bill, the Yellow Ribbon Program, and others (see Military Aid Programs section for an overview of the various programs) in addition to the FAFSA. This will give you a clear understanding of all of the benefits for which you qualify before accepting student aid awards. For example, you may qualify for federal and state grants that, along with your military aid benefits, might be enough to cover the full cost of your education, making any student loans offered unnecessary.

   If you have questions about your financial and military aid benefits, talk to your school financial aid office. You can also view online resources, such as the U.S. Department of Veterans Affairs website.

7. You must remember to apply early for student aid every year. Nearly everyone is eligible for some type of aid. While there are billions of dollars of student aid available, competition is fierce, and aid is awarded on a first-come, first-served basis. In order to get the most aid possible, you should submit your FAFSA as close to January 1 as you can, even though actual application deadlines may vary at individual schools.

   In addition, certain military aid programs that can help cover up to the full cost of your education, such as the Yellow Ribbon Program, are awarded annually by participating colleges on a first-come, first-served basis. Therefore, applying early is critical.

   You must reapply for aid each year by submitting a new FAFSA. The aid "window" for each academic year stays open 18 months, so if your family runs into a financial problem during the first semester, there's still time to request more aid for the current academic year. Aid may also pay some costs retroactively.