One of the first college lessons that students learn: It’s expensive. Adding up what it costs to go to college — tuition, fees, room and board, books — can be an experience in sticker shock.
To help foot the bill, the U.S. Department of Education awards around $150 billion in various forms of financial aid to about 15 million students each year. To qualify, you have to fill out the Free Application for Federal Student Aid, and you should complete it as soon as possible — even before you decide which college to attend — to be eligible for the most aid.
When you fill out the FAFSA, you’re applying for three types of federal aid: loans, grants and work-study programs. States, colleges and even private organizations also often use the FAFSA to award grants and scholarships. For help filling out the FAFSA, check out our FAFSA Guide and tutorial.
Here’s a look at all three federal FAFSA financial aid options.
Federal student loans
Federal student loans are fixed-interest-rate loans the government lends to students to pay for college, and interest rates vary depending on when you borrow. If you qualify, choose this option over private student loans, because federal loans typically have lower interest rates and flexible repayment options. (More on federal vs. private student loans). Most federal loans also offer grace periods, which means you don’t have to start making payments until at least six months after you graduate.
There are two federal student loan programs: Direct and Perkins.
- Federal Direct Loans: The government’s largest loan program consists of four loan types: subsidized, unsubsidized, PLUS and consolidation loans.
- Direct Subsidized Loans, also known as Subsidized Federal Stafford Loans, are for undergraduates only. They’re need-based, which means eligibility depends on a borrower’s (and his or her family’s) income and assets. Subsidized loans don’t accrue interest while the student is in school.
- Direct Unsubsidized Loans, also known as Unsubsidized Federal Stafford Loans, are for both undergraduate and graduate students. They’re not need-based, which means borrowers can qualify regardless of their (or their family’s) income and assets. Unsubsidized loans accumulate interest while the student is in school.
- Direct PLUS Loans are for graduate students and parents of undergraduate students. You need to have decent credit to qualify, unlike with subsidized and unsubsidized loans.
- Direct Consolidation Loans are for combining multiple federal student loans into one. For more information about this option, check out our guide to federal student loan consolidation.
- Perkins Loans: Through this federal loan program, participating colleges lend up to $5,500 a year to undergraduates and up to $8,000 to graduate students with “exceptional financial need.” Perkins loans have a fixed 5% interest rate regardless of when you borrow and a nine-month grace period.
Funding for the Perkins Loan program expired in September 2015, but Congress passed a law temporarily extending the program. New undergraduate borrowers who qualify will be eligible for Perkins Loans through Sept. 30, 2017, but only after they’re awarded all the federal Direct Loans they qualify for.
Federal student grants
Federal grants are essentially free money; you don’t have to repay them. However, they’re reserved for financially needy students. The federal government offers four types of grants: Pell Grants, Supplemental Educational Opportunity Grants, Teacher Education Assistance for College and Higher Education Grants, and Iraq and Afghanistan Service Grants.
- Pell Grants: This federal grant program is available to any undergraduate who qualifies based on financial need. The maximum award for 2015-16 is $5,775. The grant amounts are based on each student’s need, and there’s no first-come, first-served system — every student will get the full amount for which he or she qualifies.
- Supplemental Educational Opportunity Grants: Participating campuses award these federally funded, need-based grants to students on a first-come, first-served basis. Students can get between $100 and $4,000 a year depending on their need, on when they apply and the other aid they get.
- Teacher Education Assistance for College and Higher Education (TEACH) Grants: The TEACH grant program awards up to $4,000 a year to undergraduate and graduate students studying to be teachers. To receive the grant, you must sign an agreement saying that you’ll teach in a high-need field or a low-income area for at least four academic years within eight years after graduating. If you don’t complete that requirement, the grant will turn into a federal Direct Unsubsidized loan.
- Iraq and Afghanistan Service Grants: You qualify for this program if one of your parents died in the U.S. Armed Forces in Iraq or Afghanistan after Sept. 11, 2001. If you qualify you can get up to $5,775 — the amount of the Federal Pell Grant — each year.
Federal Work-Study programs
Many schools participate in the federal government’s Work-Study program, which provides part-time jobs to full- or part-time undergraduate and graduate students with a financial need. Check with the school you plan to attend to see if this opportunity is available.
How to find out which FAFSA financial aid options you’re awarded
After you fill out the FAFSA, you’ll receive a Student Aid Report within three days to three weeks, according to the Federal Student Aid website. This report is a summary of the information you provided on the FAFSA. Review it to ensure the information on your application is correct.
Later on, you will receive an award letter from the schools where you’re accepted, detailing the types of aid you’re eligible for, including federal, state, institutional and private aid. Depending on the school, you could receive the award letter as early as the spring (if you applied for the fall semester) or as late as the fall.
The bottom line
Filling out the FAFSA makes students eligible for federal student loans, federal grants and work-study programs, as well as grants and scholarships from states, colleges and private organizations. You won’t know which FAFSA financial aid options you’ll be offered until you receive an award letter from the schools that accept you. Fill out the form, and you could win some help in paying for college — an effective treatment for that case of sticker shock.
Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel.
Image via iStock.
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