The Fundamentals of Financial Aid

It happens every year at this time: college-bound students and their families receive financial aid award letters from the colleges where they were accepted. While the letter might seem simple to understand at first, the reality is that parents and students need to take a close look at its contents. The financial aid jargon can often confuse the most prepared family.

Financial aid award letters provide students and their families with the type and amount of aid they are eligible for, funding sources and conditions of the award. The type and amount of federal aid awarded depends on many factors including the cost of education, family information provided on the Free Application for Federal Student Aid (FAFSA) and the availability of funds. The letters generally include information on some of the more common financial aid sources found in award packages, such as:

Federal(1) Pell Grant: Students who meet federal criteria for financial need automatically receive this grant, which does not require repayment. Once students accept this offer, the grant is credited directly to their college accounts.
Federal SEOG (Supplemental Education Opportunity Grant): This grant is awarded to low-income students based on availability of funds at the college and does not require repayment. Once accepted, the grant is credited directly to students' college accounts.
College or University Grant: Individual colleges or universities determine eligibility for this award. The college funds this grant and does not require repayment. Once students accept this grant, it is credited directly to their college account.
Federal Work-Study: This program is awarded to students with financial need. Students work part time to earn this award and are responsible for tuition payment. Work-Study funds are not credited directly to students' accounts.
Federal Perkins Loan: This low-interest-rate (5 percent) loan is for students with exceptional financial need and is based on the school's available loan pool. As with all federal education loans, repayment is required. Once students accept the loan offer, they must follow their college's guidelines on receiving it. After the school disburses the loan funds and students sign a promissory note, funds are credited directly to their college accounts.
Federal Stafford Loans: These low-interest-rate(2) education loans must be repaid. Annual borrowing limits vary depending on students' year in college; freshmen receive a maximum of $2,625. Students must follow their college's guidelines on applying for and receiving the loan. After students sign a promissory note, the lender disburses the loan funds to the college; students then either receive a check or funds are credited directly to their college accounts. Two types of Stafford loans are available:

Subsidized: These loans are awarded to students with financial need. The federal government pays the interest on the loan while students are in college and during deferment and grace periods.

Unsubsidized: These loans are awarded to students regardless of family income. Borrowers pay interest while attending college or may defer payment and allow interest to accrue. In most cases, accrued interest is "capitalized," or added to the principal loan amount when repayment begins.

If the award letter is not enough to cover all college expenses, parents should consider applying for the Parent Loan for Undergraduate Students (PLUS). PLUS loans are available to parents of undergraduate dependent students and are not based on income or assets. Parents may take up to 10 years to repay and the interest rate is variable, with a maximum of 9 percent. Repayment begins shortly after funds are received.

Students and families who have questions about their financial aid award letters or other college-funding issues should call the College Answer(R) Service, a toll-free hotline at (800) 891-4599, where financial aid experts answer questions from 8 a.m.-9 p.m. ET, Mon.-Fri. Parents who need more information on PLUS loans should call the Parent Answer(SM) Service, (800) 891-1410, 8 a.m.-9 p.m. ET, Mon.-Fri. Operators will help parents determine their eligibility for a PLUS loan and assist with the application process.

The following is a sample financial aid award letter(3) for a freshman attending classes full-time and living on campus. The annual cost of attendance is $15,000 and includes tuition and fees, room and board, books and supplies, and personal expenses.

SLM UNIVERSITY

John E. Student Social Security Number

25 College-Bound Drive

University College, VA 20000

Dear Student:

After reviewing your FAFSA, we are pleased to provide you with the following financial aid offer. This award is contingent upon anticipated annual renewal of funding from federal, state and private sources. You may accept or decline any of the awards offered(4).

Award

Type of Aid Fall Spring Total Accept Decline

Federal(5) Pell Grant 600 600 1200 ( ) ( )

Federal SEOG (800) 800 1600 ( ) ( )

SLM Grant 1000 1000 2000 ( ) ( )

Federal Work-Study Program 700 700 1400 ( ) ( )

Federal Perkins Loan 600 600 1200 ( ) ( )

Federal Subsidized

Stafford Loan(6) 1300 1300 2600 ( ) ( )

5,000 5,000 10,000

Please sign this letter and return to the financial aid office within two weeks. Read the enclosed information on the process to apply for and receive the Stafford Loan. If you need additional funding to supplement this offer please refer to the attached list of Additional Funding Options.

Notes:

With an annual cost of $15,000, SLM University will bill this student $8,000/semester. The student received a financial aid award of $10,000/year or $5,000/semester, but must work part-time to earn the $1,400/year or $700/semester work-study award. Even with grants, student loans and work-study, the student will need an additional $5,000/year or $2,500/semester.

Additional Funding Options

If family savings and income can't cover this amount, the student may consider the following additional funding options:

Monthly Payment Plans: Extend payment of college costs not covered by financial aid, over a period of time determined by the college. Many schools offer 10-month payment plans.
Parent Loan for Undergraduate Students (PLUS): Federal loan that allows parents of dependent students to borrow up to the full cost of the students' education minus financial aid received. Credit-worthy parents are eligible to borrow a PLUS loan for students regardless of family income.
Private Loans: Non-federal loans available to credit-worthy students and parents from banks, credit unions and other private sources. Interest rates on private loans are usually slightly higher than federal loans.

The federal programs listed on award letters are based on need; award packages also may include non-need-based financial aid.
Interest rates are based on the T-Bill + 1.7 percent during in-school periods and T-Bill + 22.3 percent during repayment. Rates are variable, reset every July 1 and capped at 8.25 percent.
This letter contains some of the more common financial aid sources found in award packages. The type and amount of federal aid awarded depends on many factors including the cost of education, family information provided on the FAFSA and the availability of funds.
Students generally receive the conditions that govern the award and are given the opportunity to accept or decline the awards offered.
All federal programs listed on the award letter are based on need. Award packages may also include non-need-based financial aid.
Interest rates are based on the T-Bill + 1.7 percent during in-school periods and T-Bill + 2.3 percent during repayment. Rates are variable, reset every July 1 and capped at 8.25 percent.

SOURCE Sallie Mae

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