:max_bytes(150000):strip_icc()/quick-guide-how-fafsa-loans-work.aspfinal-095c438b775f49488e405992d7f8feba.jpg "A Quick Guide to How the FAFSA Works")
Every college-bound person and their parents need to know how the Free Application for Federal Student Aid (FAFSA) process works. Some may dismiss the idea of applying for financial aid for college because they think they make too much money to qualify. But regardless of their family earnings, they may be eligible for some form of financial assistance, including federal, state, and school-based aid as well as merit-based scholarships.
In fact, it makes sense for almost all families with a college-bound kid to fill out the FAFSA.
Key Takeaways
- Most families are eligible for some form of federal financial aid for college.
- Students with exceptional financial need may be eligible for federal grants and subsidized loans.
- Other students and parents may be eligible for non-need-based aid, such as unsubsidized federal loans.
How Does FAFSA Work?
The primary purpose of the FAFSA is to determine how much financial aid a student qualifies for, including both need-based and non-need-based aid. It determines eligibility for federal need-based grants, including the Pell Grant and Federal Supplemental Educational Opportunity Grants (FSEOG); subsidized federal student loans, which are based on need; unsubsidized federal student loans, which most students qualify for regardless of need; federal work-study; state-based financial aid, including grants, scholarships, and loans; school-based financial aid, including need-based grants and scholarships; and school-based merit aid (since many schools require the FAFSA to be on file before any aid awards are distributed).
To determine a family’s financial need, the FAFSA asks a series of questions about the parents’ and student’s income and assets as well as other factors, such as how many children there are in the family. It then comes up with a Student Aid Index (SAI).
The confusingly named Expected Family Contribution (EFC) was renamed the Student Aid Index (SAI) for the 2024–2025 school year forward to clarify its meaning. It does not indicate how much the student must pay the college. It is used by the school to calculate how much student aid the applicant is eligible to receive.
In addition to changing the name, the transition to SAI will also change the formula a bit. Parental income was once divided if they had more than one child in college at one time. Now, each child’s SAI will use the same amount of parental income information, whether they are supporting multiple children in college or not.
The FAFSA is the official form that students or their families use to apply for financial assistance for college from the federal government. States, individual colleges and universities, and private scholarship programs rely on the information provided in the application as well.
In terms of assets, the FAFSA assumes that 20% of a student’s assets and 5.64% of the parents’ assets should be available for spending in any one college year. Those assets include bank accounts and investments but exclude the value of retirement accounts, life insurance policies, and annuities. Any equity in the family home is also excluded.
The information you supply on the FAFSA determines whether you qualify for need-based aid, non-need-based aid, or some combination of the two.
If you aren’t ready to fill out the FAFSA itself, you can get an estimate of your SAI and likelihood of receiving financial aid by using the office of the Department of Education’s Federal Student Aid Estimator.
Here are some of the programs that require filling out the FAFSA.
Need-Based Financial Aid
Federal Pell Grants
Grants are the most attractive type of financial aid because they do not need to be repaid. Pell Grants, the main federal grants for college, are intended for students who demonstrate exceptional financial need. They are primarily awarded to undergraduates, but some teacher certification programs are also eligible. The maximum award is $7,395 for the 2024–25 award year (July 1, 2024, to June 30, 2025). A college or university’s financial aid office determines how much money students qualify to receive, based on their family’s SAI and the school’s cost of attendance (COA).
Federal Supplemental Educational Opportunity Grants
These grants also do not need to be repaid, but they are only available at certain schools. The amounts range between $100 and $4,000 per year. As with Pell Grants, these supplemental grants are meant for students with few other financial resources.
Federal Direct Subsidized Loans
These loans are subsidized by the government, which means that will not be required to pay interest on them while you are in school and for a grace period of six months after you graduate. Loan amounts that can be subsidized range from $3,500 to $5,500 per year, depending on your year in school and whether you are considered a dependent or independent student as defined by the office of Federal Student Aid. These subsidized loans are not available for graduate study.
Federal Work-Study
The federal work-study program makes paid part-time jobs available through participating colleges and universities. Both undergraduate and graduate students may be eligible.
Federal loans, whether subsidized or unsubsidized, tend to be less costly than private loans and have more flexible repayment options.
Investopedia / Candra Huff
Non-Need-Based Financial Aid
Direct Unsubsidized Loans
Unsubsidized loans are similar to their subsidized counterparts with one big exception: The government doesn’t pay the loan interest while the student is in school or during a six-month grace period afterward. If students or their parents don’t pay the interest during this time period, it will be added to the principal of the loan.
Schools can offer these loans as part of a financial aid package regardless of a family’s financial situation. Dependent students are eligible for a maximum of $31,000 in subsidized and unsubsidized loans over their undergraduate years unless their parents are ineligible for federal PLUS loans, in which case the limit may be higher.
Federal PLUS Loans
These loans are intended for parents or graduate students. They aren’t subsidized by the government, so the interest that accrues during the college years will be added to the principal if it isn’t paid while the student is in school.
Teacher Education Access for College and Higher Education (TEACH) Grants
Students who are training to become teachers can qualify for these grants—up to $4,000 per year—even if they don’t meet need-based criteria. To qualify, the student must take certain classes and, within eight years of graduation, have worked for at least four years in an elementary or secondary school or educational service agency that serves low-income families. These grants don’t have to be repaid unless the student fails to fulfill the requirements, in which case the grant is converted into a direct unsubsidized loan.
How to Use Financial Aid
Fortunately for most prospective students, the actual process of applying for financial aid is relatively straightforward. For added peace of mind, you can refer to the step-by-step guide below to make certain that you’re staying on top of your financial aid during your (or your child’s) academic career:
- Investigate financial aid options sooner, rather than later: You should already have a solid idea of how you’re going to pay for college well before the first day of school. Mark the application deadline for the FAFSA on your calendar (you’ll want to do so for each year you plan to request financial aid). Additionally, be sure to investigate any grants and scholarships you might qualify for, in addition to prepaid tuition and education savings (529) plans.
- Complete the FAFSA application: Ahead of each year of college, you’ll want to fill out and submit your FAFSA application. Your eligibility for federal grants, work-study, and loans is based on your FAFSA data, with some states and universities rewarding additional aid based on said data.
- Review and receive your financial aid: Once you’ve received your financial aid offer (or offers, if you’ve been accepted by more than one school), be sure to review and compare (if applicable) the types, amounts, and costs of each financial aid package. Once you’ve accepted the aid package of your choice, all you have left to do is inform your chosen school of any additional sources of aid you’re likely to receive. The university’s financial aid office will apply the aid to the amount you owe and send you any remaining funds for other college expenses.
- Repeat these steps annually until graduation: From here on, all you mainly have to worry about is making good grades, as one of the requirements of maintaining financial aid eligibility is making satisfactory academic progress. As previously mentioned, you’ll also need to fill out the FAFSA each year you’re in school to receive additional financial aid.
What Is the Point of a FAFSA?
The U.S. Department of Education uses the FAFSA to determine a student’s eligibility for need-based federal financial aid for college based on their financial situation. Federal financial aid may include federal grants, scholarships, work-study, and/or loans.
Is the FAFSA a Loan or Free Money?
The FAFSA is not a loan or free money. It is simply an application that you fill out in order to determine your eligibility for receiving a federal loan, grant, or work-study. There are three main types of financial aid that a student may be deemed eligible for after completing the FAFSA. Some of this money is free money, some must be earned through work, and some must be repaid.
Who Qualifies for a FAFSA?
The most general eligibility requirements to qualify for the various forms of federal student aid include that you have financial need, are a U.S. citizen or eligible noncitizen, and are enrolled in an eligible degree or certificate program at a college or career school. However, there are more eligibility requirements you must meet to qualify for federal student aid and these requirements are specific, based on the type of aid. The majority of students are eligible to receive some type of financial aid from the federal government to help pay for college or career school. The student’s age, race, and field of study are not taken into account when determining their eligibility.
When Should I Fill Out My FAFSA for 2024–2025?
To be considered for federal student aid for the 2024–2025 award year, you needed to complete a FAFSA form by June 30, 2025. Each state also has its own deadline.
The Bottom Line
Most families—regardless of how much they earn or have accumulated in assets—will find it useful to fill out the FAFSA. If it turns out that they are ineligible for free money in the form of grants or scholarships, they are still likely to be eligible for non-need-based aid in the form of direct unsubsidized loans from the federal government. Federal student loans typically have more favorable terms than loans from private lenders and offer a variety of flexible repayment options.