Your Guide to Federal Student Aid

Families who are saving for college have an average of $10,040 set aside for higher education. But the cost of a four-year public university for 2016-2017 is estimated to be $30,232. So should you dip into your retirement fund or pick up a second job to send your kid (or yourself) to school?

The short answer is no. This is where federal student aid comes in.

FAFSA

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To apply for federal loans, you need to fill out the FAFSA, or the Free Application for Federal Student Aid. For the 2016-2017 school year, the federal deadline isn’t until June 30, 2017, but make sure you check your state’s deadline as well.

The info you provide about your household income will determine how much your family is expected to contribute to funding education. Once each FAFSA is processed, the applicant will receive offers of grants, work study, and/or loan amounts.

But let’s back up. Before applying for student aid, you need to know the jargon involved. Here are some terms to get familiar with.

Adjusted Gross Income: Your family’s total income minus standard deductions (like alimony payments, deduction for tuition, etc.). You can easily find this listed on your most recent federal income tax return.

Capitalization: The amount of interest added on the full balance of the loan. This number will add up during the time a student is in school and during the grace period thereafter, ultimately increasing the overall loan cost.

Dependency Status: This is a tax designation that will affect the amount offered in a loan. Simply put: A parent can claim a child as their dependent when the parents are financially responsible for the child. Once a child is out on their own, they file as an independent.

Direct Consolidation Loan: If you’re offered multiple federal student loans and accept them during the school period, you can consolidate them into one single loan. This means you’ll make only one payment per month as opposed to several. Interest gets recalculated by the average of the loans that are consolidated, so it could end up being higher for than some of the lower-interest loans. But there’s good news: The rate is fixed, so you don’t have to worry about it going up.

Direct PLUS Loans: If your child’s financial aid doesn’t cover all their necessary college costs, you can take out an additional Parent PLUS Loan. You will be fully responsible for paying this back — even if you make an agreement with your kid that they’ll pay it. If your child misses payments after graduation, it’s your credit score that will get dinged. This loan is only for undergrads, but if you’re a graduate or professional student, you can apply for a Graduate PLUS Loan for yourself.

Entrance Counseling: This training session is available online and must be completed before accepting any federal student loans. It explains a student’s responsibilities as a loan borrower and takes about 30 minutes to complete.

Expected Family Contribution: All your FAFSA information will ultimately determine a number that represents what your family is expected to contribute toward your student’s higher education — and your eligibility for financial aid. Typically, the higher your EFC, the lower your loan offer will be.

Forbearance: A temporary period when monthly loan payments are suspended or reduced due to financial hardship. During this period, interest will continue to accrue. Go to your loan provider’s website to learn how to apply for a forbearance. Often it requires just a phone call or filling out an online form. Make sure to read the fine print and ask questions before finalizing.

Grace Period: When a student graduates, leaves school, or drops below half-time status, they have a period of time in which they’re not required to make payments on loans. Usually interest is added to the principal balance during this time. And take note that different loans offer different grace periods — they typically vary from six months to about a year.

Grant: This is financial aid that does not need to be repaid (unless the student withdraws from school and owes a refund). Grants are almost identical to scholarships, except that grants tend to be need based while scholarships are usually merit based. Read more about the types of grants offered.

Loan Forgiveness: In very limited cases, your loan balance can be canceled and you won’t be responsible for repaying the remaining balance. Note that unlike with credit card debt, it’s very rare for student debt to be discharged in bankruptcy.

Subsidized Loan: A need-based loan in which the federal government pays the interest that accrues while the student is in school. This is available only to undergraduate students.

Unsubsidized Loan: A loan in which borrower pays the interest that accrues. This loan isn’t need based, and is available to both undergrad and graduate students.

Verification: A process the school uses to confirm that your FAFSA information is correct. About one-third of FAFSAs submitted are selected for it, and it usually means you need to submit more paperwork. If you’re selected, it’s recommended that you use the IRS Data Retrieval Tool, which pulls information directly from your submitted tax docs and the IRS (this can be found on the FAFSA application). It takes about one to three weeks for verification to be completed.

Work-Study: A federal student aid program that offers a student a part-time employment while enrolled in school to help pay for college. Generally, universities will offer various options for work-study. When filling out the FAFSA you indicate whether you’re interested.

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