Over the next few weeks, hundreds of thousands of college freshmen will be moving into their cramped dorm rooms and beginning their college careers. Amidst all of the emotions, tears, unpacking, and meeting new friends, is the unavoidable fact that to move into a college dorm, you must have it paid for first.
Financial aid is a vital component of paying for college. While many parents take advantage of a 529 plan, and while some are simply able to pay out of pocket for these costs, the vast majority of students and parents rely heavily on financial aid to make college a reality.
How do you learn about your financial aid options? If you are reading this blog, you are likely already way far above the average person in terms of your financial savviness. However, financial aid is a completely different animal than understanding how a mortgage works, or how to invest in the stock market.
When searching for financial aid, and eventually when you are evaluating the financial aid award offer from your college, here are some guiding principles to keep in the back of your mind. I call this: The Financial Aid Pyramid.
Not all financial aid is created equal. As we will see, some forms of financial aid are very different than others, and some are most definitely better than others. This pyramid shows us the pecking order of which types of awards we should pursue, and which awards are worth our time and effort, as opposed to those that we may qualify for with little effort.
Private Scholarships and Grants
At the top of the pyramid are private scholarships and grants.
Private scholarships and grants are those that are offered to you from an organization outside of your college. A Rotary club for example, or the Coca Cola scholarship, or the Target All-Around scholarship. These are typically scholarships that have an application process, possibly an interview process, and depending on the award, may have a large number of applicants.
Federal and State Scholarships and Grants
Next, comes federal and state scholarships and grants.
Federal grants, such as the Pell Grant or Federal Supplemental Educational Opportunity Grant, are qualified for by submitting the FAFSA. If you qualify based on the FAFSA criteria, you will receive the award regardless of who else has applied.
Most state scholarships work the same way. If you qualify based on your class rank, GPA, and SAT/ACT scores, you will receive the scholarship. I have placed these awards second, only because they generally take less effort in the application process. I would recommend focusing your time on the private scholarships.
Federal Student Loans
Third, comes federal student loans.
Loans, like it or not, are an integral part of many financial aid packages. It is important to note, however, that not all student loans are created equal. The Federal Direct Stafford Loans are the best student loans to receive, and they are qualified for by submitting the FAFSA. A freshman can qualify for up to $5,500 and a senior can qualify for up to $7,500 per year. Payments are deferred until after you graduate.
Parents can also take out Federal Parent PLUS Loans, which generally have much more favorable repayment terms than any other type of loan, and are easier to qualify for if credit is an issue for you.
Private Student Loans
Finally, we have private student loans.
The bottom of the barrel are private student loans. These are loans through a bank such as Sallie Mae, Wells Fargo, FedLoan, Nelnet, or a large number of other student loan lenders. You may see these loans and notice that they currently have very low interest rates, which is certainly correct. However, the main reason I placed them at the bottom is because the interest rates are almost always variable, and repayment begins immediately. They also require a credit-worthy co-signer, and are sometimes difficult to qualify for.
The Bottom Line
Start at the top of the pyramid and work your way down. Spend all of your energy focused at the top, and then take advantage of the other awards along the way if you need to. I think this method will help you maximize your efforts, and ensure that you are applying for and accepting the most beneficial financial aid available to you!
What do you think of the financial aid pyramid?
DJ works in financial services at a large public university. He lives in the Southeast with his wife and young daughter.