Though rising higher education costs don’t appear to be letting up any time soon, grants, scholarships and loans can all help make college more affordable—or even free.

Free Money

Applying for grants and scholarships should be prioritized above applying for loans, since these funding options offer “free money,” while loans have to be paid back.

Grants

In most cases, grants are distributed by the government and other nonprofit organizations. Eligibility and amount are usually determined according to the distributor’s assessment of an applicant’s financial need. There are several well-known federal grants available to students:

Federal Pell Grant –Pell Grants are awarded based on your level of financial need, status as a full- or part-time student and the cost of your school’s attendance. Applicants are automatically considered for Pell Grants when they submit their Free Application for Federal Student Aid (FAFSA). For the 2016-2017 school year, the maximum Pell Grant award is $5,775. Pell Grants are distributed primarily to students who show the greatest financial need. For example, according to a 2011 study conducted by Fastweb LLC, 95 percent of Pell Grant recipients in the 2007-2008 academic year were at or below 250 percent of the poverty line (adjusted gross income of $53,000 for a household of four). Today, 250 percent of the poverty line for a household of four is $60,750.

Federal Supplemental Educational Opportunity Grant (FSEOG) – Eligibility and amount for these grants also are determined primarily by level of financial need. However, other factors in determining eligibility and grant amount include the amount of other aid you receive, the amount of funds available at your school and how early you apply for the grant. Students are considered for an FSEOG after filling out a FAFSA and may receive a grant of between $100 and $4,000 per year.

Teacher Education Assistance for College and Higher Education (TEACH) Grant – The TEACH Grant is less common than other federal grants because it is specifically for students who intend to become teachers and has strict eligibility requirements beyond demonstrating financial need. Students must sign a “TEACH Grant Agreement to Serve” in which they vow to teach in a high-need field at a school that serves low-income families for at least four years within the first eight years after graduating. Recipients must also complete TEACH Grant counseling each year, enroll in TEACH Grant-eligible programs and maintain a specific level of academic performance. Those who meet the requirements may receive up to $4,000 each year.

Scholarships

One distinction between grants and scholarships is that scholarships are typically awarded by merit, and grants are most often awarded by financial need. Scholarships are similar to grants in that they generally offer money that does not need to be repaid. Many scholarships are awarded for athletic or academic success. Others are given to members of a specific group or as prizes for contests, such as essay competitions. There are thousands of scholarship opportunities available to students and many places to find them. Potential resources include employers, high school guidance counselors and the Internet.

When searching for scholarships online, be careful to avoid websites that request money for results—the only thing you should be spending when searching and applying for scholarships is time. Both www.fastweb.com and www.collegeboard.org are useful scholarship resources. The College Board offers a free scholarship finder tool that allows the user to enter requested information and exposes relevant scholarship opportunities. Access this tool at www.bigfuture.collegeboard.org/scholarship-search.

Image of Student Loan paperwork

Federal Student Loans

If you need additional funds to pay for college, the government has several student loan options that can help. Federal loans typically have much lower interest rates and more flexible repayment options than private loans.

Direct Subsidized Loans – Depending on level of financial need and year in school, undergraduates may borrow between $3,500 and $5,500. Once the loan is made, an upfront 1 percent loan fee is added to the total. Interest does not accrue until the student graduates or withdraws from college, and loan repayment begins six months after that. The direct subsidized loan interest rate for loans disbursed between July 1, 2015, and June 30, 2016, is fixed at 4.29 percent.

Direct Unsubsidized Loans – Similar to direct subsidized loans, undergraduates may borrow a base amount between $3,500 and $5,500, depending on year in school and level of financial need. If the amount you receive for your subsidized or unsubsidized loans does not exceed the anticipated costof attendance determined by your school’s financial aid office, you may be eligible for an additional $2,000 per year in direct unsubsidized loans. Keep in mind that the base amount of $3,500 to $5,500 is a combined total of subsidized and unsubsidized loans. These loans charge an upfront fee of 1 percent and immediately begin accruing interest at a fixed rate of 4.29 percent (for loans disbursed between July 1, 2015, and June 30, 2016). Repayment begins six months after leaving school.

Direct PLUS Loans – PLUS loans are available to graduate students, professional degree students and parents of dependent undergraduate students, should they need additional funds. Currently, PLUS loans have a 4.2 percent loan origination fee, and a fixed interest rate of 6.84 percent that begins immediately after disbursement of the loan. The maximum loan amount is determined by subtracting your other financial aid from the expected cost of college as determined by your school’s financial aid office.

Federal Perkins Loans – Of all the federal loans available, Perkins Loans are the most cost-efficient. Perkins Loans don’t begin to accrue interest until the end of the six-month grace period. Once the grace period concludes, Perkins Loans begin charging interest, fixed at only 5 percent. However, Perkins funds are limited, and only students who have the greatest financial need qualify for the loan. Undergraduate students can borrow up to $5,500 per year. To apply for federal grants and student loans, you must submit the Free Application for Federal Student Aid (FAFSA) available at www.fafsa.ed.gov.

Repayment Options for Federal Loans

Federal student loans offer repayment options that are more flexible than private loans. Unless they request otherwise, borrowers are placed on a standard, 10-year repayment plan that usually requires monthly payments of at least $50, depending on the total amount owed. Standard repayment is usually the cheapest long-term option because the loan balance is paid down faster. However, if you need a repayment plan with smaller monthly dues, a graduated repayment plan is also a 10-year plan in which the monthly amount due starts out low and increases every two years. Another option is the extended repayment plan, which allows borrowers to make payments for up to 25 years at lower monthly costs. Finally, you might be eligible for an income-based repayment (IBR) plan or income-contingent repayment (ICR) plan. While IBRs and ICRs do have minor differences, they are identical in that monthly dues are determined according to your adjusted gross income and household size. These plans typically take about 15-25 years to pay off.

Private Loans

Private student loans are comparable to most other loans. They are funded by banks and nonfederal organizations (such as Sallie Mae), and the amount, eligibility, interest rates and other fees are typically determined by your credit history. Interest rates for private student loans are usually higher than federal student loans, but lower than credit cards.

Though private student loans are available to you, it is generally recommended that you consider private loans only after you’ve exhausted all other loan types available.


This article was written by Advicent Solutions, an entity unrelated to First Bank. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. First Bank does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2012-2014 Advicent Solutions. All rights reserved. Reprinted with permission of Advicent Solutions.