Student Loans

The Hierarchy of Financial Aid

Financial aid can be complicated. Unfortunately, there are so many rules and regulations (not to mention government red tape) that it honestly is a full time job just keeping track of it all.

There is no way that you can know it all. However, there is one very easy way to make sure you get the most of your financial aid package. You need to understand the hierarchy of financial aid.

This will help you determine which awards you will accept, decline, or adjust, when deciding on your final financial aid package.

financial aid office

Tier 1 Financial Aid

At the top, and therefore the most sought after and the most valuable, are grants, scholarships and work-study. These are considered the most valuable aid because they are essentially “free” money that does not have to be repaid.

Grants typically come in the form of federal financial aid such as: Pell Grant, Federal Supplemental Educational Opportunity Grant, and Academic Competitiveness Grant.

State programs such as a Lottery Tuition Assistance are also considered grant aid.

Scholarships can come in many forms. There are many state supported scholarships and then there are literally millions of private local organizations from all over the country, that provide funding for scholarships.

Also, you will want to consider applying for scholarships at the school you plan to attend. Many private schools have large endowments that are awarded through scholarships to deserving students.

There are also athletic, academic, and ROTC scholarships available at most colleges. The top tier of financial aid also includes the federal work-study program, although it is important to note that a work-study position is a part time job. You are paid a weekly or monthly salary based on the hours you worked, and your per-hour rate.

Your work-study award will show up on your financial aid award letter, but it cannot be used as a direct tuition payment.

Tier 2 Financial Aid

The second tier of financial aid is federal student loans. These loans are disbursed under the William D. Ford Direct Stafford Loan Program. There are two types of Stafford loans: Subsidized and Unsubsidized.

The subsidized loan has a 3.4% fixed interest rate. The Unsubsidized Stafford loan has a fixed rate of 6.8%. They have generous deferment policies which allow you to defer payments until 6 months after you graduate.

They also have flexible repayment terms ranging from 10 years all the way up to 30. These are considered the most valuable student loans because of their generous deferment options, low interest rates and fees, and their flexible repayment schedules.

Students may also qualify for a Federal Perkins Loan, which is a loan funded by and repaid to your school. Perkins loans are based on financial need and have a fixed 5% interest rate.

Parents can also borrow a Parent PLUS loan on behalf of their students. The PLUS loan will require a credit check however, and the interest rate is a fixed 7.9%. Interest will begin to accrue upon disbursement of the loan funds.

Tier 3 Financial Aid

The third and final tier of financial aid is private student loans. When reviewing your financial aid package you will not see these loans listed as financial aid awards. That is because they are considered loans of last resort.

What I mean by that, is that after you have exhausted your grant and scholarship aid, maxed out your lending from Stafford loans, and contributed all of your personal financial means to your education, and still have additional need for educational expenses, ONLY then would I consider taking out a private student loans.

Private loans must be applied for from independent lending agencies.

Private student loans certainly serve a purpose: to allow students to borrow money to achieve their educational goals. However, these loans should only be taken out after much due consideration.

These loans generally have much higher interest rates (3%-20%), rely on a good credit score and/or co-signer to qualify, are variable rate, charge much higher origination and processing fees, have more strict repayment terms, and may not have deferment options.

Analyzing your Financial Aid Award Letter

When you receive your financial aid award letter from a prospective school it is important to understand the categories that your awards fall into. You have the option to accept, decline, or adjust any of the awards listed on your financial aid letter, and that responsibility is entirely in your lap as a student.

Understanding the financial aid system can literally save you tens of thousands of dollars during your college years, and while you repay your student loans. Following this simple hierarchy of financial aid will ensure that you have your priorities straight, and that you are maximizing the financial aid that is available to you.

What sources of financial aid did you seek?

BIO: The Money for College project was started with one goal in mind: to help people find ways to pay for college. MfCP is published by DJ, a career professional working in student financial services at a large (19,000+) research university. At MfCP you can find easy to understand explanations of financial aid awards, creative ways to make money for college students and working adults, and also sound financial literacy principles.

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  • MoneyforCollegePro

    Thanks for publishing the post LaTisha!

  • http://www.youngfamilyfinance.com Wayne @ Young Family Finance

    I did not get much help in the tier 1. A few small-dollar scholarships (better than nothing). I also maxed out teir two and borrowed some in tier three. However, I think that the internet is much better for locating grants and scholarships.If you are diligent in looking, it’s easier to find Tier 1 scholarships.

    • MoneyforCollegePro

      @Wayne — The internet is an amazing resource when looking for scholarships, but I have found that searching in person, and searching local is often a more effective way of doing business. It’s the “low hanging fruit” scholarships versus the nationwide contests.

  • http://debtfreebythirty.net Niki

    II was very fortunate to have most of tier 1 pay for my education. I graduated from a Florida high school and they have a great scholarship program(statewide) for students who choose to go to a state school.

  • http://freedom48.net/ Julie @ Freedom 48

    I’ve found a lot of these kinds of posts to be very enlightening. No financial aid in Canada (we have an alternative program)… but I LOVE hearing how things work in the U.S!