The financial aid fab four: hit the right chord with a combo of federal, state, college, and private funding

Careers and Colleges, Nov-Dec, 2003 by Don Rauf, Traci Mosser

When you compare your complete financial aid packages from the colleges that have accepted you, you will find that your aid can consist of funding from four major sources--the federal government, your state, your college, and any private scholarship dollars that you may have won.

What follows is a detailed look at the major financial aid programs for undergrads, as well as profiles of students who tell how they pay for college. Review these sources carefully and make sure you're not missing out on any college cash.

1. FEDERAL GOVERNMENT

More than 65 percent of all financial aid comes from the federal government. (See pie chart at top of page 20.) When you apply with the FAFSA, you will find out if you qualify for these programs:

FEDERAL PELL GRANTS. Award amounts depend on program funding each year. Last year the Pell Grant maximum was $4,000. Pell grants go to students demonstrating significant need and funds are guaranteed to students who qualify.

FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANTS (SEOGs). Ranging from $100 to $4,000 a year, these awards are also for undergraduates with exceptional need. Unlike the Pell, this program does not guarantee an award if you qualify--it depends on the availability of funds at each school.

FEDERAL WORK-STUDY. This program provides jobs paying at least minimum wage to undergraduates with financial need.

FEDERAL PERKINS LOANS. These low-interest (5 percent) loans allow undergraduates with exceptional financial need to borrow up to $4,000 a year. The total amount borrowed over the course of college cannot exceed $20,000.

FEDERAL STAFFORD LOANS. The Stafford is the government's major loan program. With a variable interest rate that can never exceed 8.25 percent, these loans offer up to $2,625 for freshmen, $3,500 for sophomores, and $5,500 for juniors and seniors. Fortunately, interest rates are at record lows--the rate on the Stafford is currently 2.82%. You can borrow even more if you are considered financially independent of your parents. (See the definition of independent in our FAFSA article on page 28.)

There are two types of Stafford loans--subsidized and unsubsidized. Subsidized loans are awarded based on need, and you are not charged interest while you're in school or in deferment (an official time when you can delay repayment--for example, if you're unemployed). Repayment typically begins six months after you graduate, leave school, or drop below half-time status. Unsubsidized loans are available regardless of need. However, with these loans, you're responsible for the interest from the day you receive the loan until it is repaid.

FEDERAL PLUS LOANS. This program lets parents borrow for each dependent child who is enrolled at least half-time. PLUS provides an amount no more than the cost of tuition, room and board, etc., minus the amount of aid already received. First payments on these loans must be made 60 days after the final disbursement.

In the past, you could only take out Stafford and PLUS loans through a private lender, but now you can take out a direct loan if you're attending one of the more than 1,000 schools that participate in the Federal Direct Student Loan Program. If you take out a loan under this plan, the U.S. Department of Education is your lender--not a bank. Loans through private lenders are still most prevalent..

NEW TAX CREDITS. Depending on your family's income, you or your parents may be able to benefit from special tax deductions during the years you're in college and beyond. The Hope Scholarship is a tax credit of up to $1,500 your parents can claim during each of your first two years of college. The lifetime Learning Credit is an annual maximum of $2,000 and applies to subsequent years of enrollment. Additionally, the government's student loan interest deduction allows you or your parents to deduct up to $2,500 from your taxes during each of the first five years you repay your loans after college, depending on your income. And the government allows penalty-free withdrawals from Individual Retirement Accounts if the money will be used to pay for college.

Plus, you may benefit from loan forgiveness programs (see page 23), and the military also offers funding for those willing to serve (see page 37).

2. STATE GOVERNMENT

When you're done researching federal resources, look closer to home. Contact your state's department of education and ask for literature on grants, tuition assistance, fee reductions, and loans. You may have to fill out additional financial aid forms, since only 22 states currently rely on the FAFSA. Many state funding programs are specifically for students who go to college in-state. Increasingly, states are offering financial incentives to keep top students within state borders. However, reciprocal arrangements between states often permit students to receive discounted tuition in other states, usually nearby. Although many programs are need-based, several are based on academic, military, or minority status.