Types of Federal Student Aid

Types of Federal Student Aid

College is expensive but there are a wide variety of sources and avenues for students to finance their education. Financial aid can come from the college itself, either as merit-based or need-based financial aid, from private organizations and sponsorships, and for domestic students, from the federal government. The federal government provides students with 3 main types of financial aid programs – Grants, Loans and Work-Study.

Grants

Like need-based financial aid provided by the colleges, grants offered by the federal government are financial aid that do not require students to repay them. Below are 4 main federal grants offered by the U.S. Department of Education:

A. Federal Pell Grants

– Awarded to undergraduate students who are working towards a first bachelor’s or professional degree

– The amount received depends on certain criteria such as financial need and cost of academic attendance

– Successful applicants are awarded a maximum of $5,500 annually (2 semesters up to a maximum of 12 semesters)

– Note: For students who are eligible for Federal Pell Grant and whose parents/guardians died while performing military obligations in Iraq and Afghanistan may be awarded more than $5,500.

B. Federal Supplemental Educational Opportunity (FSEOG) Grant

– Awarded to students with exceptional financial need who have fulfilled the criteria for the Federal Pell Grant

– Priority is given to recipients of the Federal Pell Grant

– Unlike Federal Pell Grants, not all schools participate in the FSEOG program, and schools participating in the FSEOG award the grant to students on a first come, first served basis.

– Successful applicants are awarded a maximum of $4,000 annually.

– Tip: Start your financial aid application early and always take note of the deadlines set by the Federal government, the state and the school.

C. Teacher Education Assistance for College and Higher Education (TEACH) Grant

– Awarded to students who are keen on pursuing a teaching career path and enrolled in an institution that participates in the TEACH program.

– As educators for the future generations, applicants must fulfill certain academic requirements such as performing well in college entry tests excellent GPA scores.

– In addition, students must sign a TEACH grant agreement, and failure to comply would result in a conversion of the grant into a Loan, which needs to be repaid.

– Successful applicants are awarded a maximum of $4,000 annually.

D. Iraq and Afghanistan Service Grant

– Awarded to students who are ineligible to receive the Federal Pell Grant due to less financial need, and whose parents/guardian died in Iraq or Afghanistan while fulfilling military obligations after the events of 9/11.

– Applicants must be less than 24 years of age when the parents/guardians’ death occurred.

– Successful applicants are awarded a maximum of $5,500 annually.

Loans 

Unlike grants, student loans are borrowed, and must be repaid through installments. When sponsorship and grants are unable to fully  cover your educational expenses, getting loans is another alternative to pay for college. As compared to private loans (from banks), federal loans have fixed and lower interest rates, which means that you are subscribing to a fixed installment plan. Student loans may be cancelled within 120 days after school matriculation and the money received will be returned without any interest charged to it.Below are the federal loans that are offered to students:

A. Direct Subsidized and Unsubsidized Loans

– Undergraduates displaying financial need are eligible for direct subsidized loans while students with no financial need can apply for unsubsidized loans.

– The interest rate for subsidized loans stands at 3.4% while unsubsidized loans have an interest rate of 6.8%.

– For direct subsidized loans, applicants are not required to pay for the interest rate as long as they are still studying or have deferred  and are also given a grace-period of 6 months after graduation. (Interest-rate will be paid by the U.S. Department of Education)

– However, no exceptions are made for unsubsidized loans, and students are required to pay interest rates for all periods.

– The aid amount for direct subsidized loans ranges from $3,500 to $5,500 while the aid amount for direct unsubsidized loans ranges from $5,500 to $20,500. Do note that the aid amount is dependent on the current year standing of the student as well as his/her status as a dependent or independent student.

B. Direct PLUS Loans for parents of undergraduates

– Students must meet the eligibility requirements for federal aid

– Parents must not have negative credit history

– Interest rate for Direct PLUS Loan is 7.9% and parents are required to pay interest rates for all periods.

– The aid amount is the maximum cost of school attendance, minus any other financial aid that the student receives

C. Federal Perkins Loan Program

– Catered to full-time or part-time students demonstrating exceptional financial need

– Interest rate for this loan program is 5%, but it is important to note that not all colleges administer this program as the institutions are the ones who are providing the loan, not the federal government.

– The aid amount varies, but undergraduate students are eligible to receive up to $5,500/year.

Loan Repayment Plans

Repayment plans are established to give students more time and flexibility to repay their loans. While students are required to select a certain repayment plan, it should be noted that they are allowed to change their repayment plans at any point of time! As Federal Perkins Loans are made available by the school, it is important to check with the institution for its own repayment plan.

For students who are awarded the Direct Subsidized Loans, Direct Unsubsidized Loans and PLUS Loans, these are some of the repayment plans for you:

A. Standard Repayment Plan

– Payment Plan: at least $50/mth for 10 years

– Perks: Students will eventually pay less interest for their loans over time compared to other plans.

B. Graduated Repayment Plan

– Payment Plan: low payment plan, which will increase every two years for 10 years

– Perks: Suitable for students who have a low income, but are expected to see income increment over time.

C. Extended Repayment Plan

– Payment Plan: a fixed monthly payment amount (that is lower than the Standard and Graduated Repayment Plan) for 25 years.

– Criteria: At least $30,000 in outstanding direct loans or $30,000 in outstanding FFEL Program Loans

D. Income-based Repayment Plan (Not eligible for PLUS loans for Parents)

– Payment Plan: Monthly payment (15% of discretionary income) and is lower than the 10-years Standard Repayment Plan for 25 years.

– Criteria: Student demonstrates partial financial hardship

– Pros:

(i) Interest Payment Benefit – If the monthly payments fail to cover all of the interest acquired, the government will pay for your unpaid interest for up to 3 consecutive years.

(ii) Remaining balance after the 25-years period of the IBR Plan will not need to be repaid by meeting certain requirements.

(iii) Holding a full-time job in the public service allows you to make 120 IBR payments and be eligible for forgiveness of remaining balance under the Public Service Loan Forgiveness Program.

– Cons:

(i) More interest accumulated as monthly payment is made over a longer period of time.

(ii) More paperwork required for annual billing and documentation.

(iii) Any remaining balance that is forgiven after 25 years is subjected to taxes.

E. Pay As You Earn Repayment Plan

– Payment Plan: Monthly payment (10% of discretionary income) and is lower than the 10-years Standard Repayment Plan for up to 20 years and monthly payment varies according to income change.

– Criteria: Student demonstrates partial financial hardship

– Pros:

(i) Interest Payment Benefit – If the monthly payments fail to cover all of the interest acquired, the government will pay for your unpaid interest for up to 3 consecutive years.

(ii) Remaining balance after the 20-years period of ‘Pay As You Earn Repayment Plan’ will not need to be repaid by meeting certain requirements.

(iii) Holding a full-time job in the public service allows you to make 120 ‘Pay As You Earn Repayment Plan’ payments and be eligible for forgiveness of remaining balance under the Public Service Loan Forgiveness Program.

– Cons:

(i) More interest accumulated as monthly payment is made over a longer period of time.

(ii) More paperwork required for annual billing and documentation.

(iii) Any remaining balance that is forgiven after 20 years is subjected to taxes.

F. Income-Contigent Repayment Plan (Not eligible for FFEL Program and PLUS Loans to parents)

– Payment Plan: Monthly Payments (either 20% of discretionary income or an amount that is dependent on loan payment for 12 years multiplied by an income percentage income, whichever is lower) for up to 25 years

– Pros:

(i) Remaining balance after the 25-years period of the Income-Contigent Repayment Plan will not need to be repaid by meeting certain requirements.

– Cons:

(i) More interest accumulated as monthly payment is made over a longer period of time.

(ii) Any remaining balance that is forgiven after 20 years is subjected to taxes.

G. Income- Sensitive Repayment Plan (Not eligible for Direct Loan Programs)

– Payment Plan: Monthly Payments that varies depending on the annual income for up to 10 years

Pros:

(i) Flexibility depending on income

– Cons:

(i) More interest accumulated as monthly payment is made over a longer period of time.


For students who have or are receiving several federal student loans, another repayment option is to consolidate all the federal loans into one to help simplify payments.

– Pros:

(i) Payment Plan: Monthly payments may be lowered and paid over a period of up to 30 years

(ii) May be able to switch variable interest rates from other plans to one fixed interest rate (a weighted average of the interest rates of loans being consolidated, and will not exceed 8.25%) for the monthly payments.

– Cons:

(i) More interest accumulated as monthly payment is made over a longer period of time.

(ii) Possibility of losing borrower’s benefit offered with the original loans such as interest rate discounts, rebates and cancellation benefits

(iii) Loss of flexibility as repayment plans cannot be changed at any point of time.

Repaying your student loans may look like a tedious and mind-boggling process, but for those receiving federal aid, it is a good idea to keep yourself informed of the various repayment plans before committing to one.

Federal Work-Study Plan

For eligible students who have expressed interest in work employment when filling up the FAFSA (Free Application for Federal Student Aid), the Federal Work-Study Program is another avenue that allow students to finance their education. This program encourages students to work either on-campus or off-campus in community service or fields related to one’s major.

– Students will earn the current federal minimum wage (paid by the hour), but the amount may be higher depending on the location and nature of the work.

– The amount earned cannot exceed the assigned Federal Work-Study award, meaning that students cannot work more hours than assigned.

– Do note that this program is not offered by all institutions and it is pertinent to check the college’s financial aid website for more details.

 

Are you overwhelmed yet? Don’t be! This post aims to provide students with an overview of the types of federal aid and repayment options available, but it is always good to discuss your financial aid options with your parents, high school counsellor and the colleges’ financial aid office. A great tip for college applicants is to apply for financial aid as early as possible! Starting early gives you more time to review the financial aid process, clarify doubts with the appropriate agents, reduces unwanted anxiety as the deadline approaches and  it is important to know that certain financial aid fundings are given on a first come, first served basis!