Financial Aid Terms Defined

Financial aid terms

Applying to college can be scary and overwhelming, in and of itself. Add in the process of applying for financial aid, and it gets even more complicated. Lengthy terms and conditions, often confusing financial questions, plus a series of firm deadlines may have you struggling to complete your application in time – let alone understand everything you've been asked. You may find yourself wanting to skip over unfamiliar terms in the interest of finishing your financial aid application, but doing so could actually be against your best interests in the long run.

Don't miss something important, just because you don't understand a specific financial aid term. Most financial aid applications include instructions and definitions to help you during the application process, and your school's financial aid office may offer resources and assistance, as well. In the meantime, take a look at some of the most common financial aid terms you'll come across below. Learn what they really mean so you can be better prepared to apply for and receive assistance when you're ready to invest in school.

General Financial Aid Terms

Free Application for Federal Student Aid (FAFSA): Filling out the FAFSA is most students' first step toward securing financial aid. Your FAFSA results establish your eligibility to receive financial aid from the federal government, how much you may be awarded, and what form it can take. States and schools may also use the information you submit on your FAFSA to determine aid amounts.

Most students qualify for some kind of federal aid, but most financial assistance is distributed on a first-come, first-served basis. That's why early submission of your FAFSA is highly recommended. Become familiar with the form and the information it requires before applications open on January 1st each year. To fill out the FAFSA now, go to www.fafsa.ed.gov.

Expected Family Contribution (EFC): The government uses your FAFSA information – including income, assets, family size, and the number of children in your family who are currently attending college – to determine your EFC. Your EFC is the total amount of money that your household is expected to be capable of contributing toward your college tuition and annual expenses. The size of your EFC will have a direct impact on the amount of need-based financial aid for which you may qualify.

Types of Financial Aid

Grant: Grants are sums of money that do not need to be repaid. Usually offered to students by the federal government, these "gifts" are generally distributed based on your proven financial need, which is determined by your FAFSA results.

Scholarship: Like grants, scholarships are financial awards that don't need to be repaid, but they can come from a variety of sources, including individual schools, non-profit foundations, and private businesses and organizations. You can earn a scholarship based on a range of criteria, including your academic merit, extracurricular achievements, ethnicity, age, and more.

Loan: A loan is borrowed money that requires repayment, usually with interest. Your FAFSA results will alert you to any federal loans that you qualify to receive. You may apply for loans through the government or through private lenders like banks. Generally, federal loans carry lower interest rates than private loans. Always make sure you understand the terms of your loan and your repayment options prior to accepting borrowed funds.

Loan-Specific Terms

Subsidized Loan: If you accept a subsidized loan, the government will pay the interest that accrues while you are still enrolled in school, plus any interest added during grace periods or deferment. Subsidized loans often make it easier to pay back a loan once you graduate.

Unsubsidized Loan: You are responsible for paying back all accrued interest on unsubsidized loans, from the date the funds were disbursed.

Interest: Interest is a fee charged by a lending organization, like the government or a private bank, for the right to use borrowed funds. When you accept a loan, your interest rate will be expressed as an annual percentage applied to the principal loan amount, which is the original amount borrowed or the remaining balance still due.

Annual Percentage Rate (APR): The annual percentage rate of a loan refers to the amount of interest added to your loan each year. Your APR considers the combined monetary impact of your interest rate, loan fees, capitalization of interest (the addition of unpaid interest to the principal), and more. The higher your APR is, the more interest you will owe over the life of the loan.

Capitalization: Capitalization refers to the addition of unpaid interest to the principal balance of a loan. When interest amounts go unpaid, your lender can capitalize the interest based on the terms of your loan. Capitalization increases the principal amount due on a loan, which can in turn raise your monthly payments and the amount of interest that accrues in the future.

Deferment: In some instances, you may be able to defer, or postpone, loan repayments. Depending on the terms of your loan, you could be eligible for deferment while you're in school, right after you graduate, and even during periods of economic hardship. Keep in mind that interest may still accrue, even in periods of deferment.

After you've read and understood the general terms, types of loans, and loan-specific financial aid terms, you'll be better equipped to file for financial aid. Make sure you have all the information and assistance you need prior to starting your application, so that you can breeze through the form with confidence later. At the end of the day, ensuring that you understand what you're filing for can make a difference in how much aid – and which kind – you actually receive.

Written by Ashford University staff.

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