Investment Glossary – Financial Aid

“So how are you going to pay for college?”

“Well I’m hoping to get a good financial aid package.”

Ah, yes. The “financial aid package.” A nice three-word phrase that hides any type of meaningful information about the important things, such as what that package entails, what it still may end up costing you, and whether that aid package is actually worth it. So let’s make it simple.

Financial aid is any kind of money provided to students to help them pay for the cost of their education.

It may include loans. It may include grants. It may include work-study.

Loans are one of the most common forms of financial aid for either four-year colleges or community colleges. And they’re exactly what they sound like. Someone, typically the federal government, state government, college you’re attending, or bank, agrees to give you money to pay for your education. They then want you to eventually pay that money back to them, typically with interest attached to it. So a loan is money given to you today with the promise that you will pay it back to the institution that lent it to you over a fixed amount of time in the future. The benefits of loans include the fact that you get the money today, and you typically don’t have to repay the money while you are in college. The downside is that you do have to repay the money, meaning that when you start working, a portion of your paycheck every month is going to pay for something you already experienced. That means you have less money in the future to spend on things you may want.

Grants are another common form of financial aid. Like a loan, an institution somewhere decides that they are going to give you money to pay for your education. Only unlike loans, grant money never has to be paid back. This is a good thing. It means that you get money for your education today, and you don’t have to pay that money back in the future. It’s a pretty ideal situation, but because grants are so attractive, they are typically harder to come by. Different schools may offer significantly different grant packages based on your academic profile, and the inclusion of large amounts of grant money may make a difference in determining whether college is worth the cost.

The final type of financial aid that is usually included in a package is work-study money. Work-study programs are agreements in which you agree to take on a part-time job while you’re in the process of receiving your education, so the money earned in that part-time job can pay for your tuition. All work-study programs are run by the school you attend, but supervised as part of the Federal Work-Study Program. The job you get may be at your school or in a local business, and the hours are strictly regulated based on your work-study award, so that you work the proper number of hours to pay the amount of work-study compensation you have received. The key benefit of work-study programs is that like grants, you don’t have to pay any money back after you’re done with school. The downside is that you have additional work to do while you’re receiving your education since you now have a part-time job in addition to going to class and doing your homework.

Understanding the components of your financial aid package and how they work is critical to making sure you are making a good financial decision in addition to a good educational decision when you decide what you want to do after high school. One school may offer you a significantly bigger package, but have a higher proportion of loans, meaning you may be on the hook for higher expenses to pay those loans off when you graduate. Make sure you take into account not just the overall size of the aid package you receive, but the composition of it. This is just as important when it comes to determining the overall cost of your education.