How Does Paying For College Actually Work?

Jon O'Donnell Updated on April 8, 2019

You are not alone. Right now--at this very moment--millions of parents and students are asking the same question: how does paying for college actually work? It can be overwhelming. Daunting, to say the least. But you’ve come to the right place. Nitro is here to help clarify your options, decode the acronyms, and understand the process. So if you haven’t gotten any scholarships or filled out your FAFSA yet, don’t worry. If you’re not even sure what a FAFSA is...we’ve got you covered.

If you’re like most parents and students, you may not have enough savings to pay for the full cost of a college education. You will want to explore scholarships, grants, and loans to fill that gap. What follows is info you need to know to set yourself up for success--in college and in the years beyond--because financial aid decisions you make now will impact life long after graduation.

Terms To Know And What Schools Think You Can Afford

Here's a quick look at acronyms and tools you'll encounter in the application process:

  • COA is a college's cost of attendance. This includes tuition and fees, room and board costs, books and supplies, personal expenses, and transportation costs.
  • EFC is your expected family contribution. This is a number that college financial aid offices will use to determine how much aid they can offer you. They consider your family's taxed and untaxed income, assets and benefits (such as unemployment or Social Security), your family's size, and the number of family members attending college in the year the aid applies. To qualify for a zero EFC--meaning you’re more likely to receive full funding for college--the income requirement is $25,000 or less. But fear not, it’s not an “all or nothing” situation. According to the National Center for Education Statistics, more than 80% of students receive some sort of financial aid. As we said, you are not alone. 
  • Need-Based Aid represents the maximum amount of aid you can receive toward your financial need.
  • Net Price is the full cost of school (tuition, lodging, books, etc.) minus any need-based aid your family receives.
  • A Net Price Calculator is a free, handy tool that can be found on every college’s website. These are an excellent device to help parents and first-year students estimate the true cost of an education at the respective school. Be prepared with all your financial and tax info, and be ready to invest time in the process. If you’re looking at ten schools, you’ll have to repeat your calculations ten times.

The difference between COA and EFC is the amount you’ll need to provide. So...

COA minus EFC equals Your Financial Need

What if the colleges do not provide you with enough aid? If you qualify, there are many options. Some bring you free money, others represent money that will have to be paid back.

The How, What, and Why of FAFSA

First and foremost, fill out a Free Application for Federal Student Aid (FAFSA). This will tell you how much government financial aid you're eligible to receive. It's often required for private scholarships and grants you're seeking, too. It is an involved form, so if you’re looking for some help, check out our step-by-step Nitro guide

A couple of big FYIs for you before we proceed: misconceptions about federal student aid abound. Don’t believe any of the following:

  • My parents earn too much for me to qualify. Wrong.
  • Only good grades earn financial aid. Nope.
  • My age or ethnicity make me ineligible. Incorrect.
  • I support myself so I don’t have to include parent info on the FAFSA. Fuhgeddaboutit.

Each year more than 19 million people fill out the FAFSA form. (Told you you weren’t alone!) When filing yours, meeting deadlines is as important as providing accurate information.  At state and college levels, filing your FAFSA early can mean access to more money from more sources--so don’t delay. For the 2019-2020 school year, the application process opens on October 1, 2018.

In most cases, you'll need to re-apply for federal student aid each year you're in school. Because your financial information can change, your eligibility for federal or state aid, or institutional merit-based aid, can change as well. You'll need to fill out and submit a FAFSA each year. States and colleges set their own FAFSA deadlines, so be sure to check due dates for every school you'll be applying to.

How Paying for College Works: Grants

A Pell Grant is typically awarded to undergraduate students working toward their first bachelor's or professional degree. The maximum Pell Grant amount varies from year to year, but currently it's $5,185. Pell Grant requirements include:

  • Your college's participation. Ask the financial aid office if they offer Pell Grants.
  • U.S. citizenship or a permanent resident green-card status.
  • A clean legal record.
  • Academic progress. Pell Grants have academic standard requirements.
  • Special circumstances. A student of a parent killed in military duty in Iraq or Afghanistan may qualify, as may students with certain intellectual disabilities.

When you fill out your FAFSA, your Pell Grant eligibility will automatically be determined. Please note that the grant does not renew automatically: you must fill out the FAFSA for every year that you need aid.

The Federal Supplemental Educational Opportunity Grant (FSEOG) is another federal grant, with awards ranging from $100 to $4,000. Applicants must be a U.S. citizen, a full-time student, and have a FAFSA to submit.

The Work Study Option

Federal work-study programs are federally-funded program that helps students find part-time jobs on- or off-campus.

Work-study is awarded based on the financial need determined by your FAFSA application. Your financial aid letter from the schools you’re applying to will include work-study amounts you’ve been awarded. And here’s a little Nitro tip for you: the earlier you apply, the more likely you are to receive work-study funds because each school has a maximum total available to all their students.

Typical work-study jobs include working in the school library or bookstore, serving meals, or assisting with events. Off-campus work-study usually benefits the public in some way. As you progress further into your major, the more likely you are to get a job related to your field of study. Again, applying early helps. So, too, does reaching out to the school’s financial aid office to see what jobs are available.

How Paying for College Works: Scholarships

We want you to exhaust every possible resource because, frankly, every little bit helps. When you reach a point where you’ve crunched all the numbers and you still have a financial need, renew your search for scholarships. There’s free money out there--let us help you find it.

There are plenty of scholarships and grants out there: each brings money you don't have to repay. Before you can apply for 'em, though, you gotta find 'em. Where to look?

  • Start with the Nitro $2,000 Scholarship - All you have to do to apply is complete our online survey questions, and post on one of our social channels.
  • Your High School. Many schools offer merit-based, athletic, and artistic awards; community service and honor societies may also have scholarships. Ask your guidance counselor or principal.
  • Your College. If you've been accepted by a school, ask their financial aid office about scholarship availability and qualifications.
  • Online. Start with and use your personal attributes, hobbies, and interests as search terms.
  • Bulletin Boards. When you're in a public library, a community center, a house of worship, or a coffee shop, look for postings. Ask your employer about scholarships, too.
  • Civic Groups. Ask community organizations such as the Rotary or Kiwanis Clubs, Boy Scouts of America, Girl Scouts of the USA, or 4-H.
  • Your State. If you're going to college in-state, ask your guidance counselor to add your state to your online scholarship search criteria.
  • The Federal Government. The Fed is the largest source of need-based scholarships, primarily in the form of Pell Grants. There are also ROTC scholarships, aid for AmeriCorps volunteers, training vouchers for former foster care youths, and aid for military service (including spouses or children of veterans).

How Paying for College Works: Federal and Private Loans

If you've exhausted scholarship opportunities and still need money, a Federal subsidized, Federal unsubsidized, or private loan might be the answer. 

Your federal loan opportunity will be determined by each individual school and will be based on the financial need determined by your FAFSA application. This information will be included in your Financial Aid Award Letter from that school. Here’s an explanation of two of the two most common loans: 

  • Federal Direct Subsidized Loans do not accrue interest during allowed repayment breaks or while you are at least a half-time student.
  • Federal Direct Unsubsidized Loans always accrue interest and they have borrowing limits; they don't have income limits for qualifying.

Private student loans from banks and independent lenders are also an option. These institutions have their own approval criteria, interest rates, loan limits, processing fees, and repayment conditions. You must apply directly to the specific lender.

It's easy to go online and compare multiple lenders to find the best deal, but you should consider all factors before putting your name on a loan. Among the things you'll need to show private lenders:

  • Enrollment at an eligible school.
  • U.S. citizenship or permanent residence.
  • You're of legal age in your state of residence.
  • Information about your tuition and other fees.
  • An estimate of financial aid you're already approved to receive.

You may need a co-signer for a private student loan: a parent, spouse, or family friend who'll agree to share the responsibility of repayment if you are unable. Co-signers must demonstrate:

  • A verifiable income.
  • Good credit history.
  • No excessive delinquencies, judgments, or bankruptcies pending, filed, or discharged in the previous two years.
  • No prior student loan defaults.
  • U.S. citizenship and be at least 18 years of age. 

Even if you don't need a co-signer, including one may help you reduce your interest rate. Some lenders limit private loan borrowing to your total COA minus financial aid, others have a yearly loan cap. Either way, you'll want to borrow only the amount you'll need, not the max you can get. You'll be glad you did this when it comes time to start repayment.

Fixed vs. Variable Interest Rates

Borrowing money to pay for college will likely incur fees in the form of interest rates. There are two types of these; here's what you need to know about them.

A variable interest rate can change based on your loan's terms. It can rise and fall based on various factors--the economy, mortgage rates--and with it your repayment will go up or down.

A fixed interest rate remains constant for the entire length of the loan. You always know what your monthly payment will be.

Bringing It All Back Home

For anyone needing financial aid, it all starts with your FAFSA. We can’t overemphasize this. Be prompt and accurate with your application in each of your college years. This will be the first step in helping you to take advantage of financial aid opportunities. There's a lot of money out there to be had, but there’s also a lot to research, consider, and decide before you get to college. So follow our links. Drop us a note. Tell us how we can help you. Don't be shy!

As we said at the outset, you are not alone. You’ve got Nitro.

Published in: FAFSA

About the Author
Jon O'Donnell

Jon is a writer and marketer for Nitro who is passionate about bringing transparency to the student loan process along with providing families with the information needed to make smart financial decisions. He also just recently refinanced his student loans allowing him to pay them off 5 years faster all while saving an additional $152/month. As he continues to pay them off himself, he strives to help others do the same. Jon also has a long history of connecting people with educational opportunities to help them improve their careers and their overall personal finances. In his free time you can find him reading travel blogs and researching destinations around the world in search of his next adventure. Read more by Jon O'Donnell

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