Each college or university determines an EFC (expected family contribution). State institutions often use FAFSA to determine the EFC. Many private institutions use FAFSA in conjunction with an institutional financial aid document.
After the college or university determines the EFC the it subtracts any merit scholarships the student may have recieved from its cost of tuition. For example:
Johnny is considering attending College X. College X tuition is $30,000. For this example assume the student received a $5,000 merit scholarship from College X. The cost of tuition is now approximately $25,000. Utilizing the aforementioned financial aid documents, College X has determined that the EFC is $15,000 per year. College X would then subtract $25,000 (tuition minus scholarship) from $15,000 (expected family contribution) and get $10,000. This $10,000 is referred to as the family's "need." The equation is as follows:
$30,000 (tuition) - $5,000 (scholarship) - $15,000 (EFC) = $10,000 (need)
After the college determines the "need" of the family, it attempts to fill that "gap" with other forms of financial aid. These types of aid include, but are not limited to:
Academic Merit Scholarships
Institutional Grants
Federal Grants
State Grants
Federal Stafford Loans
Federal Work Study
Most colleges will attempt to fill that $10,000 "need" with these type of "aid." As you can see "aid" does not necessarily mean "grant." Some types of "aid" must be repaid such as the Federal Stafford Loan. Other types of "aid" such as work study, are part of the financial aid package but will not be realized until the student actually works for the finances.If College X is able to fill the $6,000 of the $10,000 in "need," the family will responsible to pay that $4,000 difference. That $4,000 difference is referred to as the "gap."
After all of the aforementioned things are taken into consideration, Johnny will owe $19,000 out of pocket for tuition. ($15,000 EFC + $4,000 gap)
Additionally, Johnny's family will have to pay the cost of any room, board, books, or fees that College X may have.
Finally, depending on how the $6,000 in need based aid was structured, Johnny will responsible for re-paying any loans or working for any work study that was part of that aid package.
Sample Financial Package:
Tuition & Fees : $30,000
Room & Board: $10,000
Financial Assistance:College X Scholarship: $5,000
College X Grant: $3,000
Federal Pell Grant: $5,000
State Grant: $3,000
Subsidized Stafford Loan: $3,500
Unsubsidized Stafford Loan: $2,000
Federal Work Study: $2,400
___________________________
Total: $23,900Costs: $40,000 - Aid: $23,900 = Out of Pocket Cost: $16,100
Many families see the final out of pocket cost $16,100 and realize they do not have $16,100 in cash to pay the bill, thus those students or families take out student loans. Most student loans, including the Federal Stafford Loan, have payment schedules that may deferred until 6 months after the student graduates from college.
The most popular student loan is called the Parent Plus Loan. This loan is a student loan that must be cosigned by a parent. This is different from the Stafford loan, which does not require a parent cosigner. Most loans outside of the Stafford loan will require a parent cosigner.