How colleges award financial aid — and how to estimate yours

Understanding how college financial aid work is one of the most important steps to paying for your education. Here's how colleges typically calculate awards, and how to figure out how large your own aid package may be.

If you’re not sure whether you’re eligible for financial aid to help pay for college, there’s an easy answer: Yes. You are.

“Everybody is eligible, regardless of income,” says Brad Yeckley, assistant manager of the Student Financial Education Center at Penn State University. What varies is the type of aid you’ll get and whether you’ll have to pay it back.

To make a mysterious process a little clearer, we asked experts at Penn State in Pennsylvania and the Dallas County Community College District in Texas how colleges generally create financial aid packages. We share their insight and also give you some tips on how to estimate your own award:

How colleges award financial aid

Step 1: They determine your financial need

To get federal, state and school financial aid — and even some private scholarships — you must fill out the Free Application for Federal Student Aid, known as the FAFSA.

Nerd Tip

Some forms of financial aid are first-come, first-served, and schools and states often have their own deadlines. Apply for financial aid as soon as possible once the FAFSA opens on Jan. 1 of each year.

Based on the financial information you enter on the FAFSA, the government uses a formulato decide how much you can pay for college out of pocket. That number is your expected family contribution, or EFC. A college will subtract your EFC from the school’s annual cost of attendance (which includes tuition, living expenses, books, supplies and transportation) to determine your financial need.

The EFC formula takes into account more than just your family’s income. Family size and how many children are in college at the same time matter, too. Plus, your parents’ income won’t be considered if you’re an independent student and don’t receive financial support from them.

“It is a misconception that family income is the only or the largest indicator of what your aid award could be,” Yeckley says.

Step 2: They award need-based aid

Schools start by granting you need-based aid (if you qualify), meaning funds that are earmarked for students with financial need. Those can include need-based grants — from the government or the school — and need-based federal loans such as Perkins and direct subsidized loans. Direct loans, also known as Stafford loans, are the most common types of federal student loans. Subsidized loans are more favorable than their unsubsidized counterparts because they don’t accrue interest while you’re in school or for the six months following graduation.

Grants and scholarships, often referred to as “gift aid,” don’t need to be paid back, and they’re usually awarded before other types of aid. “We want to give out all the gift aid first, and we would use loans as a last resort,” says Carrie Pratt, senior manager of communications and training at the Dallas County Community College District.

Each need-based grant or loan has an annual maximum. For instance, the largest Pell Grant you can get in 2016-17 is $5,815. There’s also an order in which schools distribute need-based aid, and Pell Grants are usually first, Pratt says.

Step 3: They award non-need-based aid to fill gaps

If you don’t receive enough need-based aid to cover your cost of attendance, or didn’t qualify for any at all, the school will then offer you federal direct unsubsidized loans or PLUS loans (available to parents and graduate students).

These loans are less desirable than direct subsidized or Perkins loans because they accrue interest while you’re in school and during your grace period after you graduate. PLUS loans in particular carry high interest rates, and those made to parents are eligible for fewer repayment plans.

But because you don’t have to demonstrate need, direct unsubsidized and PLUS loans are easier to qualify for than are direct subsidized loans.

“If Bill Gates filled out a FAFSA, he would be given an unsubsidized student loan, I’m sure,” Yeckley says.

Colleges might also include private student loans in your award letter, if you need additional funds to meet the cost of attendance beyond the federal loan maximum. But private loans don’t come with the same protections that federal loans do, including loan forgiveness and flexible repayment plans. Their interest rates are often higher, as well.

How to estimate your financial aid award

You might want to gauge the amount of aid you’ll be eligible for so you’re prepared when your award letter arrives. Use these tools to estimate your aid early in the college application process.

FAFSA4Caster

This tool from the U.S. Department of Education helps you estimate what federal financial aid you’ll qualify for, such as Pell Grants, work-study and direct loans.

The FAFSA4Caster doesn’t give you a full picture of what aid you’ll receive from the state or the colleges you apply to, though. Additionally, the generosity of certain federal aid programs, such as work-study, differs from school to school based on available funding. That means the FAFSA4Caster gives you an early look primarily at your eligibility for Pell Grants, but likely not much else.

Net price calculator

The “sticker price” that you’ll find on a school’s website doesn’t accurately reflect what you’ll end up paying. The net price, or the amount that you must pay after factoring in scholarships and grants, is a more useful measure.

A net price calculator will show you how much grant aid you’re likely to receive to attend a particular school. That amount could include federal Pell Grants as well as state and school grant funding. But net price calculators don’t always show you exactly how much of each you’ll receive. That’s why it’s helpful to get an estimate of your potential Pell Grant from the FAFSA4Caster.

Most colleges include net price calculators on their websites, but the tools aren’t always easy to find. Search for a calculator using the U.S. Department of Education’s Net Price Calculator Center. You can gain extra insight into graduates’ typical total debt and monthly loan payments at specific schools using the Department of Education’s College Scorecard.

A final thought

It’s smart to understand your financial aid options before you apply to schools so you can make a plan to graduate with as little student-loan debt as possible. Borrowing less now means owing less later, when you graduate and want to save for things such as a vacation, a house or retirement.

“You can live like a student while you’re in college,” Yeckley says, “or you can live like a student for the rest of your life.”

This article first appeared at NerdWallet.