skip to main content

See the results of our 2022 Personal Finance Study!

How Financial Aid Works: A Complete Guide

Samantha Rose
Samantha Rose is a personal finance writer covering financial literacy for OppU. Her work focuses on providing hands-on resources for high school and college-age students in addition to their parents and educators.
Read time: 32 min
Updated on January 3, 2022
OppU banner logo
Got questions about financial aid? We’ve got answers.

Introduction: How does financial aid work?

College is an exciting time for a student — navigating friendships, independence, intellectual growth, and responsibilities. Many students (and families) are shocked, however, once they see the sticker price.

Unfortunately, tuition prices just keep rising and during the 2018-19 academic year families spent an average of $26,226 on college. The good news is while educational expenses can be overwhelming at first glance, a financial aid package can make college an affordable option for anyone.

In fact, income and educational savings only make up 43% of the resources that families use to pay for college, according to a 2019 Sallie Mae survey. That’s less than half! The survey also found that scholarships and grants covered 31% of costs during the 2018-19 academic year.

If you need help affording college, then you’ll need to learn about your financial options. This comprehensive guide is an essential first step in the process of understanding, finding, applying for, and receiving financial aid.

Here's what the guide covers:

Section 1 -- What is financial aid?
Section 2 -- The FAFSA
Section 3 -- Grants
Section 4 -- Scholarships
Section 5 -- Loans
Section 6 -- Education benefits and funds
Section 7 -- Veteran and military benefits
Section 8 -- Federal work study
Section 9 -- Terminology

1. What is financial aid?

Financial aid gives students the means to afford and attend college, university, and trade school. Basically, it helps students pay for the rising costs of higher education — tuition, room and board, books and supplies, and transportation.

Different forms of student aid — such as grants, work-study, scholarships, and student loans — allow people to make the dream of education a reality — leading to greater career options and financial success.

Types of financial aid

Federal, state, school, and private financial aid — there are several different ways for students to receive help paying for college. Now, imagine all of these sources throwing free money or low-cost financial options at you. Good news, that’s basically what happens.

Federal and state agencies, colleges, high schools, nonprofit foundations, and corporations are all eager to give their money to hard-working, promising young students. Whether these sources are interested in supporting bright minds or looking to fill a charitable quota, it still works out in your benefit, so take advantage!

Before you start researching, be sure to understand the specifics of each avenue of financial aid. For example, does financial aid need to be repaid? Which students qualify? What’s the application process?

Luckily, we’ve compiled a comprehensive list of the various types of aid. Read on to score a valuable education at a lower cost!

Federal aid

Federal Student Aid, an office of the U.S. Department of Education, is the number one provider of aid in the country. It provides financial assistance in the form of grants, loans, and work-study.

Federal Student Aid is need-based, which means the only factor that matters is a student’s financial situation and ability to afford college. Test scores, athletic ability, volunteer hours — they don’t matter.

Eligibility considers the income and assets of students, but since they are most likely dependents, this includes their parents or guardians, too. Want to know if you’re a dependent or independent student? Read about the criteria below.

First off, dependency status for federal aid is not the same as dependency status for federal income taxes. All undergraduate students under the age of 24 by December 31 of the financial aid award year are considered to be dependent on a parent or guardian. An independent student is one who meets at least one of the following:

  • Is at least 24 years old
  • Is working on a degree beyond a bachelor’s
  • Is married or separated, but not divorced
  • Has a child or other legal dependents
  • Is a veteran of the U.S. Armed Forces
  • Is currently serving on active duty
  • Has two deceased parents
  • Was in foster care or was a ward of the court
  • Is emancipated
  • Is homeless or at risk of homelessness

Veteran and military student aid

The federal government provides special considerations for students and their families who are in the military.

It doesn't matter whether you are active duty, in the Reserve or National Guard, a veteran, eligible for GI Bill benefits or not — you should be taking advantage of these programs. Yes, even senior active duty members can receive federal loans and grants for educational expenses.

For instance, the Reserve Officers’ Training Corps (ROTC) offers a merit scholarship at more than 1,000 colleges. The U.S. Department of Veterans Affairs (VA) offers education benefits to veterans, their widows, and their dependents on the GI bill.

State aid

Some grant and scholarship programs are available on a state-by-state basis. Almost every state education agency has at least one grant or scholarship available to local residents, and many have a long list of student aid programs.

The one catch? Eligibility is usually restricted to state residents who are attending a college in-state, but that's not always the case. Also, there are annual deadlines for most programs. (If you miss a deadline, be sure to try again next year!)

Institutional aid

Institutions typically offer merit-based financial aid, however some do offer need-based, as well.

Merit-based aid is awarded based on a student’s achievements, whether they are academic, artistic, or personal. Students with little to no financial need are just as entitled to a merit-based award as those with greater financial need. Scholarships are the most common way to receive merit-based aid.

Need-based aid is sometimes awarded by institutions with a demonstrated commitment to diversifying their student body. By providing aid to qualified students who may otherwise not be able to afford to attend their institution, they are able to recruit students with a variety of experiences and backgrounds.

Be on the watch for universities that offer need-based scholarships in addition to having need-blind admissions. Need-blind admission is a college admission policy in which the institution does not consider an applicant's financial situation. This works in the benefit of students because schools make admission decisions independent of their implications for how much financial aid they’ll require.

Private aid

To pursue private aid — such as scholarships from organizations, foundations, or individuals — a student will need to complete separate applications for each.

Since private aid applications each have their own submission forms, instructions, and eligibility requirements, students should plan to spend a large chunk of their own time researching and applying for this type of aid.

Private scholarships are typically funded by companies, foundations, organizations, and individuals who tailor their scholarship based on a mission or ideology. The value of private aid varies wildly, from a few hundred to tens of thousands of dollars. In fact, there are even a few full-ride private scholarships out there. While they are rare, they do exist.

The Bill Gates Scholarship is one of them. The Gates Scholarship is highly selective and intended for Pell Grant-eligible, minority, high school seniors. Gates Scholars receive funding for the full cost of attendance that isn’t already covered by other financial aid and the expected family contribution.

Any student can find private scholarships that apply to their situation; the search process may just take time, effort, and patience.

Employer tuition assistance

Employer tuition assistance includes employer-sponsored programs that provide aid to employees and their dependents who want to pursue higher education. It’s an especially popular choice for employees pursuing graduate degree programs, like an MBA.

In many cases, the funds received from these programs will be excluded from income and are, hence, tax-free.

Employers may also award employer-sponsored scholarships to employees and dependents of employees. Only tuition and fees are excludable from income. The student usually must be enrolled in a degree-seeking program to qualify.

How to get financial aid

Financial aid can be awarded to students either automatically or through an application process.

For instance, students must submit the FAFSA in order to receive federal student aid. Located on the FAFSA is an option to send the report to various institutions. Once a student does this, however, the financial aid package that each institution puts together for admitted students, based on the information in the FAFSA, is typically automatic. That means at this point it’s out of a student’s hands, as the academic institution is basing their financial aid package on several factors, such as family income and financial need.

Likewise, state aid and private scholarships also require some type of application, whether independently or linked to a FAFSA report.

2. The FAFSA

To get the ball rolling on several financial aid opportunities, students need to fill out a Free Application for Federal Student Aid (FAFSA). The FAFSA is a form that requires details about a student’s financial situation, family circumstances, college, and other personal information needed to verify the need and eligibility for financial aid.

Most students opt to fill out the FAFSA online through the government portal, but there are also PDF and paper versions available.

FAFSA eligibility requirements
  • You must be a U.S. citizen or an eligible noncitizen and have a valid Social Security number.
  • You must have a high school diploma or GED certificate.
  • You must be enrolled or accepted as a student in an eligible degree or certificate program.
How to apply for the FAFSA

You’ll have to fill out the FAFSA form and submit the application. To complete the FAFSA, make sure that you have the following items:

  • Social Security number
  • Alien Registration number for non-U.S. citizens
  • Federal income tax returns, W-2s, and other records of earned money
  • Bank statements and records of investments
  • Records of untaxed income
  • FSA ID to electronically sign the FAFSA

Dependent students, which most are, will need the above information from their parents, too. Remember, unless you meet the criteria of an independent student then you are classified as a dependent and you will have to report parental information on the FAFSA.

Follow the online prompts to fill in the above information in the form. Luckily, the FAFSA allows users to save an in-process copy to complete at a later date if they realize they don’t have all of the information necessary. Just don’t forget to go back and fill it out then hit that submit button!

After submitting the FAFSA, the U.S. Department of Education will process the application within three to five business days. A paper submission will take longer; expect about seven to 10 processing days.

Once the application is processed, a copy of the Student Aid Report (SAR) will be sent to the student, summarizing the information provided on the FAFSA. Make sure everything is correct. Missing or incorrect information should be corrected as soon as possible.

The SAR includes the Expected Family Contribution (EFC), determines eligibility for a Federal Pell Grant, and will be used by each institution to determine its own financial aid.

What online calculators are available?

If you’d like to estimate things like the cost of college, your expected family contribution, or other anticipated financial aid awards, then consider using an online calculator. It’s as simple as plugging in a few numbers and critical bits of information, hitting submit, and then receiving a detailed estimate.

College Cost Calculator

A college cost calculator helps students and their families estimate how much college will cost by the time of enrollment. It lets users compare the true cost of various colleges.

EFC Calculator

Students are expected to contribute to the cost of college. The Expected Family Contribution (EFC) is an index number the federal government and colleges use to determine what that amount is, in addition to how much aid a student is eligible to receive. The EFC amount is calculated using the financial information students provide in their FAFSA.

FAFSA Estimator Calculator

The U.S. Department of Education's FAFSA4CASTER tool provides an early estimate of financial aid eligibility. Provide some basic information and it will estimate your eligibility for federal student aid.

3. Grants

Grants are a gift that don’t need to be repaid! We’re not joking, grants are free money.

What are the details? Well, grants are a way for the U.S. government to fund ideas, projects, and pursuits to stimulate the economy. Grants can support all kinds of initiatives from innovative research to professional development.

Educational grants allow the recipient to pursue postsecondary educational goals without having to pay the money back in any way. As such, grants are a great option for low-income students who would have difficulty accessing and affording higher education otherwise.

Students applying to college should absolutely apply for grants to help them pay for tuition and other educational costs, since they have nothing to lose. Students can apply for most grants at no cost after filling out the FAFSA.

Federal grants

One way that the U.S. government provides financial aid to students is through federal grants. These types of grants provide financial assistance funded by a federal agency. Read on to learn about the different ways to score free money from the government.

Federal Pell Grant

A Federal Pell Grant is a subsidy offered by the federal government and limited to students who have financial need. These need-based grants are intended to increase access to postsecondary education for low-income students.

The amount awarded depends on a number of factors, including financial need, the cost to attend school, a student’s status as a full-time or part-time student, and whether the student will be attending school for an academic year or less. Pell grants can pay for a hefty chunk of higher education costs. In fact, $5,775 was the maximum grant for the 2015-16 academic year. And remember, these grants don’t need to be repaid. Pretty sweet, right?

In order to apply for a Pell Grant, students should plan to submit a FAFSA.

Federal Supplemental Educational Opportunity Grant (FSEOG)

The FSEOG program is meant to support undergraduate students who demonstrate substantial financial need. It’s a voluntary program that’s run by the financial aid office of each participating university.

Participating schools receive FSEOG funds from the U.S. Department of Education’s Office of Federal Student Aid and then must dole out those funds to students based on financial need, when they apply for the grant, the amount of other aid received, and the availability of the school’s remaining funds. Students who receive an FSEOG are typically awarded between $100 and $4,000 each year.

In order to apply for an FSEOG, students should submit the FAFSA as early as possible so their college can determine their level of financial need. Also, be sure to check with the school, as each one sets an individual deadline for campus-based funds.

Academic Competitiveness Grant (ACG)

Most students have heard of the Pell Grant but most likely not the Academic Competitiveness Grant (ACG). This is unfortunate because the ACG provides additional aid to low-income students with rigorous academic backgrounds. To receive the ACG, students must be a Pell Grant recipient.

The ACG was created to meet the growing demand for science, technology, engineering, mathematics, and foreign language fields, as well as promote all-around educational excellence. Through the grant, college students receive financial aid to pursue college majors that are in high demand in the global economy.

First-year students can receive up to $750; second-year students can receive up to $1,300.

National Science and Mathematics Access to Retain Talent (SMART) Grant

The SMART Grant picks up where the ACG ends by providing funding to low-income third- and fourth-year students. The annual maximum is $4,000 each year.

Teacher Education Assistance for College and Higher Education (TEACH) Grant

Are you interested in teaching and making an impact on young students? If so, a TEACH Grant may be for you. Students can receive financial aid simply for enrolling in a program that will prepare them to teach in a high-need field in elementary or secondary school and by making a four-year teaching commitment after graduation.

TEACH Grant-eligible programs that are high-need include, but are not limited to, the following:

  • Bilingual education
  • English language acquisition
  • Foreign language
  • Math
  • Reading
  • Science
  • Special education

TEACH Grants are intended to solve the demand for highly educated teachers to work in low-income schools where there’s a shortage of specific subject area teachers. Recipients can get up to $4,000 each year while enrolled in school.

Students interested in a TEACH Grant must apply by submitting a FAFSA. In addition to the grant, recipients should expect to complete the TEACH Grant Initial and Subsequent Counseling and sign the Agreement to Serve, which includes acknowledging their teaching commitment and penalties if they withdraw.

Iraq and Afghanistan Service Grant

This federal grant exists to support the educational pursuits of students whose parent or guardian died during military service in Iraq or Afghanistan after the events of Sept. 11. Unlike the Pell Grant, the Iraq and Afghanistan Service Grant is not limited by family income.

If this grant may apply to your situation, complete the FAFSA for a chance to receive up to $6,195 (as of the 2019-20 academic year).

State grants

Government-sponsored state financial aid is set up in a similar way to federal aid, but the requirements vary state-by-state to better target specific student populations. For instance, in California the Cal Grant program provides financial aid to undergraduates, vocational training students, and teacher certification students who have been residents of the state of California for at least one year.

Students interested in a state-funded grant should first complete the FAFSA, make sure they meet residency requirements for their state, and then research their available options on the relevant state’s government website.

School grants

Colleges and universities also provide their undergraduate students with grants, but unlike federal or state grants, school-sponsored aid is secured from in-house sources. Institutions rely on their endowment, a foundation, or the generous donations of alumni to fund their grant programs.

One of the grants offered by the University of Wisconsin, for example, is funded by the Wisconsin School of Business and the College of Engineering to alleviate the financial burden on high-need students enrolled in their respective programs.

In order to qualify for school grants, students should make sure to read up on the available financial aid options and eligibility requirements of the school they plan to apply to or attend. Although the requirements of these grants vary wildly, it’s always a good idea to begin by filling out the FAFSA.

Employer grants

Companies have a vested interest in their employees’ educational and professional goals. When students gain experience and skills, they become much more valuable to their employer, not to mention more satisfied with their job. It’s a smart plan for companies to provide their employees with financial aid to continue their education.

Students who maintain a job, should speak with their manager about company-sponsored grants, in addition to other forms of aid that may be available, like tuition assistance or reimbursement.

4. Scholarships

A scholarship is an award of financial aid for students to further their education. Scholarships are awarded based on a variety of criteria, which usually reflect the values and purposes of the donor or founder of the award.

The best part? Recipients are not required to repay scholarship money. Woohoo! Free money!

School scholarships

Schools sometimes provide their own scholarships through the generous support of donors and alumni. The source of funding may be different, but a school-sponsored scholarship generally fits into one of three main categories: endowed, academic, or athletic.

Endowed scholarship

An endowed scholarship is a major gift to a college or university used to fund scholarships. It often honors a donor or a donor's loved one. Therefore, the eligibility is based on the instructions of the donor.

Perhaps the donor was an English literature major who wants to contribute to the educational journey of another aspiring writer. Or maybe the donor strongly believed in expanding and celebrating diversity and prefers for the scholarship recipient to be a minority student.

Thanks to the generosity of the donor, an endowed scholarship can benefit generations of students and inspire students to give back to their alma maters upon graduation.

Academic scholarships

Let’s face it: If you’re accepted to a prestigious university, then the chances that your classmates are all exceptional is guaranteed. This makes it that much harder for universities to award scholarships based on merit. The pool of applicants is competitive enough!

Yet, a small percentage of students will receive an academic scholarship, perhaps based on a high school GPA or SAT/ACT test scores. Valedictorians and salutatorians should inquire with their college to see if they qualify for any academic scholarships.

Athletic scholarships

Are you a top-tier athlete? Chances are a college will pay lots of money to recruit you.

Every jock with brains is well-suited to receive an athletic scholarship. While merit may not be the sole basis of an athletic scholarship, it still helps.

Private scholarships

We’ve covered private scholarships already, but just a quick refresher: Private scholarships are funded by companies, nonprofits, individuals, and the list goes on.

These are essentially free money, because they are given to students with the goal of helping them pay for college. While they vary based on eligibility criteria, there is at least one private scholarship out there for every type of student.

Curious about the standard criteria and application process? Read on to get a breakdown on how to find and apply for private scholarships.


Private scholarships have a range of eligibility criteria, as the providers are able to set their own requirements.

That’s right. Private scholarships can have restrictions around anything and everything. The most common to watch for include a minimum GPA, state or country residency status, college major, clubs, hobbies, interests, ethnicity, gender, and the list goes on.

When looking for a private scholarship, it’s important to first understand the type of student you are in order to narrow down the search. Are your strengths your high GPA and class rank? Then a merit-based private scholarship is calling your name. Or maybe you have strong writing skills and are passionate about a niche hobby. Then search for organizations related to your interests and write a standout essay.

By recognizing your strengths and weaknesses, you will be able to tailor your search for only the scholarships that best suit you. This will save valuable time and energy. Because trust us, the scholarship application process can be daunting.

Application process

It’s daunting, but doable — and extremely worth it. That’s how we characterize the scholarship application process.

Once you’re ready to apply for a scholarship, it’s time to fill out an online or paper application and submit any necessary documentation. Here’s a brief overview of how to do that:

Read the fine print. Scholarships typically include rules and guidelines. Don’t miss out on a chance to win money, because you didn’t adhere to the deadline or submission details.

Complete the application. Next, there is often a general application form that needs to be completed. The application will ask for a student’s personal information, such as name, age, high school or university, major, grades, test scores, and so on.

Gather your extra materials. Some scholarships require applicants to prove their grades or test scores by submitting a transcript or official scores from the College Board. Other times, students will need to submit recommendations from teachers, counselors, or other professional relationships, such as a manager. It’s important for students to cultivate strong professional relationships so that they have reliable adults to speak to their achievements, skills, and goals.

Turn on your thinking cap. Finally, it’s commonplace for scholarship providers to ask students to answer one or more essay questions. Essays can be anything from responding to a research question to writing a personal statement full of biographical information. Whatever the topic, it’s crucial for students to write a strong essay to elevate their application to winning status. Nobody has cracked the code for how to write the perfect scholarship essay, but there are a few basic tips that everyone should adhere to:

  • Spend time writing and editing your essay. Treat it like an assignment that will be graded, so put the effort in.
  • Make sure to fully answer the prompt while speaking to your achievements or personal experiences, where appropriate. That means be thorough, but succinct — it’s a balance.

5. Loans

A student loan is borrowed financial assistance that is meant solely for educational costs, even though some students blow it on spring break. Instead, use that money responsibly since it has to be repaid at some point.

Student loans are offered to college students by lenders at a wide range of interest rates and with varying terms and conditions. What does all of this mean? Don’t get bogged down by the language used, like a subsidized versus unsubsidized loan and what it means to refinance or consolidate. Check the terms below for helpful definitions.


A lender provides the student loan — the money you use to pay for college.

Loan servicer

A servicer is a company that acts as the intermediary between you and your lender. You’ll work with a servicer to repay the money owed to the lender. Servicers also offer support to change loan terms and assist lenders with deferment and forbearance.

Loan term

Student loan terms are how long the lender expects it will take for borrowers to repay their debt. Student loan terms range from relatively short at five years to as long as 30.

Interest rates

An interest rate plays a huge factor in determining how much a borrower pays on student loans, as well as how long it will take to pay off the loans.

There are two types of interest rates to know. A fixed-rate student loan is a locked interest rate that won’t change throughout the duration of the loan. A variable-rate student loan can increase or decrease based on the market.

Subsidized vs. unsubsidized

Understanding the difference between subsidized and unsubsidized loans is important because it affects how student loan interest is calculated as well as repayment plans.

Subsidized loans often have better terms for students. The federal government pays the interest that accrues while a student is in school at least half-time, during a grace period of six months after leaving school, and during deferment.

An unsubsidized loan, on the other hand, accrues interest during all periods and is solely the responsibility of the borrower to pay. Students who choose not to pay interest while in school, during the grace period, during deferment, or during forbearance (a postponement period during which accruing interest must be paid), will have interest accrue and capitalize. That means the growing interest will be added to the principal amount of the loan.

There is more information on direct subsidized loans and direct unsubsidized loans in the relevant section below.

Loan limits

Student loans have borrowing limits that differ depending on the loan provider and whether a student files as a dependent or independent undergraduate.

For the 2019-20 academic year, total loan limits for dependent students are $31,000 with a cap of $23,000 in subsidized student loans; limits for independent students are $57,000 with a cap of $23,000 in subsidized loans.

Private student loans have an annual limit equal to the financial need, so that’s the cost of attendance minus financial aid received. Typically these loans max out around $75,000 to $120,000 for undergraduate students.


When a student obtains a new loan at a new interest rate and uses the money to pay off older loans, this is called refinancing. It’s typically only done to get better repayment terms and a lower interest rate.


Consolidation is the process of combining several student loans, like the Stafford loan, PLUS loan, and Federal Perkins loan, into one debt. This is done to reduce monthly payments, but comes with a longer loan term.

Entrance and exit counseling

Students must take entrance counseling to receive a federal student loan. The simple online course aims to teach students what it means to take on the responsibility of a student loan.
Similarly, students must go through exit counseling after they graduate, leave school, or drop below part-time enrollment. This prepares them to repay their federal student loans by understanding factors including a grace period, interest rates, and repayment plan options.

Federal student loans

Federal student loans are provided by the U.S. Department of Education in order to help students from all backgrounds pursue postsecondary education without the restriction of their finances. The pro of federal student loans is that they include terms and conditions that are set by the law so they often work out in favor of the borrower. As such, federal loans typically have fixed interest rates and beneficial repayment plans, such as an income-driven plan, that works with students based on their salary.

Learn more about the different federal student loan options available to students and how they differ below.

Direct subsidized loans

Also called Stafford loans, these are subsidized loans that will have their interest payments covered in part by the U.S. Department of Education. Remember, interest is only covered during three events: while a student is enrolled at least half-time, during a grace period, and during deferment. These loans are offered to students with a demonstrated financial need.

Direct unsubsidized loans

Unlike subsidized loans, these types of loans include interest payments that must be paid by the borrower. Also, they’re available to everyone, not just those with financial need.

Direct PLUS loans

A Direct PLUS loan can be for students or parents. This is a great option for families who want to take on some of the financial responsibility of paying for a child’s education. In order to receive a PLUS loan, the borrower must undergo a credit check, which makes this an unlikely option for undergraduate students with little to no credit history.

Dependent students whose parents aren’t eligible for a Direct PLUS loan should check their options as they may be able to get additional direct unsubsidized loan funds.

Grad PLUS loans

Intended for students attending graduate and professional school, Grad PLUS loans offer a fixed interest rate with flexible loan limits. Eligibility doesn’t depend on financial need, but students must still file the FAFSA in order to qualify for the Grad PLUS loan.

Direct consolidation loans

Using consolidation, these types of loans allow the borrower to combine multiple loans into a single loan provided by one servicer. This means one monthly payment!

Private student loans

A private student loan is another opportunity for students to receive financial assistance for college. Unlike federal student loans, private student loans can come from a variety of providers or individual lenders all with their own unique terms. These are generally more expensive than federal student loan options, but are still a solid option for students who need funding.

Sallie Mae is probably the most popular example of private student loans, as it’s the largest private student loan originator in the United States.

6. Education benefits and funds

An educational fund allows families to prepare for a student’s future education expenses, covering anything from elementary school to college. By saving money now, they’ll ultimately cut costs in the future, all thanks to the magic of compound interest.

When saving for a child’s education, a traditional savings account won’t cut it. That’s why tax-advantaged savings accounts were created. These types of accounts are often sponsored by individual states or private institutions, allow after-tax contributions, tax-free interest growth, and tax-free withdrawals.

A student who is already enrolled in college won’t be able to take full advantage of an education savings account, but a parent with a young child should start investing today. Read on to learn about the different options available to save up for a future college grad.

529 College Savings Plan

The most popular education savings account is the 529 plan. This account is great because it is sponsored in all 50 states and Washington, D.C. That means anyone interested in contributing to a student’s future educational expenses can do so. Just be careful, since the initial account holder, like a parent, will always be the permanent holder.

There are two types of 529 plans: A prepaid tuition plan and education savings plans differ slightly, but both are solid ways to tuck away money for the future.

A prepaid tuition plan lets the investor purchase credits at a specific college for future tuition. These are often sponsored by a state government and thus have residency restrictions. For instance, parents who live in Florida may contribute to a tuition plan allowing their child to attend an in-state college, like the University of Florida or Florida State University, with the funds they have saved. Of course, the drawback is that students are then tied to spending this money in their home state. Parents take a risk by assuming their child will only want to attend college in state.

An education savings plan is more flexible as it allows the saver to open an investment account to be used for any qualifying higher-education expenses, like tuition, room and board, or textbooks. The funds in this type of account can be applied anywhere, even abroad.

Coverdell Education Savings Account (ESA)

A Coverdell ESA is another option offering tax-free contributions that can grow until they are withdrawn for educational expenses. And yes, those withdrawals are also tax-free. They do come with a restriction, however, as these accounts are only available to families below a certain income level, but they also have lower maximum contribution limits.

The major draw of a Coverdell ESA is that the funds can be used for more than college. These accounts are able to cover K-12 expenses, meaning the money is much more versatile for the investor. Whereas 529 plans have a tuition limit in place for K-12 education, the Coverdell ESA can cover books, school supplies, equipment, and even tutoring.

As a bonus, a Coverdell ESA is transferable once a child turns 18 years old. With great power comes great responsibility, however, as any early withdrawals (and penalty fees) then fall solely on the child.

7. Veteran and military benefits

Military service offers a robust array of education benefits to both those on active duty and to those veterans who have left service. Take advantage of these military benefits, as they are a valuable financial option when paying for college.

Additionally, it’s generally best to use certain benefits while on active duty and others after leaving military service. For instance, tuition assistance should be used while on active duty, and GI Bill benefits should be saved for after military service, because the programs have a longer expiration date.

Tuition Assistance

Tuition assistance is money that covers the cost of tuition and fees. Like a grant, it doesn’t need to be repaid. Active service members get up to $4,500 each year to use in tuition assistance.

All service members are eligible, but specific criteria is determined by the individual branches of the military, such as the Air Force, Army, and Navy.

GI Bill

The GI Bill encompasses several education programs by the Department of Veterans Affairs. Students can determine their eligibility for each program by using the GI Bill® Comparison Tool and then check out the current rates on the VA website. To learn more about each type of program, read on.

Montgomery GI Bill (MGIB)

The Montgomery GI Bill is an education benefit for 36 months of classes worth up to $73,800, as of the 2019-2020 rates. Active duty members must contribute $100 each month for the first 12 months of their service, for a total of $1,200. Then, they become eligible to receive a monthly education benefit worth much more than their investment.

The MGIB can be used on active duty or after separating from service. It expires 10 years after separating from military service, leaving plenty of time to take full advantage of its benefits.

Trainees on active duty can only use the stipend to reimburse tuition and fees, meaning the payment amount is capped. Further, if a trainee is also using military tuition assistance, then the MGIB payments are limited to only cover the difference between tuition assistance and the remaining amount of tuition and fees.

Recipients who have left active duty service get a monthly stipend at the full payment rate to use for classes at a qualifying institution. This means that they can receive a payment amount above the cost of tuition. Checks are made payable to the student.

Montgomery GI Bill - Selected Reserve (MGIB-SR)

The Montgomery GI Bill Selected Reserve is another education benefit program that falls under the Montgomery GI Bill, but for members of a military reserve force or reservists. To be eligible reservists must serve for a six-year obligation or must be an officer in the Selected Reserve serving six years on top of an initial service obligation. The program offers 36 months of education benefits worth up to $13,824, as of the 2019-2020 rates.

Post-9/11 GI Bill

The Post-9/11 Veterans Educational Assistance Act provides assistance to those who served on active duty after the events of Sept. 11. It pays for college tuition, fees, a housing allowance, and up to $1,000 for books. Checks are sent directly to an educational institution.

According to the 2019-2020 rates, the Post-9/11 Bill offers a generous amount for the full benefit. For public schools, it covers all tuition and fee payments for in-state students. For private or study abroad schools, the bill covers up to $24,476.79 each academic year.

Fry Scholarship

The Fry Scholarship extends Post-9/11 GI Bill benefits to the surviving spouses and children of service members who died while in the line of duty after the events of Sept. 11. Children must be at least 18 years of age; surviving spouses cannot be remarried.

To apply, dependents must first pick a school with the GI Bill Comparison Tool and then check to make sure that VA benefits are approved for their program. Then, they must apply online or submit a VA form. Finally, qualifying recipients need to choose between either the Fry Scholarship or the Dependents Education Assistance (DEA). The only exception is for students who had a parent die in the line of duty before August 1, 2011 — they can use both the Fry and DEA (see more about the DEA below).

Upon approval, recipients can receive up to three years of financial benefits. This includes money to pay full tuition at in-state public schools or up to $22,805.34 for out-of-state or private schools. Recipients will also receive an allowance for housing and books and supplies.

Survivors’ and Dependents’ Education Assistance (DEA)

The DEA program provides educational assistance and training opportunities to dependents of veterans who died or are disabled due to a service-related event.

The 2019-2020 rates for the DEA include 36 months of classes worth up to $44,928.

For students who are eligible for both the DEA program and the Fry Scholarship, they will have to decide between one or the other, unless they meet the sole exception — a parent who died in the line of duty before August 1, 2001. In this case, they can receive both benefits.

Vocational Rehabilitation and Employment (VR&E)

The Vocational Rehabilitation and Employment program assists veterans who have a service-related disability by helping them obtain employment and/or achieve independent living. This includes providing funding for educational attainment like job training and resume development. For more information or to apply for VR&E benefits, go to the VA website.

8. Federal work-study

If you’re looking for another way to pay for college, consider working. No, we don’t mean a retail job.

Federal work-study gives students with financial need part-time jobs during the school year in order to pay for their education. Not all colleges participate in the Federal Work-Study Program, however, so check with your financial aid office first.

Work-study jobs are set up just like a normal job, but students are paid by their college with funds provided by the federal government. The goal of work-study is to employ students in jobs with either an emphasis in civic engagement — to make a difference in one’s community — or in jobs related to their major. Work-study jobs can be on-campus, at a college, or off-campus, but are most likely at a nonprofit organization or public agency.

Students earn at least minimum wage, but have the potential to earn much more based on skill and experience. They will receive a paycheck just like with any other job, as opposed to having wages deducted from tuition. As a bonus, work-study wages aren’t held against a student when completing the FAFSA.

9. Terminology


The Office of the Bursar at a college is in charge of managing student tuition accounts. Get familiar with this office as they’ll be sending bills, making payment plans, and issuing refunds for financial aid.

Cost of attendance (COA)

Cost of attendance is the annual amount needed to attend college. Included in this cost is tuition, an on-campus dorm, meal plan, textbooks, school supplies, transportation, personal expenses, and expected financial aid.

Demonstrated need

The financial difference between the cost of attendance and the expected family contribution is a student’s demonstrated need. This is the amount of money a student needs to be able to afford college and can be bridged with financial aid.

Expected family contribution (EFC)

This is a measure of a family’s ability to pay for college and states how much a student is expected to contribute towards their education. It’s calculated based on personal financial information, including income, assets, taxes, and benefits.

Financial aid

Grants. Loans. Scholarships. Work-study. Financial aid can be federal, state, institutional, or private. But all of these different types of aid can help you pay for college.

Free Application for Federal Student Aid (FAFSA)

The Free Application for Federal Student Aid is used to determine students’ financial need when applying for college. Then, it offers federal aid, like loans, grants, and work-study, to bridge that gap.

Master Promissory Note (MPN)

A Master Promissory Note is a legal document that binds students to taking responsibility for repaying their educational student loans, whether subsidized or unsubsidized. Every borrower must sign this document in order to receive a student loan.

Need-aware admission

Need-aware admission means that an institution can consider an applicants’ ability to pay for college when making an admissions decision.

Need-blind admission

Need-blind admission works in favor of the student because it means an institution can’t consider an applicant’s financial situation when making an admissions decision.

Net price

A college’s sticker price is the net price of attendance. This is everything like tuition and room and board minus the grants, scholarships, and other educational benefits a student may receive. The net price is unique to each student depending on their personal financial circumstances.

California Residents, view the California Disclosures and Privacy Policy for info on what we collect about you.