Financial Aid 101: The Terms to Know

Getting into college is an exciting experience. Receiving your financial aid award letter, however, can be nerve-wracking as you try to figure out how you will pay for college.

The worst part is that you may find yourself scratching your head over the terminology used in your financial aid package. It can be difficult to calculate exactly how much you owe, given the myriad ways in which you can finance your higher education.

Recently, the U.S. Department of Education released the Financial Aid Shopping Sheet, which is meant to help students understand their financial aid packages. The Shopping Sheet is a standardized template for financial aid awards. If a student applies to colleges and universities that use the Shopping Sheet, she’ll be able to easily compare her financial aid options.

Even though not all schools use the Shopping Sheet, it’s a useful tool to define some very common financial aid vocabulary that you will encounter within your financial aid package:

Cost of Attendance ("COA") The total cost to attend a college or university, usually for an academic year. Colleges and universities define the component parts of COA, and it will vary depending on a student’s situation. Usually it is an estimate of tuition and fees; room and board; books and supplies; transportation; and personal expenses. This is the budget that federal financial aid eligibility is based on.

Grants/Scholarships Financial aid, often but not necessarily based on financial need, that does not need to be repaid (unless, for example, you withdraw from school and owe a refund).

Federal Pell Grant A federal grant for undergraduate students who demonstrate financial need after filling out the Free Application for Federal Student Aid ("FAFSA").

Net Cost (aka Net Price) An estimate of actual cost that a student and his family need to pay in a given year to cover education expenses in order for the student to attend a particular school. Net price is determined by taking the institution’s Cost of Attendance and subtracting any grants and scholarships for which the student may be eligible.

Work-Study A federal student aid program that provides part-time employment while you are enrolled in school to help pay your education expenses. If you are awarded a work-study, make sure you check with your financial aid office to understand which jobs will qualify.

Federal Perkins Loan A federal student loan, made by the recipient’s school, for undergraduate and graduate students who demonstrate financial need.

Federal Direct Subsidized Loan A loan based on financial need for which the federal government pays the interest that accrues while the borrower is in an in-school, grace, or deferment status. For Direct Stafford Subsidized Loans (also known as Direct Subsidized Loans) first disbursed between July 1, 2012, and July 1, 2014, the borrower will be responsible for paying any interest that accrues during the grace period. If the interest is not paid during the grace period, the interest will capitalize — it will be added to the loan’s principal balance.

Federal Direct Unsubsidized Loan A loan for which the borrower is fully responsible for paying the interest regardless of the loan status. Interest on unsubsidized loans accrues from the date of disbursement and continues throughout the life of the loan.

Family Contribution (aka Expected Family Contribution) This is the number that’s used to determine your eligibility for federal student financial aid. This number results from the financial information you provide on the Free Application for Federal Student Aid (FAFSA).

Parent PLUS Loan A loan that is available to parents of dependent undergraduate students for which the borrower—in this case, the parent—is responsible for paying all interest and principal. Interest will begin to accrue on these loans once they are disbursed.

Private Education Loan A non-federal loan made by a lender such as a bank, credit union, state agency, or school.

Loan Default Failure to repay a loan according to the terms agreed to in the promissory note. For most federal student loans, you will default if you have not made a payment in more than 270 days. You may experience serious legal consequences if you default.

Obviously, this list is not exhaustive. But, hopefully, it will help you distinguish between the different forms of aid offered in your financial aid award letter. You should also review the Federal Student Aid’s website which features a glossary of terms (many of the definitions above are from this glossary). In general, the FSA website is a great resource to peruse if you have questions about federal financial aid.