How FAFSA Works – The Ultimate Guide To Student Loans

Spread the love

Are you applying for a student loan? If so, then you must know how FAFSA works and how you can apply for a FAFSA application.

Whether you are a college student or a parent who is looking for low-cost federal loans, you can easily qualify with our guide on how FAFSA works. If you are looking for low-cost student loans, this is the ultimate guide for how to get student loans.

It’s essential for every individual heading to college and their parents to understand how the Free Application for Federal Student Aid (FAFSA) process operates. Some might overlook applying for college financial aid, assuming they earn too much to qualify.

However, irrespective of their family income, they could still qualify for various forms of financial assistance, such as federal, state, and school-based aid, along with merit-based scholarships. Indeed, it’s a sensible choice for nearly every family with a child heading to college to complete the FAFSA.


What Does FAFSA Stands For?

FAFSA stands for the Free Application for Federal Student Aid. It’s essentially a crucial tool for families and students navigating the college journey.

By completing the FAFSA, individuals can unlock various financial assistance opportunities, including federal grants, loans, and work-study programs. This application plays a pivotal role in determining eligibility for financial aid, ensuring that students can access the support they need to pursue higher education without facing unnecessary financial barriers.

It’s a fundamental step in the college planning process, bridging the gap between academic aspirations and financial realities. To summarize:

     FAFSA: Free Application for Federal Student Aid

     FAFSA Application: The process of submitting the Free Application for Federal Student Aid, which is a comprehensive form used to determine eligibility for various financial assistance programs to support college education.

How FAFSA Works? (How Does FAFSA Works)

The main purpose of the FAFSA is to assess a student’s eligibility for financial aid, encompassing both need-based and non-need-based assistance. It plays a crucial role in determining qualification for federal need-based grants such as the Pell Grant and Federal Supplemental Educational Opportunity Grants (FSEOG).

Additionally, it assesses eligibility for subsidized federal student loans, which are need-based, as well as unsubsidized federal student loans, available to most students regardless of need.

The FAFSA also influences eligibility for federal work-study, state-based financial aid, including grants, scholarships, and loans, as well as school-based financial aid, covering need-based grants and scholarships. Also to be noted that, many schools require the FAFSA for the distribution of school-based merit aid awards.

Understanding how FAFSA works:

The FAFSA gauges a family’s financial need by posing questions about both parents’ and students’ income and assets, considering factors like the number of children in the family. From this information, it calculates a Student Aid Index (SAI).

The Expected Family Contribution (EFC) underwent a name change to Student Aid Index (SAI) starting from the 2024–2025 school year onward. This adjustment aims to bring clarity to its meaning.

Importantly, the SAI does not signify the exact amount a student must pay to the college. Instead, it serves as a tool for the school to calculate the student aid for which the applicant qualifies.

Along with the name change, the shift to SAI brings about a slight modification in the formula. Previously, parental income was divided if they had more than one child in college simultaneously. Now, regardless of whether parents are supporting multiple children in college, each child’s SAI will utilize the same amount of parental income information.

As the official application for federal financial assistance for college, the FAFSA is crucial. Various entities, including states, colleges, universities, and private scholarship programs, rely on the details provided in the application.

Regarding assets, the FAFSA assumes that 20% of a student’s assets and 5.64% of parents’ assets should be available for spending in a single college year. Bank accounts and investments count as assets, while retirement accounts, life insurance policies, annuities, and home equity are excluded.

The data you provide on the FAFSA determines your eligibility for need-based aid, non-need-based aid, or a combination of both. If you’re not prepared to complete the FAFSA yet, you can estimate your SAI and likelihood of receiving financial aid using the Federal Student Aid Estimator from the Department of Education.

Several programs require filling out the FAFSA, and here are some examples:

  1. Need-Based Financial Aid (Federal Pell Grants)
  2. Federal Supplemental Educational Opportunity Grants
  3. Federal Direct Subsidized Loans
  4. Federal Work-Study
  5. Non-Need-Based Financial Aid (Direct Unsubsidized Loans)
  6. Federal PLUS Loans
  7. Teacher Education Access for College and Higher Education (TEACH) Grants

1. Need-Based Financial Aid (Federal Pell Grants)

Grants stand out as the most appealing form of financial aid since they don’t require repayment. Pell Grants, the primary federal grants for college, target students displaying significant financial need.

While undergraduates are the main recipients, certain teacher certification programs also qualify. The highest award for the 2024–25 award year (July 1, 2024, to June 30, 2025) is $7,395.

The financial aid office of a college or university assesses the amount students are eligible to receive, considering their family’s SAI and the school’s cost of attendance (COA).

2. Federal Supplemental Educational Opportunity Grants

These grants, which also don’t require repayment, are exclusive to specific schools. The grant amounts vary from $100 to $4,000 per year. Similar to Pell Grants, these additional grants target students with limited financial resources.

3. Federal Direct Subsidized Loans

These government-subsidized loans come with the perk that you won’t need to pay interest on them while you’re in school and for a grace period of six months after you graduate.

The subsidized loan amounts vary from $3,500 to $5,500 per year, depending on your school year and your status as a dependent or independent student, as defined by the office of Federal Student Aid. It’s important to note that these subsidized loans are not an option for graduate study.

4. Federal Work-Study

The federal work-study program offers part-time paid jobs at participating colleges and universities, and both undergraduate and graduate students may qualify for these opportunities.

Federal loans, whether they are subsidized or unsubsidized, usually come with lower costs compared to private loans and provide more flexible repayment options.

5. Non-Need-Based Financial Aid (Direct Unsubsidized Loans)

Unsubsidized loans share similarities with their subsidized counterparts, but there’s a crucial difference: the government doesn’t cover the loan interest while the student is in school or during a six-month grace period afterward. If the interest isn’t paid by students or their parents during this period, it gets added to the loan principal.

Schools can include these loans in a financial aid package, irrespective of a family’s financial situation. Dependent students can qualify for a maximum of $31,000 in subsidized and unsubsidized loans throughout their undergraduate years, unless their parents are ineligible for federal PLUS loans, in which case the limit might be higher.

6. Federal PLUS Loans

These loans are designed for parents or graduate students and lack government subsidies. This means that if the interest isn’t paid while the student is in school, it will be added to the principal during the college years.

7. Teacher Education Access for College and Higher Education (TEACH) Grants

Aspiring teachers can be eligible for these grants, receiving up to $4,000 per year, even if they don’t meet need-based criteria. To qualify, students must take specific classes and, within eight years of graduation, work for at least four years in an elementary or secondary school or educational service agency serving low-income families.

The best part is that these grants don’t require repayment unless the student fails to meet the requirements, at which point the grant transforms into a direct unsubsidized loan.

How to Use Financial Aid? (How to Use FAFSA)

Luckily, the process of applying for financial aid is generally straightforward for most prospective students. To ensure you’re on track with your financial aid throughout your academic journey (or your child’s), you can follow the step-by-step guide below for added peace of mind.

  1. Investigate financial aid options sooner, rather than later
  2. Complete the FAFSA application
  3. Review and receive your financial aid
  4. Repeat these steps annually until graduation

1. Investigate financial aid options sooner, rather than later

It’s crucial to have a clear plan for covering your college expenses well in advance of the first day of school. Mark the FAFSA application deadline on your calendar for each year you intend to seek financial aid.

Also, take the time to explore potential grants, scholarships, prepaid tuition options, and education savings plans (like 529 plans) that you might be eligible for.

2. Complete the FAFSA application

Before each college year, it’s essential to complete and submit your FAFSA application. Your eligibility for federal grants, work-study opportunities, and loans relies on the information provided in your FAFSA. Additionally, certain states and universities may offer extra aid based on this data.

3. Review and receive your financial aid

After receiving your financial aid offer (or offers from multiple schools), it’s crucial to carefully review and compare the types, amounts, and costs associated with each package.

Once you’ve made your decision and accepted the aid package you prefer, the final step is to inform your chosen school about any additional aid you expect to receive. The university’s financial aid office will then apply the aid to your owed amount and disburse any remaining funds for other college expenses.

4. Repeat these steps annually until graduation

Moving forward, your primary focus should be on achieving good grades because maintaining financial aid eligibility requires satisfactory academic progress. As mentioned earlier, don’t forget to complete the FAFSA each year you’re in school to continue receiving additional financial aid.


Whether a family has a high income or substantial assets, completing the FAFSA is beneficial for most. Even if they don’t qualify for grants or scholarships, there’s a good chance they are eligible for non-need-based aid, like direct unsubsidized loans from the federal government.

Federal student loans generally come with more favorable terms compared to loans from private lenders and provide several flexible repayment options.

Frequently Asked Questions (FAQs)

What is the Point of a FAFSA?

The U.S. Department of Education utilizes the FAFSA to assess a student’s eligibility for need-based federal financial aid for college, considering their financial situation. This financial aid can encompass federal grants, scholarships, work-study opportunities, and/or loans.

Is the FAFSA a Loan or Free Money?

The FAFSA isn’t a loan or free money; it’s just an application you complete to figure out if you’re eligible for a federal loan, grant, or work-study. Once you’ve filled out the FAFSA, you could qualify for three main types of financial aid. Some of it is essentially free, some requires you to work for it, and some needs to be repaid.

Who Qualifies for a FAFSA?

To be eligible for different forms of federal student aid, you generally need to demonstrate financial need, be a U.S. citizen or eligible noncitizen, and be enrolled in an approved degree or certificate program at a college or career school.

However, there are additional specific eligibility criteria based on the type of aid. The federal government provides financial aid to the majority of students to assist with college or career school expenses, and factors like age, race, and field of study do not influence eligibility determinations.

When Should I Fill Out My FAFSA for 2024–2025?

If you wanted to be eligible for federal student aid in the 2024–2025 award year, you had to fill out a FAFSA form by June 30, 2025. Keep in mind that each state has its own deadline as well.

Leave a Comment