It's important for every family with college-bound members to know how FAFSA works. Families often dismiss the idea of applying for financial aid for college because they think they make too much money to qualify. But regardless of how much a family earns, they may be eligible for some form of help, often in the form of relatively low-interest loans. For that reason, it makes sense for almost all families with college-bound kids to fill out the Free Application for Federal Student Aid, more familiarly known as the FAFSA.

Key Takeaways

  • Most families are eligible for some form of federal financial aid for college.
  • Students with "exceptional financial need" may be eligible for federal grants and subsidized loans.
  • Other students and parents may be eligible for non-need-based aid, such as unsubsidized federal loans.

What Is the FAFSA?

The FAFSA is the official form that families use to apply for financial assistance for college from the federal government. States, individual colleges and universities, and private scholarship programs rely on its information, as well.

The primary purpose of the FAFSA is to figure out how much financial aid you qualify for, including both need-based and non-need-based aid.

How Does the FAFSA Work?

To determine a family's financial need, the FAFSA asks a series of questions about the parents' and student's income and assets, as well as other factors, such as how many children there are in the family. It then comes up with an Expected Family Contribution (EFC), which, by the government's reckoning, represents how much of the cost of college the family should be able to pay with its own resources.

In terms of assets, the FAFSA assumes that 20% of a student’s assets and 5.64% of the parents’ assets should be available for spending in any one college year. Those assets include bank accounts and investments but not the value of retirement accounts, life insurance policies, and annuities. Any equity in the family home is also excluded.

The information you supply on the FAFSA determines whether you qualify for need-based aid, non-need-based aid, or some combination of the two.

If you aren't ready to fill out the FAFSA itself, you can get an estimate of your EFC and likelihood of receiving financial aid by using the office of Federal Student Aid's online FAFSA4caster.

Here are some of the programs that require filling out the FAFSA.

Need-Based Financial Aid

Federal Pell Grants

Grants are the most attractive type of financial aid because they do not need to be repaid. Pell Grants, the main federal grants for college, are intended for students with "exceptional financial need." They are primarily awarded to undergrads, but some teacher certification programs are also eligible. The maximum award in the 2019–2020 academic year is $6,195. The college or university's financial aid office determines how much money students qualify to receive, based on their family's EFC and the school's cost of attendance (COA).

Federal Supplemental Educational Opportunity Grants

These grants also do not need to be repaid, but they are only available at certain schools. The amounts range between $100 and $4,000 per year. As with Pell Grants, these supplemental grants are meant for students with few other resources to draw on.

Federal Direct Subsidized Loans

These loans are subsidized by the government, which means that Uncle Sam will pay the interest on them while you are in school and for a grace period of six months after you graduate. Loan amounts that can be subsidized range from $5,500 to $12,500 per year, as of 2020, depending on your year in school and whether you are considered a dependent or independent student, as defined by the office of Federal Student Aid. These subsidized loans are not available for graduate study.

Federal Work-Study

The federal work-study program makes paid part-time jobs available through participating colleges and universities. Both undergraduate and graduate students may be eligible.

Federal loans, whether subsidized or unsubsidized, tend to be less costly than private loans and have more flexible repayment options.

Non-Need-Based Financial Aid

Direct Unsubsidized Loans.

Unsubsidized loans are similar to their subsidized counterparts with one big exception: The government doesn’t pay the loan interest while the student is in school or during a six-month grace period afterward. If students or their parents don't pay the interest during this time period, it will be added to the principal of the loan.

Schools can offer these loans as part of a financial aid package regardless of a family's financial situation. Dependent students are eligible for a maximum of $31,000 in unsubsidized loans over their undergraduate years, unless their parents are ineligible for federal PLUS loans, in which case the limit may be higher.

Federal PLUS Loans

These loans are intended for parents or graduate students. They aren't subsidized by the government, so the interest that accrues during the college years will be added to the principal if it isn’t paid while the student is in school.

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

Students who are training to become teachers can qualify for these grants—up to $3,764 per year (as of 2019–2020) —even if they don’t meet need-based criteria. To qualify, the student must take certain classes and, within eight years of graduation, have worked for at least four years in an elementary or secondary school or educational service agency that serves low-income families. These grants don't have to be repaid unless the student fails to fulfill the requirements, in which case the grant is converted into a direct unsubsidized loan.

The Bottom Line

Most families—regardless of how much they earn or have accumulated in assets—will find it useful to fill out the Free Application for Federal Student Aid, or FAFSA. If it turns out that they are ineligible for "free money" in the form of grants, they are still likely to be eligible for non-need-based aid in the form of direct unsubsidized loans from the federal government. Such loans typically have more favorable terms than loans from private lenders and offer a variety of flexible repayment options.