How Does FAFSA Work?

Every college-bound person and their parents need to know how the Free Application for Federal Student Aid (FAFSA) process works. Some may dismiss the idea of applying for financial aid for college because they think they make too much money to qualify. But regardless of their family earnings, they may be eligible for some form of financial assistance, including federal, state, and school-based aid and merit-based scholarships.

In fact, it makes sense for almost all families with a college-bound kid to fill out 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.

How FAFSA Works

The primary purpose of the FAFSA is to determine how much financial aid a student qualifies for, including both need-based and non-need-based aid. It determines eligibility for federal need-based grants including the Pell Grant and Federal Supplemental Educational Opportunity Grants (FSEOG); subsidized federal student loans, which are based on need; unsubsidized federal student loans, which most students qualify for regardless of need; federal work-study; state-based financial aid, including grants, scholarships, and loans; school-based financial aid, including need-based grants and scholarships, and school-based merit aid (since many schools require the FAFSA to be on file before any aid awards are distributed).

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).

The confusingly named Expected Family Contribution (EFC) will be renamed the Student Aid Index (SAI) in July 2023 to clarify its meaning. It does not indicate how much the student must pay the college. It is used by the school to calculate how much student aid the applicant is eligible to receive.

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

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 excludes 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 undergraduates, but some teacher certification programs are also eligible. The maximum award in the 2020–2021 academic year is $6,345. A 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 financial resources.

Federal Direct Subsidized Loans

These loans are subsidized by the government, which means that will not be required to pay 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 $3,500 to $12,500 per year, 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 $4,000 per year (as of 2020–2021)—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.

How FAFSA Works FAQs

What Is the Point of a FAFSA?

The U.S. Department of Education uses the FAFSA application to determine a student's eligibility for need-based federal financial aid for college based upon their financial situation. Federal financial aid may include federal grants, scholarships, work-study, and/or loans.

Is the FAFSA a Loan or Free Money?

The FAFSA application is not a loan. It is simply an application that you fill out in order to determine your eligibility for receiving a federal loan. There are three main types of financial aid that a student may be deemed eligible for after completing a FAFSA application. Some of this money is free money, some must be earned through work, and some must be repaid.

When Should I Fill Out My FAFSA for 2020–2021?

To be considered for federal student aid for the 2020–2021 award year, you can complete a FAFSA form between Oct. 1, 2019, and 11:59 p.m. central time (CT) on June 30, 2021.

Who Qualifies for a FAFSA Loan?

The most general eligibility requirements to qualify for the various forms of federal student aid include that you have financial need, are a U.S. citizen or eligible noncitizen, and are enrolled in an eligible degree or certificate program at a college or career school. However, there are more eligibility requirements you must meet to qualify for federal student aid and these requirements are specific, based on the type of aid. The majority of students are eligible to receive some type of financial aid from the federal government to help pay for college or career school. The age of the student, race, and field of study are not taken into account when determining their eligibility.

The Bottom Line

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