Glossary: Financial Aid
The National Association of Financial Aid Administrators has an extensive glossary, but here are some plain language definitions of some of the most common and confusing financial aid terms.
Campus-Based Aid: A pair of programs designed to supplement Pell Grants for financially needy students and to provide aid for middle-class students who just miss the cutoff for the grants. Unlike Pell Grants, which are awarded directly to students, campus-based aid is distributed to colleges, which add their own dollars to the programs and then allocate the money to students. The current campus-based programs are Federal Work Study and SEOG (see below). A third program — Perkins loans — was eliminated in 2017. The amount of campus-based aid an institution receives is based on a formula that takes into account historical allocations. This benefits public flagship campuses and private colleges that joined the program at its inception at the expense of for-profit institutions and community colleges, which now enroll the largest proportion of the neediest students. Over the last couple decades, there have been several failed attempts to update the funding formula to make it more equitable.
CSS Profile: Also known as the College Scholarship Service Profile, this online application allows students to apply for non-federal student aid.
EFC: Expected Family Contribution. Until 2020, this was the term for the resulting calculation on the FAFSA — the amount a student or family is expected to contribute to a college education. A family’s EFC is based on a formula that takes into account taxed and untaxed income, assets and benefits (such as unemployment or Social Security), as well as family size and the number of family members who will attend college that year.
FAFSA: The Free Application for Federal Student Aid, the form used to apply for federal student aid. The FAFSA has long been criticized for its complexity, and many students and families who would qualify for aid fail to complete it. Yet simplification efforts have made the FAFSA much less daunting in recent years, with skip logic and an IRS data retrieval tool allowing families to bypass many of the form’s questions and pre-fill others.
Institutional Methodology: The federal government uses one formula, known as “federal methodology” to determine how much federal (and, typically state) financial aid a student is eligible for. But each college has its own unique formula — called its “institutional methodology” — to determine how much of its own money it will provide to individual students.
Pell Grants: The bedrock federal grant program, providing aid to roughly a third of college undergraduates. Since their creation as Basic Education Opportunity Grants in the mid-1960s, Pell Grants have helped millions of low- and middle-income students afford college. But the program hasn’t kept pace with the relentless rise in college costs. In the mid-1970s, the maximum award covered roughly three-quarters of the average cost of attendance at a four-year public college; today, it covers less than a third. The decline in Pell’s purchasing power has prompted a recent campaign to double the grant.
Prior-Prior Year: In 2016, the government created a policy allowing families to file the FAFSA using tax details from two years prior. For instance, a high school student interested in attending college in the fall of 2022 would file the FAFSA using details from their 2020 taxes rather than from their 2021 taxes.
Student Aid Index: As of 2021, this is the new name for the number the federal government calculates from all of the data families fill out in the FAFSA. It is used to determine a family’s contribution to the student’s college costs.
Supplemental Educational Opportunity Grants, or SEOG: A “campus-based aid” program that provides grants of up to $4,000 a year. Colleges have a say in how the money is distributed to students, but they must give priority to those with “exceptional financial need,” as determined by the FAFSA.
Work Study: A campus-based aid program providing part-time work to undergraduate, graduate and professional students. Federal law requires colleges to pay work-study recipients at least the minimum wage, though some jobs pay more. Jobs can be either on campus or off, and at least 7 percent of a college’s allocation must be set aside for community service.
PLUS loans: A type of federal loan that colleges offer parents and graduate students to bridge the gap between federal grants and direct loans (previously called Stafford loans) and the cost of attendance. PLUS loans have few underwriting criteria, making them an attractive option for families with adverse credit histories who wouldn’t qualify for private loans. But they also come with higher origination fees, higher interest rates and fewer repayment options than Stafford loans, so they can be risky for low-income families to take on.
Private Loan: Loans that are issued by banks or other for-profit companies. Private loans are standard financial transactions, just like, say, auto loans. They are not considered financial aid, since the borrower pays market rates that generate a profit for the lender. Almost all private student loans require students to recruit an adult with good credit to cosign or guarantee repayment of the loan. If the student fails to make timely payments, the lender demands repayment from the co-signer. Private loans typically lack the borrower protections and flexible repayment options of federal loans. In most cases, students should only take out private loans after exhausting their federal eligibility.
Stafford Loans: The former name for low-interest federal loans (now called direct loans) provided to students through their schools. In the past, banks and other lenders competed with the federal government to provide the loans; today, they are issued only by the U.S. Education Department. Compared to private loans, Stafford loans tend to offer more generous, and more consistent, borrower benefits, with options to defer repayment or make payments based on the borrower’s income.
Subsidized Loan: A type of Stafford loan available only to undergraduates with demonstrated financial need (as measured by the FAFSA). With subsidized loans, the government covers the interest while the borrower is in school at least half time and for a six-month grace period after leaving school.
Unsubsidized Loan: A type of Stafford loan available to both undergraduates and graduate students, regardless of their financial need. The college determines how much a student may borrow based on factors such as their year in school, their age, their cost of attendance and other financial aid they receive. Interest accumulates while a borrower is in school, and is “capitalized” — added to the principal of the loan — when they leave. This name is misleading because these loans do receive support from taxpayers. They charge below-market interest rates and offer generous repayment and forgiveness options that end up costing taxpayers. But because they continue to accrue interest while the student is in school, they receive a smaller subsidy than the so-called “subsidized” federal student loans.
Other Ways of Paying for College
Income Share Agreements (ISAs): Contracts in which students receive education funding in exchange for a promise to pay a fixed percentage of their income for a set period of time after graduation. ISAs are trendy, but they’re still relatively rare. Most ISAs are made by institutions, with Purdue’s among the most prominent, though a few are offered by private lenders.
American Opportunity Tax Credit: The most generous of the federal tax breaks for higher education, covering up to $2,500 in qualified expenses for students pursuing a degree or credential. The AOTC is partially refundable, meaning students who do not pay as much in taxes as the amount of the credit can get a portion of the overage refunded to them. The credit can only be claimed for four years; couples earning over $180,000 and individuals earning over $90,000 are not eligible.
Lifetime Learning Credit: A slightly less generous ($2,000 max), non-refundable credit with a lower income cutoff than the AOTC. Its main advantages over the AOTC are that it can be applied to studies outside a degree or credential program and there is no limit on the number of years it can be claimed.
Updated May 2021.
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