What to Know Before Applying for Financial Aid

Highlights:

• You don't need existing credit history to apply for financial aid -- there are lots of options

• Financial aid may -- or may not -- impact your credit scores, depending on which option you pursue and your repayment habits

• Do your research to find out what's available, the application criteria and whether your credit scores might be impacted

You’ve turned in your last final exam and emptied your high school locker. You have a college acceptance letter in hand, and next week, you’ll put high school behind you forever. The world is your oyster – but first, you need to figure out how you’ll pay for college.

Or maybe you’ve made it through college, successfully navigating 8 a.m. classes and late-night study sessions, spring formals and football seasons. You’re ready to go out into the world – after you finish graduate school.

As you look at financial aid options, there are a few things you should know. There are many different financial aid options available to students regardless of credit history. Some of those options – such as student loans – require repayment. But others -- such as grants or scholarships -- are generally not repaid, unless there is a change in a student's enrollment status or, in some circumstances, financial need status. Some options may be reflected on your credit reports and may potentially impact credit scores, while others may not. 

“Going to college is an exciting educational step, but it’s an important financial decision, too,” said Faith Sandler, executive director of The Scholarship Foundation of St. Louis, Mo., a nonprofit organization that aims to provide access to higher education to students in the community who lack the financial means to attain their educational goals.  

“Many students are making their first important (and legally binding) financial decisions as they turn 18, so it’s critical that they stop, think, ask questions, and understand what their signature on an enrollment or loan document will mean,” Sandler said. It is also important to understand how the options you choose may – or may not – be reflected on your credit reports and potentially impact credit scores.

If you’re just graduating high school and looking into financial aid, don’t worry about a lack of credit history. There are some student loans designed to help those people with little to no credit history. Some types of loans, along with options such as grants or scholarships, may not require a credit check at all. Research all the different options to decide what’s best for you. 

Types of Financial Aid Available | Course Syllabus

Financial aid can include scholarships, federal grants, federal student loans, private loans and more, and each option may have its own pros and cons.

Most colleges and universities, along with other organizations and companies, offer scholarships to qualifying students for a wide variety of qualifications: academics, athletics, creative endeavors, leadership and community service are among the most common. Scholarships can be need or merit-based and generally don’t have to be repaid, but may have standards for maintaining the award from year to year.

Certain local or national organizations, groups and clubs may also offer independent scholarships. You can check with your school guidance counselor or advisor or search online for scholarships that may be available in your area or field of expertise. 

State and federal grants are awarded to undergraduate or graduate students. While federal grants are based on financial need, qualifications for state grants can vary. Most federal grants require students to attend four-year colleges, universities, community colleges or career schools. Like scholarships, state and federal grants generally do not have to be repaid, unless there is a change in a student's enrollment or financial need status.

Federal student loans are loans funded by the U.S. Department of Education. These loans generally come with a fixed interest rate, which means the interest rate stays the same over the life of the loan. If you request it, payments on most student loans can be deferred while a student is enrolled, meaning payments don't begin until after school is completed.

There are four types of federal student loans:

• Subsidized federal student loans generally carry the most favorable terms, with fees and interest covered by the government while the student is enrolled. Subsidized federal student loans are made to students demonstrating financial need and generally do not require a credit check.
• Unsubsidized federal student loans may have less favorable terms, and are not limited to students with financial need. They generally do not require a credit check.
• PLUS (Parent Loan for Undergraduate Students) loans are made to graduate or professional students or parents of dependent undergraduate students. While eligibility is not based on financial need, a credit check is required. Borrowers with an adverse credit history must meet additional requirements to qualify. Payments on PLUS loans are typically not deferred while the student attends school. 
• Consolidation loans allow you to combine your federal student loans into a single loan. However, consolidating your loans may result in losing certain borrower benefits, such as interest rate discounts, principal rebates, or some loan cancellation benefits. 

Private loans are typically offered through a bank and generally accrue interest on day one. This means that from the day you accept the loan, the money you owe for borrowing will start to add up. The longer you take to pay it off, the more money you’ll owe. Private loans can sometimes have changing, or variable, interest rates and are generally ineligible for income-driven repayment – repayment plans that account for your income, family size, state of residence and other personal factors. A credit check is generally required for private loans.

Many schools participate in federal or state work-study programs, which allow students with financial need to earn money to pay for school through part-time jobs. 

The Application Process | Homework

How to Apply for Financial Aid 

Different kinds of financial aid have different application requirements. Scholarship applications may be offered directly through a college or university, or through local organizations, groups, or clubs.

Federal grants and student loans require the applicant complete and submit a Free Application for Federal Student Aid (FAFSA) form. Each year you’re in school, you’ll have to fill out and submit this form in order to remain eligible for financial aid. Your college, university or career school will work with you to determine how much money you qualify for and when you’ll receive it. Applications for state grants are often enacted through FAFSA as well. 

When to Apply for Financial Aid 

If you are applying for federal aid, FAFSA submission opens October 1. Priority deadlines for related state and institutional grants vary, so early submission of the FAFSA is advised. Many organizations and states require FAFSA as part of their grant or loan applications. State deadlines vary, and certain programs may award financial aid on a first-come, first-served basis. Schools may also have their own deadlines. Make sure you confirm all submission deadlines.

What You Need to Apply for FAFSA 

FAFSA requires a few bits of information that you’ll need on hand when filling out your application. The most common information required includes:

• Your driver’s license number
• Your Social Security number or Alien Registration number if you are not a U.S. citizen
• Your parents’ Social Security numbers (if you’re a dependent student)
• Your federal tax returns (and your spouse's if you are married, or your parents' tax returns if you are a dependent student)
• Bank statements and other financial information from your parents (if you’re a dependent)

During the application, you’ll be asked to fill out a series of questions in order to determine your dependency status. If you answer “yes” to one or more of these questions, you’ll be considered an independent student for the purpose of FAFSA and will not have to provide your parents’ information. If you answer “no” to all the questions, you’ll be considered a dependent student and will need to provide your parents' information. 

The U.S. Department of Education has more FAFSA information on its web site. 

How Financial Aid May Affect Your Credit Scores | Final Exam

Generally, the only type of financial aid that may affect your credit scores is a student loan, whether it’s private, federal subsidized or federal unsubsidized. All student loans require repayment. Your payment history may be reported to the three nationwide credit bureaus, although some lenders report to only two, one or none at all. Late or missed payments may impact your credit scores.

Some lenders may also require a credit check when you apply. These can show up on your credit reports as a hard inquiry, which may impact your credit scores. However, if you're shopping for the best student loan terms for you, multiple hard inquiries in a given period of time are generally treated as one inquiry for credit scoring purposes. The period of time may vary depending on the credit scoring model used, but it's typically from 14 to 45 days.

Your payment history may continue to impact credit scores well after your graduation date; for instance, late or missed payments reported to a credit bureau remains on your credit reports for up to seven years and may negatively impact credit scores, although the impact may decrease over time. 

Student loans can help create a mix of credit on your credit reports, and a wider variety of credit is generally viewed as a positive factor by potential lenders and creditors. Longer loan terms, if paid responsibly, might also help bolster your credit – credit age is factored into your credit scores, and long-term, healthy credit may be one indicator of a lower-risk borrower. And student loan debt may be considered “good debt” if repaid as agreed, since it’s an investment in your future and can lead to career opportunities.

If you're in search of an undergraduate or graduate degree, it's worth it to do your homework, understand the different types of financial aid and your repayment obligations, and know how student loans can affect your credit scores before you apply.