A Glossary of Financial Aid Terms

College financial aid is a complex and sometimes confusing topic. To help newcomers, we've put together this list of terms that are often encountered in financial aid planning:

Coverdell Education Savings Accounts - Previously known as Educational IRAs. Earnings are tax-free, as are any distributions used to pay for the beneficiary's educational expenses. One difference between Coverdell and 529 accounts is that Coverdell accounts can be used to pay for items like computers, whereas 529 accounts can only be used for tuition, room and board, and books. Another important difference is that Coverdell accounts can be used to pay for primary or secondary school expenses as well as for college, whereas 529s can only be used for college expenses.

EFC (Expected Family Contribution) - Your EFC is the amount of financial support your family is expected to provide for your college expenses. The Federal and state governments and colleges and universities use different formulas to determine a student's EFC. Factors taken into account include the family's current income, savings, and the number of family members who will need to attend college.

FAFSA - The Free Application for Federal Student Aid. Completing this form is the first step in applying for federal or state educational grants and loans. Many colleges also use the FAFSA as the first step in their aid decisions. The FAFSA is available as either a paper form (available from many high schools) or as an online form (available at www.fafsa.ed.gov).

Federal Supplemental Educational Opportunity Grant - Federal educational grants available to undergraduates with exceptional financial need. Amounts vary from $100 to $4,000. Funds are disbursed through colleges and universities. As with Perkins Loans, schools may not receive enough funding to cover all eligible students, so it's best to apply early in the year.

529 College Savings Plans - A type of tax-exempt college savings account, also known as a 'qualified tuition plan.' A range of 529 savings vehicles are sponsored by states, state agencies, and educational institutions, including stock mutual funds, bond mutual funds, and money market funds. As with any financial investment, returns vary, depending on the investment instrument and market conditions. Investments are not guaranteed by the U.S. federal government or by state governments. Earnings are tax-deferred and proceeds used to pay for the beneficiary's higher education expenses are tax-exempt. Some states offer full or partial income tax deductions for contributions to 529 Plans.

529 Prepaid Tuition Plans - These state-sponsored plans allow an investor to 'buy' future college classes or credit hours at a public university at current tuition rates. Beneficiaries can, if they want to, use their accounts to pay for tuition at a private or out-of-state-college. Not all states offer this savings option.

Grants - Are similar to scholarships. They do not have to be repaid, but may entail requirements such as maintaining a minimum grade point average or attending school full-time.

Loans - Money borrowed from a bank or other institution to pay for a specified purpose. Both the capital (the amount of money borrowed) and interest must be paid back to the lender. Government-backed loans such as Stafford Loans and Perkins Loans typically have lower interest rates than private loans do, but set limits on the amount of money that can be borrowed. Private loans have fewer restrictions but usually have higher interest rates. Some private loans may require students to begin repayment before graduation.

Pell Grants - Grants awarded by the U.S. Department of Education to undergraduates on the basis of financial need. The maximum amount currently available is $4,050 per year. The actual amount a student receives will vary according to their financial situation and the amount of support the Department of Education thinks their parents can provide.

Perkins Loans - Federally-backed, low-interest educational loans available to undergraduate and graduate students with demonstrated financial need. The U.S. Department of Education provides each college or university participating in the Perkins program a certain amount of funds to use each year. Because many schools distribute Perkins funds on a 'first come, fist served' basis and may not have enough funding to cover all eligible students, it's wise to apply for Perkins Loans early in the year.

PLUS Loans for Parents - Federally-backed educational loans available to the parents or guardians of dependent children attending college. Parents may borrow up to the entire cost of their child's education minus the amount of financial aid received. Repayment begins within 60 days of loan disbursement.

PLUS Loans for Graduate Students - Federally-backed educational loans available to graduate students. Students can borrow up to the full amount needed for their education minus any financial aid they receive. No repayment is required so long as the student is enrolled in classes at least half-time. Borrowers are responsible for paying all of the interest on these loans – the U.S. Government does not pay interest while the recipient is enrolled in classes, as it does with subsidized Stafford Loans for undergrads.

Roth IRAs - Parents may withdraw funds from a Roth IRA retirement account to pay for a child's college expenses. Contributions that are withdrawn to pay for college expenses are exempt from the normal 10 per cent early withdrawal penalty. Earnings that are withdrawn are subject to income tax unless the account holder is over 59 and one-half years old and has had the account for at least 5 years.

Scholarships - A gift or grant awarded on the basis of merit or financial need that helps a student pay college costs. The main difference between scholarships and loans is that scholarships do not have to be repaid. Scholarships are available from many different institutions, including colleges and universities and community or service organizations. Recipients may be asked to provide progress reports on their education or to fulfill some other requirement to continue receiving a scholarship.

Stafford Loans - Federally-backed educational loans available to undergraduate students.

There are two kinds of Stafford Loans: subsidized and unsubsidized. The U.S. Government pays the interest on subsidized Stafford Loans while the participating student is enrolled in school. The maximum amount of money that students can borrow through subsidized Stafford Loans currently ranges from $2,625 for the first year of classes to $5,500 for the third to fifth years of classes. Loan repayment begins within six months of graduation.

By contrast, students are responsible for all of the interest that must be paid on an unsubsidized Stafford Loan. The maximum amount that can be borrowed varies from $2,625 to $18,500.

U.S. Savings Bonds - Series EE and I bonds can be redeemed tax-free to pay for tuition expenses only.

Work-Study Programs - Colleges and universities receive funds from the U.S. government to employ undergraduate and graduate students in designated on- or off-campus positions. Students must be paid at least the federal minimum wage.

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