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By Christine Benz and Adam Zoll | 10-15-2013 12:00 PM

What Role Will Financial Aid Play?

About 70% of college students receive some form of financial aid, but students and their families should understand what kind of aid they're receiving as well as the terms of any loans.

Christine Benz: We're talking today about college funding, and one increasingly important aspect of paying for college for lot of families is financial aid. What all comes under that umbrella of financial aid?

Adam Zoll: Well, in fact, Christine, I think the financial aid is probably one of the most misunderstood components of college financing. When most people hear financial aid and the prospects of getting financial aid for their child, for example, their eyes light up, and they think free money.

Benz: They think free ride maybe even.

Zoll: Maybe even free ride, which is exceedingly rare for people to get a full-ride scholarship, but even financial aid in itself is often mistaken for being free money. But, in fact, a good portion of financial aid is actually in the form of loans, which do need to be paid back. When you hear financial aid, if a school is offering your child financial aid, make sure that you understand exactly what that means: how much of this is in the form of scholarships or grants, which do not need to be repaid, and how much of it is in the form of loans. And if you are getting loans you need to, among other things, consider what the terms of the loan are, what the interest rate is, and what the repayment terms are. So just make sure that you understand exactly what's meant by financial aid if it's mentioned to you.

Benz: Let's take a look at the numbers, Adam. How does financial aid break down in terms of which students are receiving which types of aid?

Zoll: Overall, about 70% of all students receive some form of financial aid. About 60% of them receive grants or scholarships, which is the type of aid that is not need to be repaid. About 40% are getting financial aid in the form of loans and, of course, there is some overlap between those two groups.

Benz: Some students doing both, or probably many.

Zoll: Some people are getting both. It's important to distinguish between different types of financial aid. There is need-based aid that's based on the student’s income or the student’s family’s income, and there is merit-based aid. Merit-based aid is based on qualities that the student has. Maybe it's his grade point average, maybe it's demographics where he comes from. The school may be looking for students from a given state, because they like to…

Benz: To balance things out a little bit.

Zoll: They like geographical diversity. Or it could be that a student has a specific skill or talent that the school is looking for. There are different types of aid--need-based and merit-based--and, in fact, lots of schools are using merit-based aid more and more to try to attract the kind of students that they think will provide the type of student body that they hope to have.

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