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Understanding Student Loans: How Does FAFSA Work?

There is enough paperwork in the college application process itself, but you also need to understand the FAFSA. Here’s what you need to know about it.

Justin Cupler

Contributing Writer at Tally

May 10, 2022

Whether you’re a soon-to-be high school graduate or a seasoned graduate student, there’s a good chance you’ll need financial aid to pay for tuition and other college costs. Securing federal financial aid generally requires you to complete the Free Application for Federal Student Aid (FAFSA) form. But, how does FAFSA work?

There is a lot of mystery surrounding the FAFSA and its purpose. Below, we explain how FAFSA works, its purpose and other key information you’ll need to know before completing it.

What is the FAFSA?

The Free Application for Federal Student Aid is essentially an application for student aid, which could come in the form of federal student loans, federal grants or the Work-Study Program. 

States and colleges may also use your FAFSA to determine your eligibility for state or school aid. Even some private student loan companies use the FAFSA to determine your eligibility for their loan offerings.

What does the FAFSA consider?

The FAFSA’s goal is to determine the total amount you and your family can contribute to your schooling. That information is compared to the cost of the school you’ll attend to calculate your financial need.

The first variable the FAFSA looks at is expected family contribution (EFC). It’s calculated by looking at your household’s total taxed and untaxed family income — including unemployment or Social Security income, assets and other financial information — as well as the number of children in the household. The EFC is used to determine how much you and your family can afford to pay out of pocket for schooling.

Your school then uses this information and compares it to the cost of attendance (COA) to figure out the amount of need-based financial aid you qualify for. Need-based financial aid includes federal student loans, grants and the Work-Study Program.

What financial aid requires a completed FAFSA?

There is need-based and non-need-based financial aid. Need-based financial aid offers you money for school because your family’s income is insufficient to cover the cost of attending. Non-need-based is additional funding beyond your family’s needs. 

The FAFSA covers various types of financial aid — both need-based and non-need-based — including:

  • Grants: This need-based financial aid requires no repayment in most circumstances. Common grants include Federal Pell Grants and Federal Supplemental Educational Opportunity Grants (FSEOG).

  • Scholarships: Like a grant, a scholarship generally doesn’t need to be repaid, but unlike a grant, there is usually a merit qualification for a scholarship. However, even some merit-based scholarships have maximum income limits, and the school will use your FAFSA to determine if you qualify. Scholarships can be need-based or non-need-based aid.

  • Work-Study Program: You can earn money to pay for school by working part-time in the Federal Work-Study Program. These jobs are often given based on financial need, using the FAFSA as the qualifier.

  • Federal Direct Subsidized Loans: When you have a financial need to attend school, Direct Subsidized Loans will likely make up most of the funding. The federal government pays the interest on these need-based loans while you’re a college student. The U.S. Department of Education uses the FAFSA to determine how much you qualify for in direct loans.

  • Federal Direct Unsubsidized Loans: Direct Unsubsidized Loans differ from their subsidized counterparts in that the government doesn’t pay the interest while you’re in school. This non-need-based funding is generally a student’s first option to supplement the need-based funding you secure. 

  • Federal Direct PLUS Loans: These loans are for graduate students or for parents securing loans for their children. Interest does accrue while in school. Despite being a non-need-based loan, the Direct PLUS Loan still requires a FAFSA.


How does FAFSA work when it’s time to receive aid?

Once you complete your FAFSA application, you submit it to the Department of Education. The Department of Education processes it, and then sends the award to your school. So, instead of hearing about your application from the Department of Education, you will receive the student aid report, which outlines the student aid you qualify for, from your school’s financial aid office.

If you accept the aid, your school will apply it toward the key parts of your college costs, including tuition, fees and room and board. The college then gives you any leftover money to cover other qualifying expenses, such as books and school supplies.

What are the FAFSA qualifications?

To complete the FAFSA form and receive federal financial aid to attend school, you must meet a handful of minimum qualifications. These include:

  • Being a U.S. citizen or eligible noncitizen

  • Have a valid Social Security number

  • Enrollment in a degree or certificate program at a college, university, community college or career school

Special qualification situations

There are a few special qualifications that can help you receive aid or that can disqualify you from aid. These are as follows.

  • Students with parents killed in the war in Afghanistan or Iraq: If your parent died in Iraq or Afghanistan in the war after the 9/11 events, you may qualify for an additional Pell Grant or the Iraq and Afghanistan Service Grant.

  • Non-U.S. citizens: If you are a legal permanent resident who holds a green card, you are an “eligible noncitizen” and can receive federal student aid if you meet all other requirements. There are other noncitizen categories that qualify for student aid as well.

  • Students with criminal convictions: If you were or remain incarcerated, your eligibility for federal student aid may be affected, depending on the crimes you committed.

When should I file my FAFSA?

The 2021–2022 academic year FAFSA filing opened on Oct. 1, 2020, and closes on June 30, 2022, at 11:59 p.m. Central Time, but many states and schools have an earlier FAFSA deadline. However, some financial aid is limited and given on a first-come, first-served basis, so filing as near the Oct. 1 opening is ideal, even if you’re still a high school senior.

College students will also need to complete a renewal FAFSA each year so all their information is up to date and they get the right level of financial aid.

Can I make corrections to my FAFSA after filing?

The FAFSA is a long document filled with numerous questions on income and other financial situations. It’s easy to make a mistake and end up with too large or too small of a financial aid package. If you notice an error, you have until 11:59 p.m. Central Time on Sept. 10, 2022, to submit any corrections.

The FAFSA helps you secure funding for higher education

Whether you’re a high school senior or a graduate student, you’ll want to complete the FAFSA to ensure you get the appropriate financial aid package. 

Knowing how the FAFSA works is the first step in ensuring you get the aid you deserve. Keep in mind that your entire family’s income can impact your student loans, and don’t forget to keep track of the financial aid deadline.

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