Accept Your Financial Aid in This Order to Save the Most Money

Accepting Student Loans

Getting your financial aid package after submitting your FAFSA forms is both an exciting and nerve-racking experience, and for good reason: It feels a lot like your entire future is contained in those forms. But on top of that, it can also be overwhelming.

You don’t know anything about student loans or financial aid. How are you supposed to know which funds to accept and which ones to avoid? Which student loans are best? In what order should you accept your financial aid funds?

Those are all really good questions, and answering them is important. Just as you will need a plan to pay off your student loans after graduation, you should also have a plan of action when it comes to  accepting your education funding to begin with. This article is a great place to start.

Accept only as much funding as you need

Okay, so this should go without saying, but I’m  going to say it anyway: You should only accept as much educational funding as is absolutely necessary for your education. Period.

Let’s say that your parents were able to save for college for you, and you earn a decent academic scholarship that, combined, covers 75 percent of your tuition. When your financial aid package is delivered, you may find that you are offered a number of student loans—way more than you need to afford college. Though it’s true that you can accept all of these funds and use them for other education-related expenses (textbooks, a new laptop, educational supplies, etc.) that would be a really bad idea, because in the grand scheme of things you’ll only end up needing to pay it all back with interest on top. Why would anyone choose to go into debt if they’ve already got the funds for college?

I honestly don’t know, but it happens. If you want a real-life example, check out this article on Grow that details Rich, who took out $32,000 in student loans that he didn’t need because he had a full scholarship.

But the moral of the story is clear: Only accept educational funding that you need. If you can cover your college costs with savings from your parents, a scholarship, and federal work study, then DON’T TAKE OUT ANY STUDENT LOANS. If you need to take out student loans to cover your college expenses, that’s fine—but accept only as much money as you absolutely need. Yes, a brand new $1,800 laptop might make college a little more convenient and fun, but if you’re paying for that with a student loan at an interest rate of 4 percent, then it’ll cost you hundreds of dollars. Your better bet would be to simply save up the cash and buy the laptop when you have enough.

The order in which you should accept your financial aid

Want to make sure that you graduate college as cheaply as possible? Then accept your financial aid funds in the following order:

  1. Scholarships and Grants should be accepted first, since they are free money that you won’t have to pay back.
  2. Federal Work Study Funding should be accepted second, as it is interest-free money. Yes, you’ll technically be working for it, so it isn’t free money. But if working 15 hours a week while you’re in school lets you graduate from college with fewer (or no!) student loans, then that’s what you should do. Just make sure you actually use the work study funds to pay for your education and not bad beer and greasy pizza!
  3. Federal Subsidized Student Loans should be accepted third, because they will not accrue interest when you are in school or when your loans are in deferment. This makes them much cheaper in the long run than other kinds of loans, allowing you to avoid substantial interest capitalization.
  4. Federal Unsubsidized Student Loans should be accepted next, starting with Perkins Loans if you qualify (since they come with the lowest interest rate) and ending with PLUS Loans (since they come with the highest interest rate).
  5. State-Sponsored Supplemental Loans should be accepted next, if they are available to you. Some states offer supplemental education loans to students to help them fill gaps not covered by federal student loans, which can allow students to stay away from the expensive and often predatory private student loan marketplace. An example of such a state-sponsored loan program would be CHESLA supplemental educational loans available to students studying in Connecticut.
  6. Private Student Loans should be accepted as a last resort, because they will have the highest interest rate and the fewest borrower protections and benefits.

The Bottom Line

I’m going to repeat myself here, because it’s so important: By being smart when you accept your financial aid funds, you can save your future self a lot of stress, aggravation, and money. Accept only as much funding as you need, and make sure you start with free (grants, scholarships, or interest-free money (federal work study) before moving on to subsidized and then unsubsidized student loans.

If you absolutely must turn to private student loans to fill gaps, make sure you choose the loans with the lowest interest rates (preferably with fixed APRs). Better yet, take a hatchet to your college expenses so that you need to borrow less.

About Tim Stobierski

Tim Stobierski is the founding editor of Student Debt Warriors. A freelance writer and editor with a passion for teaching people about all things personal finance, his goal is to help parents and students tackle their student loan problems so that they can live happier, healthier lives. Tim's writing has appeared in a number of publications, including The Huffington Post, The Hartford Courant, Grow Magazine, and others. His first book of poetry, "Chronicles of a Bee Whisperer," was published in 2012 by River Otter Press.

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