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 it can also be overwhelming, and cause you to ask a lot of questions,  especially if you don’t know anything about student loans or financial aid. How are you supposed to know what financial aid to accept and what to avoid? Which student loans are best? In what order should you accept your financial aid funds?


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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. I wrote this article to help you understand what financial aid you should accept and what you should avoid so that you can get the most value out of your financial aid package.

How much financial aid should you accept? Only as much as you need!

While this should go without saying, I’m going to say it anyway: You should only accept as much financial aid as you need. Period.

It isn’t uncommon for a student to receive a financial aid package that includes a lot more money than you need to pay for college. Though it’s true that you can accept all of this money and use it to pay for other education-related expenses (like textbooks, a new laptop, educational supplies, etc.) this generally isn’t a great idea if you can afford to pay for all of these things on your own. Why? Because in the grand scheme of things you’ll need to pay all of that money back—with interest on top. Finding cheaper alternatives and paying out of pocket when possible can save you thousands of dollars over the life of your loans.

So why does anyone go into debt if they already have enough money to pay for college without student loans? I don’t pretend to fully understand, but I suspect a large part of it comes from a fear of missing out on everything our friends are doing. We don’t want to deprive ourselves, even if that means taking out debt that wrecks our finances for years to come.

Don’t think that it happens? Here’s Rich, who took out $32,000 in student loans that he didn’t need because he had a full scholarship.

An example just for fun

Let’s say that your parents were able to save up some money to help you go to college. You also earn a decent academic scholarship from your university. Together, the savings from your parents and your scholarship are enough to cover 75% of your tuition.

When your financial aid package is delivered, you find that you’re offered a lot more money than you need. However tempting it might be to use that extra money to buy a brand new $1,800 laptop or textbooks or anything else, if you can cover those expenses out of pocket then that is what you should do. Only accept enough financial aid to cover the 25% of tuition not covered by your parents’ savings and your scholarship.

Not convinced that accepting those extra funds in the form of a student loan will cost you that much money? Federal student loans offered through the Direct Loan program have an interest rate of 5.05% as of July 2018. If you accepted a federal student loan of $2,000 with an interest rate of 5.05% to pay for a new laptop and textbooks, and you paid it back over the course of a standard 10-year repayment plan, you would pay back a total of $2,551, and $551 of that would be interest.

Now let’s say that instead of a federal student loan, you used a private student loan, which had a much higher interest rate of 12%. In this scenario, you’d pay back a total of $3,443, and $1,443 of that would be interest.

The moral of the story is clear: Only accept the financial aid 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 5% or 12%, then it’ll cost you hundreds, possibly thousands of dollars over the life of your loan.

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? 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. Grants can come from both the federal and state government. Your FAFSA application will automatically make you eligible for federal grants, but not necessarily for state grants, so make sure you’re putting in the footwork to claim everything you’re eligible for!
  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, along with a number of other differences.

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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