lady at desk with computer and writing notes about how do FAFSA loans work
Outlier Articles Home

College Success

How Do FAFSA Loans Work?

03.30.2022 • 9 min read

Nick Griffin

Subject Matter Expert

The article explains what FAFSA is, what it stands for, and its purpose. It also explains how it works and the different types of student loans.

In This Article

  1. How Do FAFSA Loans Work?

  2. What Are the Types of Student Loans?

  3. How Do FAFSA Grants Work?

  4. What is Federal Work-Study?


Figuring out how to pay for college can be a stressful endeavor. On top of all of the other stresses during the college years—homework, papers, social relationships—the last thing that a student needs is to be worried about money.

For this reason, many people turn to financial aid.

Financial aid is a form of money to help pay for college enrollment and education expenses.

There are many types of financial aid, but primarily this means:

  • Grants

  • Scholarships

  • Work-study programs

  • Student loans

But where do you get started navigating all this?

The first step to paying for college is to fill out a FAFSA, the Free Application for Federal Student Aid. This streamlined application will tell you exactly the kind of financial aid you qualify for, with the lender being the federal government.

How Do FAFSA Loans Work?

To be clear, the FAFSA is just the first step in figuring out the types of student aid you qualify for. After filling out the FAFSA, it is the student who determines which type of aid and how much they want to take.

Filling out a FAFSA form does not mean you have to accept the aid offered to you.

The FAFSA requires the student to put in their demographic and financial information to determine the type and amount of aid offered to them.

The information that is most relevant in making this determination is from your (or your parents’) taxes called your expected family contribution (EFC). The EFC is then compared to the cost of college at your chosen institution.

By looking at past tax information, the FAFSA will report what you are eligible to take out in federal direct loans and if you qualify for federal grants or work-study programs.

Of course, it is best to accept grants first, since this is free money you do not need to pay back. But, taking out student loans is the most common way that students pay for college.

It is important to become familiar with the different types of student loans so that you can budget for them appropriately and set yourself up for success.

What Are the Types of Student Loans?

The FAFSA will determine which federal student loans you are eligible for. There are several benefits to taking out federal student loans over private student loans.

Federal student loans typically offer a much lower interest rate than private lenders, which is often above 10% for those without credit history, and give borrowers quite a bit of flexibility in what repayment looks like.

There are 3 different types of federal student loans that you should be familiar with that offer fixed interest rates to loan borrowers through their FAFSA information.

1. Direct Subsidized Loans

Currently, the interest rate on direct subsidized loans is 3.73%, which is very low for student loans. Subsidized loans are offered to undergraduate students and do not start to accrue interest until 6 months after graduation.

Direct subsidized federal loans give students the time to graduate, find a job, and become financially stable before asking them to start paying the loan back with interest. If direct subsidized loans are available to you this is the type you should take out first.

2. Direct Unsubsidized Loans

Offered to graduate and professional students, direct unsubsidized loans have a current interest rate of 5.28%. Being unsubsidized means that these loans start accruing interest from the time you take out the loan.

A savvy graduate student taking out federal unsubsidized loans would make payments on the interest accrued each month while in school. Doing so will allow you to graduate and start paying down the principal as soon as you get a good job, but you are not required to until after the 6 month grace period.

3. Direct PLUS Loans

These loans are just what the name implies - PLUS - an extra loan on top of existing student loans. These are unsubsidized, meaning they start accruing interest right away, and they have a current interest rate of 6.28%.

Direct PLUS loans are intended for graduate students or for parents (also called parent plus loans) to take out extra loans to help their children. These loans require a credit check and for dependent students a cosigner. Since these loans have a higher interest rate, they should be used only when necessary.

Utilizing student loans through the FAFSA gives students the financial flexibility to focus on their studies. All of the federal student loans listed above can be used to pay for several college costs such as tuition, fees, school supplies, and room and board (housing and food) and are paid each semester in disbursements.

Loans are still loans, and they need to be paid back with interest after you graduate. Finding alternative methods to cut down on the number of loans you need to pay back is a smart move. There are a number of tips to save money in college.

Looking at community college programs or online options like Outlier’s College Foundation, allow students to gain a semester of credits prior to entering college for a fraction of the cost.

Grants are another great way to save you money on college loans. By filling out the FAFSA you will be applying for a number of federal grants, giving you free money to go to school.

How Do FAFSA Grants Work?

It is important to remember that the FAFSA does so much more than help students access low-interest loans to pay for school.

There are also grants and work-study programs that can help make school more affordable by offering free money - that you do not have to pay back as long as you graduate and fulfill the grant requirements.

Filling out a FAFSA will let you know if you are eligible to receive any of these grants:

Federal Pell Grants

The federal government awards grants based on financial need and the cost of attendance reported on the FAFSA. Pell Grants are awarded to full-time undergraduate or graduate students and can be as high as $6,495 per year for up to 12 semesters.

Teacher Education Assistance for College and Higher Education (TEACH) Grants

Undergraduate and graduate students who are intending to become elementary or secondary teachers can receive grants through the U.S. Department of Education. These grants currently pay $4,000 per year for students, but you must become a teacher after graduation or all the gift money is converted to a federal loan, meaning it needs to be paid back.

Federal Supplemental Education Opportunity Grants (FSEOG)

Many participating schools offer these grants for low-income students who have exceptional financial needs. If your school participates and you qualify (based on your FAFSA), you can receive as much as $4,000 per academic year.

Iraq and Afghanistan Service Grants

These federal grants pay up to $6,495 per school year for a student’s education who had a parent killed as a result of military service in Afghanistan or Iraq since 9/11/2001.

State Grants

Many states offer grants to students based on several criteria such as financial need, intended major, or career path. Filling out a FAFSA and talking to your school’s financial aid office can open up a plethora of state grant opportunities.

Any student who fills out the FAFSA will find out if they are eligible for federal grant opportunities. It would be wise for a student to accept grants they qualify for first since this is free money.

After knowing how much grant money is available to you, it is time to make a budget and determine the number of student loans to take out.

Since students must complete the FAFSA each year, grant opportunities and student loan amounts may fluctuate as a result of changes to your income on your taxes.

What is Federal Work-Study?

Filling out the FAFSA will also let a student know their eligibility for a work-study program at their intended school. Which helps you earn money for all of your everyday expenses and sets you up well for significantly fewer student loans to pay off in the future.

The Federal Work-Study Program allows both undergrad and grad students with financial needs to work in a part-time job related to their field of study. These jobs can be either on-campus or off-campus and are catered to both your financial need and your course schedule. Helping you manage your time while working in college.

Not only does work-study allow a student the opportunity to help pay for school, but it also ensures students gain powerful real-life skills to make them more marketable after college.

Work-study jobs are usually awarded in addition to other financial aid like grants and loans. Allowing students to earn money to pay for anything they need while in school.


There are a number of questions that arise when beginning the process of using the FAFSA to help pay for school.

Questions students commonly ask include:

Who qualifies for a FAFSA?

Anyone who is accepted into a degree or certificate program in the US can fill out a FAFSA. Students will have to put family income information into the application which will determine the amount of financial aid - grants, loans, and work-study - they can receive.

How long do you have to pay back FAFSA loans?

It depends on the type of financial aid a student receives as to when they need to pay it back. Grants and work-study aid do not need to be paid back at all as long as all criteria are met.

Subsidized loans will start gaining interest with required monthly payments six months after the student graduates. Unsubsidized loans will start gaining interest right away, but payments are not required until six months after graduation. There are also a variety of repayment plans available.

Are there FAFSA scholarships?

There are not any scholarships offered through the FAFSA, but there are several grants. Even though scholarships and grants are both free money, there are several differences when comparing scholarships versus grants.

By filling out a FAFSA, a student will also be applying for thousands of dollars in grant money to help pay for school.

Does FAFSA work for community college?

Yes. The federal financial aid that a student applies for by filling out the FAFSA will be directly tied to the institution the student is planning on attending. Students can receive federal aid of all kinds to attend a degree or certificate program in the US.

How to start getting FAFSA money for college.

By going to and filling out a FAFSA you can learn exactly how much money the federal government will give you to go to college. Taking the time to fill out the FAFSA is the best step toward finding the money to pay for an education.

Once you know the amount of your aid package and the cost of your attendance you can begin to make a budget for college. This will help you know how much money to accept in loans.

Of course, you want to reduce the number of loan payments you will have. So finding out how to get grants for college outside of the FAFSA is also an important step toward more financial freedom post-graduation.

It is possible to figure out how to work full time and go to school full time to reduce your college debt as well. Make sure to remember that your college comes first since it is an investment in your future. It's best not to worry too much at this point, you may even qualify for a loan forgiveness program through your future employment.

Be smart, do your research, and take out the loans you need to get you where you want to be. It all starts by filling out the FAFSA.

Degrees+: Discover Online College Unlike Anything You’ve Experienced

Outlier (winner of TIME Best Inventions 2020) and Golden Gate University (#1 school for working professionals) have redesigned the experience of earning a college degree to minimize cost and maximize outcomes. Explore a revolutionary way to earn your college degree: