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How College Financial Aid Works

Stack of money laid on top of stack of books.
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Think of it as free money: Grants never have to be repaid.

A grant is considered the best form of financial aid because it's money that never has to be repaid -- ever! Grants are based on demonstrated financial need and are awarded by both federal and state governments, as well as individual colleges.

The Pell Grant is the most common type of federal grant. Eligibility for a Pell Grant is determined by completing the FAFSA. The maximum Pell Grant award amount for the 2009-2010 academic year is $5,350 per student [source: Federal Student Aid] .

In addition to the Pell Grant, Congress recently allocated extra grant money for applicants demonstrating great financial need. This money -- up to an additional $4,000 a year -- is available through the Federal Supplemental Educational Opportunity Grant (FSEOG) [source: Federal Student Aid].

If you are enrolled in an undergraduate teaching program, you may also be eligible for a federal TEACH (Teacher Education Assistance for College and Higher Education) grant. Students who sign a pledge to teach in a low-income school for at least four years can receive up to $4,000 per year in additional funds [source: Federal Student Aid].

Each state has its own grant money to offer qualifying students. States determine their grant awards based on the FAFSA, so there is no need to submit a separate application. Each state has its own FAFSA application deadline, however, so check with your state Department of Education for more information.

Individual schools also offer grants as part of their financial aid packages. A few schools -- mostly competitive private colleges -- have replaced loans entirely with grants for families who earn below a certain income threshold. At Yale and Harvard, students pay nothing if their families earn less than $60,000 a year. Pomona College in California offers full-ride grants to families that earn under $45,000 [source: Lorin].

Princeton University is the only college in the United States with a "no loans" policy for all students. That means that Princeton vows to meet the demonstrated need of all families exclusively with grants and campus jobs, even for international students [source: Princeton].

Now let's take a closer look at the Federal Work-Study program.