How the FAFSA Works

For most students, the journey towards a college degree begins with a search for financial aid.
For most students, the journey towards a college degree begins with a search for financial aid.
Digital Vision/Getty Images

The U.S. government believes in the power of higher education and is willing to put its money behind it. In the 2007-2008 school year, 66 percent of all undergraduate college students in the nation received some amount of federally funded financial aid. For full-time undergraduates, the number jumped to 79.5 percent with an average aid amount of $12,700 per person [source: NCES].

The federal government provides billions of dollars every year to qualified undergraduate, graduate and professional students through grants, loans and work-study jobs. These funds are managed by the Student Financial Aid office of the U.S. Department of Education and dispersed by the individual schools.

To receive any form of federal financial aid -- which includes Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), Perkins Loans, Stafford Loans, PLUS Loans and Federal Work-Study jobs -- you must submit the Free Application for Federal Student Aid, known by its acronym, FAFSA.

The main purpose of the FAFSA is to collect a student's (and often his or her parents') financial information to calculate something called the Estimated Family Contribution (EFC). The EFC is the amount that a family can reasonably afford to pay each year for higher education. To calculate the amount of financial aid a student receives, a school's financial aid office will subtract the student's EFC from the total cost of attendance (tuition plus living expenses).

For this reason, the FAFSA is more than just a federal application. State governments use the EFC generated by the FAFSA to hand out state-funded grants and scholarships. And many individual schools use the FAFSA's EFC to decide who will receive institutional grants, scholarships and loans. Some schools use additional calculation methods and even a separate financial aid application called the CSS/Financial Aid PROFILE.

For the 2009-2010 school year, the Student Financial Aid office processed over three million FAFSA applications, a 20 percent increase over the previous year [source: NASFAA]. Keep reading to learn more about the application process and some tricks for streamlining the process.