How Financial Aid History Works

The money you get for school matters, while you're in school and long after. We'll cover four reasons why.

First, some students who take out loans to cover a private high school's tuition may limit their choices for college. If they can't get grants or scholarships, they may need to choose a college with a lower tuition rate or delay attending until they have enough money to make loan payments after graduation [source: Goldin].

Second, students in bad standing on current financial aid could be ineligible for future aid. The government is arguably the most lenient lender for student aid, but even it has rules about who can get student loans. If you miss payments on your federal student loan, you can't get another one until you've made payments for six consecutive months [source: FSA].

Under certain circumstances, you could have to return your financial aid money if you take a leave of absence or drop out. For instance, let's say you're a college freshman who has a $2,000 Pell Grant from the U.S. government. You're supposed to get the $2,000 over your freshman year. At the beginning of the second semester, you receive a $1,000 check; however, you are a top-notch athlete and decide to leave for a semester to play professional tennis. Don't take that $1,000. The Pell Grant funds you only if you are in school. If you return it, you can apply for a new Pell Grant when you come back to school (and your dreams of being a pro tennis player fade). If you don't return it, you won't get government aid again until you do.

Third, when you're responsible for repaying a loan, you have to watch your spending until your loan is repaid. That could take 25 years [source: Sallie Mae]. When you take out a student loan, federal or otherwise, you'll eventually owe the money you borrowed, plus interest. In the best case, you'll pay it back on time. But even the best case requires sacrifices. For example, you may need to have a job soon after you graduate, even if it's not your dream job, so you can regularly pay your creditor. Some students move back in with their parents in order to funnel their full salaries into loan repayment and ditch the debt fast [source: Randall].

Lastly, if you're late on a loan payment, your credit score will suffer, which will make borrowing money harder in the future. We haven't gotten to the worst-case scenario, in which you default on, or can't pay back your student loan. That situation is messy enough to get its own section later.

Next, we'll explain who is looking at your financial aid history.

Wait a minute, you say. If we continue with the fossil record analogy, it's easy to understand how the bones of dead animals get trapped in rocks, but how does your life's worth of student financial aid become a "history," written down centrally and about as unchangeable as if it were chiseled in stone? Good question.

Your financial aid history gets compiled behind the scenes. If you've applied for student aid from the government, you report some of the information yourself when you fill out the Free Application for Federal Student Aid, or the FAFSA. On the FAFSA, you record your work-study money, grants and scholarships.

The government reports your federal student loans (except those for health professional schools) to the NSLDS, or the National Student Loan Data System [source: DOE]. Your repayment status is also there. While you may not have heard of it, the NSLDS database isn't a secret. You can access it right here. Others can access it too, including schools, the U.S. Department of Education and anyone else who works on assessing your eligibility for federal student loans or collecting your federal loan payments [source: DOE].

In 2007, concern arose that student loan companies were misusing the site, allegedly doing everything from sending advertisements to students who they thought were likely to take loans to rewarding school financial aid officers who frequently referred students to their lending company [source: Glater]. The Department of Education has since tightened its rules on who can access the database and more carefully monitors the activities of the individuals who do [source: Glater].

In addition to being stored in the NSLDS, data on your government loans goes to Equifax, Experian or TransUnion, one of the three credit bureaus in the United States, which write credit reports, or formal report cards on how well you pay back money you owe [source: Sallie Mae].

When you take out private loans, the lender records your payments (or lack thereof) and sends the information to the credit bureaus. Anyone who legitimately orders a credit check on you, from employers to landlords, can see a bureau's credit report on you.

Once the credit bureau has your information and schools have reviewed your FAFSA, is that good or bad news for you? Read on to find out.

What does it mean to have a good financial aid history?

If "good" to you means not having financial responsibilities, then a good financial aid history is getting through school on scholarships, grants, work-study and gifts, and never taking a student loan that you have to repay. But most students do take loans.

So we'll say a good financial aid history is one that doesn't majorly disrupt your life. "Good" loans are those you can and do repay on time. Even better, they're loans you don't layer. In other words, in a good financial aid history, you pay off one loan before you must repay your next loan. If you repay high school loans, you're eligible for the maximum number of college loans and don't tie up money you'll need to pay back those loans later. The same goes for college loans before law school, and so on.

With respect to your life after college, on-time loan payments show up on your credit report and boost your credit score [source: Sallie Mae]. They say to banks and future lenders that you'll also pay them on time. They'll be more likely to give you high limits and low interest rates on your credit card, car and personal loans, and on your mortgage. And that will give you maximum freedom with your money in your life. We could even argue that student loans paid back on time are better than no loans, since they help you build your credit. But there are certainly smaller financial commitments through which you can build your credit.

A bad financial aid history is easier to picture. Late loan payments are bad. Late payments incur late fees, show up on your credit report and tell all future lenders that you're a risk. Defaulting on a student loan is worse. Defaulting means not paying back your loan money. As one lending site explains, the consequences are dire and really do disrupt your life. The government can take your tax refunds or pocket 15 percent of your salary to pay your debt, or you can get sued for what you owe [source: Sallie Mae, FSA]. As for future loans, the government can deny you student loans, and private lenders can deny you any type of loan. If you do get another loan, it may be no-frills, with no grace periods or payment plans that scale to your income. Your plans for a house or graduate school may have to be put on hold. And that will be your fate until you pay back your loan or re-establish good credit.

A great way to erase the stress from your financial life is to learn as much as you can before you take on a big commitment like a loan. You can start with the articles on the next page.