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The ABCs and 123s of College Financial Aid Terms

Child reading story book.

Whether singing the alphabet or counting their little piggies, children are sponges for learning. As a parent, you need to learn, too. Your children’s higher education depends on you mastering the terminology around financial aid and how to prepare for the costs.

But don’t worry! As quickly as the tots learn to stack letter blocks, you can learn these college financial aid terms.

Saving for College

More than half of parents who are planning for college expenses, intend to save to help with costs. Other top ways families anticipate to pay for college include researching costs and financial aid, and actively budgeting between savings, borrowing and potential aid, according to a study published by Sallie Mae.1 So it’s never too early to bone up on these terms.

529 Plan

Experts rank these tax-advantaged accounts* among the best ways to invest for college. They are offered by all 50 states and Washington DC. No matter where you live, you may choose any state’s plan, including Learning Quest® 529 Education Savings Program.

*The availability of tax or other state benefits (such as financial aid, scholarship funds and protection from creditors) may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors.

Education Savings Plans and Prepaid Tuition Plans—What’s the Difference?

Education savings plans are investment accounts you may use on qualified expenses at any qualifying school. Prepaid tuition plans let you purchase credits toward future tuition at participating schools.

Coverdell Education Savings Account (CESA)

Like a 529, this is a tax-advantaged savings account to help invest for education. Unlike a 529, a Coverdell allows tax-free withdrawals to pay for elementary or secondary school expenses in addition to tuition.

Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA)

Both are trusts allowing adults to transfer assets to minors, and may be used for college. A custodian is appointed to manage the funds until the child becomes an adult.

Applying for Financial Aid

No matter how hard you save, chances are your student will also use financial aid. In fact, 86% of first-time, first-year undergraduates received financial aid in some form.2 The process comes with a whole new lexicon.

Below are some terms you should know:

FAFSA: Also known as the Free Application for Federal Student Aid, this free form is required to receive any grants or loans from the federal government. The College Board recommends that every family fill it out, regardless of income.3

CSS/Financial Aid PROFILE: Like FAFSA, this is a form you fill out to get financial aid. The College Scholarship Service (CSS) is used by private colleges and universities to determine eligibility for non-government aid.

Cost of Attendance (COA): The yearly total it will cost for a student to attend a particular college. This includes tuition, fees, transportation, health insurance, books and other miscellaneous expenses.

Expected Family Contribution (EFC): This is the amount of money your family should be able to pay for college. It’s calculated using information from the FAFSA, such as family income, assets and size.

Student Aid Report (SAR): After you file a FAFSA, you’ll receive this document informing you of your EFC. This will also be shared with schools you listed on the FAFSA.

Financial Need: The difference between EFC and COA. This number is used by college aid officers to determine how much need-based aid a student should get.

Grant or scholarship: Money for school that does not have to be paid back. According to the College Board, “grant” usually refers to need-based aid, and “scholarship” to merit-based aid.4

Financial Aid Award Letter: A document stating how much aid the school will offer your student. It usually includes grants, scholarships and loans.

Federal Student Loan or Stafford Loan: The Department of Education lends this money directly to students. Those with financial need may qualify for subsidized loans; unsubsidized loans are available regardless of need. The interest rate is fixed.5

PLUS Loan (Federal Direct Graduate PLUS Loan): These government loans allow parents or graduate students to borrow beyond the limits of the Stafford Loan.

Private Student Loan: Funds loaned by banks, private schools or other lenders, but not the federal government. They may be more expensive and don’t have some of the benefits that federal loans offer.6

Pell Grant: Aid the federal government awards to needy students with no need to pay back. The current maximum is $6,495 per year, depending on the EFC and tuition cost.7

American Opportunity Tax Credit (AOTC): This tax credit allows parents to subtract up to $2,500 of qualifying education expenses from their federal income taxes.8

Plan for Your Future

Paying for your children’s education takes a plan. We can help.


Sallie Mae, How America Saves for College, 2019,


Financial Aid Statistics,, November 2020.


What Is the FAFSA?,, February 2019.


The Basics on Grants and Scholarships,, accessed February 2021.


Understand how interest is calculated and what fees are associated with your federal student loan, Federal Student Aid at, accessed February 2021.


When it comes to paying for college, career school, or graduate school, federal student loans can offer several advantages over private student loans, Federal Student Aid at, accessed February 2021.


Publication DCL ID: GEN-21-01, Federal Student Aid, An Office of the U.S. Department of Education, January 2021.


American Opportunity Tax Credit,, January 2021.

Before investing, carefully consider the plan's investment objectives, risks, charges and expenses. This information and more about the plan can be found in the Learning Quest Handbook, available by contacting your financial advisor or American Century Investment Services, Inc., Distributor, at 1-800-579-2203, and should be read carefully before investing. If you are not a Kansas taxpayer, consider before investing whether your or the beneficiary's home state offers a 529 Plan that provides its taxpayers with state tax and other benefits not available through this plan.

You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

As with any investment, withdrawal value may be more or less than your original investment.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

The availability of tax or other state benefits (such as financial aid, scholarship funds and protection from creditors) may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors.

The earnings portion of non-qualified withdrawals is subject to federal and state income taxes and a 10% federal penalty.