Grants and scholarships: How to get free money

@Money

Getting free money to help pay for college through grants, scholarships or other means isn't as out of reach as most students think.

Typically, grants and scholarships are awarded to students based on financial need or merit. The best part is these awards don't have to be paid back.

Need-based grants and scholarships. Government officials, college financial aid officers and scholarship foundation heads examine the financial situation of the student and his or her family to see if the student "needs" financial aid to fund college. (See Who qualifies for need-based aid?)

The federal government awards Pell Grants of up to $5,550 a year to students who come from families earning less than about $40,000. And some states, including Pennsylvania, New York and Wisconsin, also award need-based grants to residents.

Colleges and charities award grants based on their own definitions of need. Many of these organizations post their criteria on their websites or explain them in their applications. (How do I apply for need-based aid?)

Merit-based grants and scholarships. Some colleges, charities and states give grants or scholarships to attract or reward students who earn good grades, win science fairs, excel in the arts or athletics, demonstrate leadership, volunteer in their communities, or show other kinds of "merit."

Many of these scholarships are awarded without regard to the student's financial situation.

A combination of need and merit. A growing number of colleges and government agencies are reserving scholarships for students who have low or middle incomes and good grades.

Here are a couple of other places where you can get money for college that you won't have to pay back.

Employers. Many employers will reimburse you for some or all of your educational expenses. Typically, however, employers will only pay for courses they deem to be work-related.

Tax breaks. The American Opportunity Tax Credit allows those who pay for college tuition or books for undergraduates to reduce their tax bill by up to $2,500 with a refundable tax credit.

Even if you do not expect to have to pay a penny in federal taxes, you should file your taxes for the year you pay tuition and claim the American Opportunity Tax Credit, because the government will likely send you a check of up to $1,000 as a rebate for your tuition or textbook expenses.

You can only take one tax break per child per year, however. If you use this credit, you can't take the tuition and fees deduction or the Lifetime Learning credit, neither of which are as lucrative anyway.

If you cannot take the American Opportunity Tax Credit because you have already used up your student's four years of eligibility, or your student is attending college part-time, you may be able to take the Lifetime Learning Credit. That credit refunds 20% of higher education expenses up to $2,000. However, it is only available to taxpayers in a limited income bracket. For 2011, the income limit was $61,000 for single filers, and $122,000 for married filers.

NEXT: Who qualifies for need-based aid? To top of page

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