What is Financial Aid? Everything You Need to Know About College Financial Aid

What is financial aid for college?

The meaning of financial aid isn’t always clear to all families. In fact, many people believe that financial aid will cover the cost of college, but that’s not the cost for all. In my years of admission, I’ve seen situations where financial aid covered the cost of college in full, and I’ve seen situations where the only thing offered to students is $5,500 in student loans. 

However, as a whole, undergraduates and graduate students received $240.7 billion in 2022-23 from all grants, federal loans, federal education tax benefits and federal work-study. The average aid per full-time equivalent (FTE) student in 2022-23 was $15,480 per undergraduate student and $28,300 per graduate student, according to the College Board.

Financial aid can seem like the most daunting hump in the getting-your-kid-to-college process. But what is financial aid, anyway? What does it entail? Don’t worry, it’s normal to be confused. 

Let’s compare financial aid to baking a cake. The ingredients — scholarships, grants, loans, work-study and out-of-pocket funds — are combined to create a finished product: Your child’s final financial aid award.  

Hang in there! Let’s dive in and learn more.

What is Financial Aid? 

Financial aid, which you may understand, is aid provided to help cover the cost of your child’s education. Scholarships are a part of financial aid. 

Financial aid can include both money that needs to be repaid and money that doesn’t need to be repaid. Financial aid can come from various sources, including federal and state governments, colleges or universities, private organizations and banks. Financial aid helps make education more affordable by reducing out-of-pocket costs for students and their families. It’s a wonderful thing and one of the best ways to pay for college!

Types of Financial Aid

What are the different types of financial aid? Let’s take a look at the definition, eligibility and some popular types of financial aid.

Grants 

Grants are money that your child does not need to repay. Eligibility for grants varies, but they are often need-based and might come from your state or the federal government.

Popular grants from the federal government include the Pell Grant and the FSEOG Grant.

Scholarships 

Scholarships differ from grants because they are typically based on merit or other specific criteria. However, like grants, your child does not have to repay scholarships. Scholarships are not necessarily awarded based on need (but they might be).

Loans 

Your child must repay loans with interest. There are two different types of loans: federal vs. private loans, and the terms, interest rates and repayment plans depend on the type of loans your child takes on.

• Direct Subsidized and Unsubsidized loans: The U.S. Department of Education (through the federal government) offers two kinds of Direct loans to students: Direct Subsidized loans, which are based on need. The government pays the interest on subsidized loans while your child is in school as long as they attend college at least part-time as well as after the first six months after they leave school. Direct Unsubsidized loans are not based on financial need, and interest accumulates right away on Direct Unsubsidized loans. Students can borrow anywhere from $5,500 and $12,500 in Subsidized or Unsubsidized loans depending on their year in school. 
• Direct PLUS loans: Parents, this one’s for you! Parents of undergraduate students can get Direct PLUS loans (also commonly called Parent PLUS loans) for students, but those pursuing a graduate degree can also get a PLUS loan. This is a federal loan that requires a credit check.
• Private student loans: Private student loans come from private companies, like banks and credit unions. Private loans might have variable interest rates and cannot be consolidated with Direct loans. These loans (which are typically more expensive than federal student loans) include terms and conditions set by the lender. Private lenders want to see a credit score to qualify. Private loans may only come in a variable interest rate (instead of a fixed rate).

When deciding between federal and private student loans, learn as much as you can, and if your child can do so, avoid them. Learn about repayment fees, interest rates (such as variable or fixed), when repayment starts and the total cost of the loan, including interest. Learn about any interest rate reductions as well.

Learn more: What is Need-Based Financial Aid?

Work-Study Programs

Work-study programs are federal programs. Money comes from the federal government and goes directly into your student’s wallet. Students must apply for a work-study job on campus, and jobs might include working in the cafeteria, admission office, academic office or more on campus. However, note that work-study programs are not automatic — students must proactively apply for a job and go to work in order to receive a paycheck. 

Of the above options, grants and scholarships are free money. Work-study is not technically free money, because your child must put forth the effort to earn it. It also typically does not go directly toward tuition — most colleges and universities pay your child. They must put it toward tuition and fees themselves.

Who Qualifies for Financial Aid?

Anyone can qualify for financial aid, which is why it’s important to apply for it, even if you don’t think your child will “get anything.” 

Factors that affect financial aid for students include financial and other general eligibility for financial aid requirements, including: 

• Financial need, including income 
• U.S. citizenship or eligible noncitizenship
• Enrollment status
• Special circumstances (such as for independent students and veterans)

Your student will eventually receive a financial aid award letter from all colleges they applied to. When the letter will arrive depends on the school.

Learn more: What is Room and Board? and Costs of Room and Board

How is Financial Aid Awarded? 

This is the confusing part for many families, and rightfully so. Each school follows a unique process in terms of dates, deadlines, procedures and awards. They even follow a different process for how they display your child’s aid! Your child might receive a financial aid award letter from various schools at different times of the year.

The amount of aid offered can cover up to the full cost of attending college. It will be broken down into three categories: free money they don’t have to pay back, earned money (typically work-study) and borrowed money (either from federal or private student loans).

It’s important to understand every aspect of the various financial aid awards and how they’re packaged, because it might be different compared to other financial aid awards your child receives. 

Learn more: 6 Ways to Handle a Disappointing Financial Aid Award

How to Get Financial Aid

There are several steps your child can take to get need-based or merit-based aid.

1. Apply for admission.

Your child can’t get scholarships from colleges until he or she applies. What type of admission does each college have? Rolling admission? Early decision? Early action? 

It’s important to know each admission type, ensure your child follows all directions and applies well ahead of the deadline. Applying incorrectly (or late) could also directly affect your child’s financial aid opportunities. 

2. Ask colleges about scholarships.

All colleges post information about scholarships on their websites. To get a full understanding of what a school offers, it’s a good idea to make contact with the admission office at each school. Colleges and universities can’t post every single scholarship they offer on their websites. Those lists are long!

For example, an alumna could have donated a scholarship for red-headed students education majors who like to knit. (Okay, that could be an exaggeration.) But there are dozens of scholarships that you might not know about unless you take the time to turn over every single stone at a particular college. 

Just ask!

Learn more: Do You Get Extra Financial Aid for Off-Campus Housing?

3. Apply for outside scholarships.

You probably want your child to apply for every bit of scholarship money possible. That means doing some extensive research online, in your community and through your school counselor’s office. There’s no one way to piece together the scholarship opportunities available to your kiddo. You can search in the following places, according to the U.S. Department of Education:

• The financial aid office at the colleges your child plans to attend
• Your child’s school counselor 
• Scholarship search tools — but make sure they’re valid
• State grant agencies
• Library reference section
• Foundations, religious or community organizations, local businesses, civic groups
• Organizations related to field of interest
• Ethnicity-based organizations
• Your employer or your kids’ employers

Pro tip: Ask colleges whether they offer scholarship competitions. Many do, and it’s a great way to earn more scholarship money.

4. File the FAFSA and (if required) the CSS Profile.

It’s important to file the FAFSA even if you think your child won’t qualify for anything. If the college requires the CSS Profile, complete that as well. 

Two of the best ways to receive financial aid include filing the Free Application for Federal Student Aid (FAFSA), and if the schools your child is considering require it, the CSS Profile.

FAFSA Overview

The FAFSA is just like it sounds — a free application you file to determine whether your child can receive federal financial aid in the form of federal grants, loans and work-study. Colleges and universities also use the FAFSA to determine how much aid to award your child. 

To complete the FAFSA form, all contributors (your student, you and your spouse if you are no longer married to your child’s other parent) must create a StudentAid.gov account using their FSA ID, ensuring their name and Social Security number match exactly. Once you gather necessary documents like tax returns and financial records, dependent students must include parent information, and you must accurately reflect marital or financial status changes. You and your child can sign and submit the form only after all contributors have completed their sections, with confirmation provided via email.

You can typically file the FAFSA on October 1, but recent lags in the new FAFSA simplification (which made the FAFSA shorter) have pushed out the FAFSA to December 1. You can still sign up for an account prior to December 1. 

Should you file the FAFSA, even if you think your child won’t “get” any aid from it?

Yes! You must also file the FAFSA every academic year your child is in school or they won’t qualify for additional federal financial aid (including renewable aid they received the previous year). It’s usually easier to renew the FAFSA because the FAFSA stores your personal and demographic information. 

CSS Profile Overview

The CSS Profile is also a free application, but it differs from the FAFSA. The CSS Profile is for institutional aid, not federal aid, and it asks more detailed questions, such as the net worth of small family businesses, home equity, medical expenses and more. It also asks you questions that do a deeper dive into your child’s income and assets.

You won’t pay anything for the CSS Profile if you make under $100,000 per year, if your child qualifies for an SAT waiver or if a student is an orphan or ward of the court under age 24. If you don’t qualify, submitting your CSS Profile to one college costs $25, and additional reports cost $16 each.

Not every school requires the CSS Profile, so check the list of participating institutions to learn more about whether the schools your child is interested in require the CSS Profile. The financial aid application process definitely lengthens when you file both the FAFSA and CSS Profile, but they can both help your child qualify for both federal and institutional aid.

5. Compare financial aid awards.

You’ve applied to several schools, filed the FAFSA, auditioned or interviewed for scholarships and attended scholarship events. Next, you’ll receive financial aid awards from schools. Sit down and compare them. 

Be sure you do an apples-to-apples comparison. What does that mean? Let’s say you’re getting a $19,000 merit-based scholarship from College X and a $17,000 merit-based scholarship from College Y. That doesn’t mean that it’s necessarily cheaper to go to College Y. 

What’s the full price for each? Figure that out, then subtract the amount of financial aid you’re awarded from each college to see which is cheaper.

Learn more: How to Get In-State Tuition When You Live Out of State

Common Financial Aid Mistakes to Avoid 

Many families wonder if they’re doing “the right things” when they look into financial aid, so here are some of the most common financial aid mistakes to keep in mind: 

• Not applying early enough: Your child can start applying for financial aid early. In fact, it’s never too early to apply for scholarships! (My daughter received scholarships in fifth and sixth grade and I still look for opportunities all the time.) 
• Believing the FAFSA will cover everything: One of the most common FAFSA mistakes is thinking filing the FAFSA will take care of the full college bill. Filing the FAFSA does not mean it will cover all your child’s college bills. In some cases, the FAFSA will only offer federal loans. Don’t make the mistake of thinking that your ticket to financial aid involves filing the FAFSA, because it likely won’t take care of everything.
• Not exploring all available aid options: Leave no stone unturned in your quest to look for available aid. This means creating a robust plan to look for scholarships, looking into merit-based scholarships and more.
• Overlooking school-specific aid: Ensure you understand everything you need to do to apply for school-specific scholarships and other types of aid at each institution your child’s considering. For example, if a school offers a presidential scholarship, ensure your child knows how to apply for it if they qualify.

Learning how to avoid financial aid errors is one of the most beneficial things you can do for your student, and it can seem tricky because every school does things just a little differently. 

Financial Aid Myths Debunked

You’ve heard the financial aid myths, like “only low-income students qualify for financial aid,” (ridiculous!) so let’s go over some of those. Steer clear of these dangerous ideas!

1. Only low-income students qualify for financial aid. 

REALITY: Students of all income levels qualify for financial aid, whether it is merit-based, financial-based or other types of aid. Financial aid eligibility is based on various factors, not just income. Many families with higher incomes still qualify for aid due to their specific financial circumstances, especially due to the cost of attendance at different schools.

2. Only students with excellent grades get financial aid. 

REALITY: While good grades can help with merit-based scholarships, financial aid is primarily need-based. Students from various academic backgrounds can qualify for grants, loans, and work-study programs.My family earns too much money, so I won’t qualify for financial aid.

3. Private colleges are always more expensive. 

REALITY: While private schools often have higher sticker prices, they also tend to offer more generous financial aid packages. In some cases, attending a private school can be more affordable than a public university.

4. Applying for financial aid is a one-time process. 

REALITY: You need to reapply for financial aid every year because financial situations can change.

5. Financial aid only comes in the form of loans. 

REALITY: Financial aid can come in various forms, such as grants, scholarships, work-study and loans. Not all aid has to be repaid. 

Learn more: How to Get Rid of Student Loans

6. You should wait until you’re accepted to a college to apply for financial aid. 

REALITY: It’s important to apply for financial aid as soon as possible. Most schools have deadlines, and aid is often distributed on a first-come, first-served basis. 

7. Only U.S. citizens can receive financial aid. 

REALITY: Many non-citizens, including permanent residents and eligible non-citizens, can qualify for financial aid. Some states and colleges also offer aid to undocumented students. 

8. Scholarships are only for star athletes or high academic achievers.

REALITY: Scholarships are available for a wide range of criteria, including community service, hobbies, unique experiences or even being left-handed! Opportunities exist for so many different types of students!

9. Parent savings in a 529 plan will prevent financial aid eligibility.

REALITY: While savings in a 529 plan are considered in financial aid calculations, they have a relatively small impact compared to income. Most families are better off saving for college than relying solely on financial aid.

10. Financial aid packages are non-negotiable. 

REALITY: In some cases, you can appeal a financial aid decision. If your family’s financial situation changes or if you receive a better offer from another school, you may be able to negotiate for more aid.

Maximize Your Child’s Financial Aid Opportunities

Understanding how this process works is the best way to establish as much control and your choices for financing college.

Most importantly, financial aid can come from a variety of sources: federal and state agencies, colleges, high schools, community organizations, foundations, corporations and more. Do everything you can to learn more about all your child’s opportunities and how it will help them in the future.

FAQs

What is financial aid and what does it do?

Financial aid can help your child tackle the costs of college. It comes in a wide variety of forms, and it’s truthfully like a puzzle you can put together to help pay for college. Whether it comes in the form of scholarships, grants or a small amount of loans, when put with the money that comes out of your pocket, it can make a huge difference in your child’s life.

Do you pay back financial aid?

Financial aid in the form of a loan must be paid back. You must repay federal loans after you graduate or stop attending school, with a grace period of six months after finishing school. Your child must also repay private student loans. Your child doesn’t need to repay other forms of financial aid, such as scholarships and grants.

Is all financial aid free money?

No, financial aid is not all free money. It includes loans, which your child must repay. For example, if your child receives federal student loans, they will have to repay them typically within six months after graduation.