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Need-based financial aid: It’s one of these mystifying terms that admission offices throw around when you visit colleges. I can vouch for that — I worked in college admissions for 12 years.

There are many ways you can take care of college costs. You can pay for it all out of pocket; your child might earn a scholarship because of her violin-playing talents or other skills. Or your child might get need-based financial aid.

What is need based financial aid, exactly? It’s exactly like it sounds — it’s aid you receive based on your family’s financial situation. Or, in rare cases, it’s based on your financial situation if you are an independent student. Your grades, test scores or extracurricular achievements don’t factor in. 

Key Takeaway

Colleges award need-based financial aid, determined by your family’s financial situation, upon filing the Free Application for Federal Student Aid (FAFSA). Colleges assess income-related answers to grant your child a financial aid award, comprising grants, scholarships, work-study and loans. Per the National Center for Education Statistics, over 85% of students receive financial aid, including need-based assistance. 

Simple enough, right? 

Right!

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An Overview of Need-Based Financial Aid

Need based financial aid depends on several factors, such as income, assets and the cost of attendance at a particular institution. Examples of need-based financial aid include grants, scholarships, work-study programs and subsidized loans. 

Types of Need-Based Financial Aid

Need-based financial aid comes in various forms, each designed to help students meet those. What qualifies for need based financial aid? Here are some common types:

  • Grants: Grants are financial awards your child doesn’t have to repay — yay! The government, colleges or private organizations often provide them. Need based grants examples include the Federal Pell Grant, Federal Supplemental Educational Opportunity Grant (FSEOG) and state-based grants. In other words, always say “yes” to grants if your child receives them on the financial aid award! However, check into the requirements for the grant. For example, your child may stop receiving it if they drop out of school.
  • Scholarships: Like grants, your child does not need to repay scholarships. (Scholarships should always prompt your family to celebrate!) Now, the tricky thing with scholarships is that your child may receive them due to financial need. Still, they can also earn them for non-scholarship reasons, including due to academic achievement, athletic ability, talents or other criteria. Many colleges and universities offer scholarships to help students afford tuition and other expenses.
  • Work-study programs: Students can work part-time jobs, called work-study, typically on campus, to earn money to help pay for educational expenses. Many people don’t realize that work-study is need-based, but it is! Your child’s wages earned through work-study are often subsidized, meaning the employer (usually the college or university) pays a portion of your student’s wages. (Note that your child will not receive the work-study money if they don’t sign up to work a job on campus!)
  • Subsidized loans: Subsidized loans are a type of federal student loan where the government pays the interest. In contrast, the student is in school at least half-time, during the grace period after leaving school and during deferment periods. They differ from unsubsidized loans because unsubsidized loans are not based on need. If you have to choose between subsidized and unsubsidized loans, choose subsidized!
  • Tuition waivers and discounts: Some colleges and universities offer need-based tuition waivers or discounts to students who demonstrate financial need. These waivers and discounts can significantly reduce the cost of tuition for eligible students.
  • Fee waivers: Fee waivers may be available for standardized tests such as the SAT or ACT and for college application fees. Students from low-income families may qualify for fee waivers to reduce or eliminate the costs associated with these tests and applications.

These are just a few examples of the types of need-based financial aid available to students. It’s a great idea to research all options and work closely with your child’s college’s financial aid office to determine the best package for their needs.

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Need-Based vs. Merit-Based Financial Aid

You may have heard about something called “merit-based aid,” and it’s different from need-based aid, but how?

Merit aid (which can come in the form of scholarships, grants, tuition waivers or other awards) is awarded based on the student’s academic, athletic, artistic or other achievements rather than financial need. The merit aid awarded is determined by the student’s performance in standardized test scores, GPA, extracurricular activities, talents or leadership qualities.

Students may be automatically considered for merit aid based on their application for admission to the college or university, or they may need to submit additional materials or applications to be considered.

Who Qualifies for Need-Based Financial Aid?

Qualifying for need-based aid includes a few important requirements. Your child must demonstrate financial need, be a U.S. citizen or eligible noncitizen, and enroll in an eligible degree or certificate program at a qualified college or career/trade school. 

Check out the other eligibility requirements.

How to Qualify for Need-Based Financial Aid for College

Students typically qualify for need-based aid by completing the FAFSA. However, they may qualify for need-based aid by filing the CSS Profile, another online application colleges and scholarship programs use to award non-federal institutional aid to students. 

The FAFSA will ask questions such as:

  • What is your tax filing status?
  • What was your adjusted gross income?
  • How much did you earn from working?
  • What is the total current balance of your cash, savings and checking accounts?
  • What is the net worth of your investments?
  • What is the net worth of your current businesses and/or investment farms?
  • What were your total tax-deferred pension payments?
  • How much did you pay to your IRA or Keogh?
  • How much total child support did you receive?
  • What was your total tax-exempt interest income?
  • What were your total untaxed portions of IRA distributions?
  • What were your total untaxed portions of pensions?
  • What were your total allowances received?
  • What were your total veterans noneducation benefits?
  • What was the total of your other untaxed income or benefits?
  • What other money has been paid on your behalf?

This is just a short list of questions it asks (and yes, they are kind of a snooze-fest). However, the great news is that it takes less time than it has in the past due to the FAFSA Simplification Act put in place, which overhauled the processes and systems used to award federal student aid, starting with the 2024–25 award year. 

This is a common question, by the way: Is FAFSA need based financial aid? The answer is no, it is the tool you use to get need-based financial aid.

How is Need-Based Financial Aid Calculated?

Yep, common question: How is need based aid determined? 

Here’s how financial aid works: Submitting the FAFSA collects information about your family’s income and assets (as seen above). The information provided on the FAFSA is used to calculate your Student Aid Index (SAI), which is the amount the federal government believes you as a family can contribute toward education expenses.

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What is the SAI? 

The FAFSA now uses the SAI to measure your family’s ability to pay for college. It has done a few new things, including removing the number of family members in college from the calculation and allowing a minimum SAI of -1500. 

With the introduction of the SAI, allowing a minimum of -1500 means that some students may have a negative SAI, indicating that they have very high financial need and may be eligible for additional financial aid beyond what was previously calculated using the EFC.

The SAI also signals separate eligibility criteria for Federal Pell Grants. The Federal Pell Grant should now reach more students with financial need.

Note: The SAI should have consequences for families with a small business. For the first time, parents who own companies with less than 100 employees will have to count the value of their business toward the financial aid calculation. You can find your child’s SAI on the FAFSA Submission Summary after you complete the form.

How Financial Aid Offices Use the SAI

The financial aid office at each college or university uses your child’s SAI to determine your child’s eligibility for need-based financial aid. They subtract SAI from the total cost of attendance to determine your financial need. The financial aid package includes grants, scholarships, work-study opportunities and federal student loans, all designed to help cover your financial need.

Each college or university may have its policies and procedures for awarding need-based financial aid, so the specific calculation methods and available aid may vary from institution to institution.

Does Your Child Have to Pay Back Need-Based Aid? 

You’ll pay back financial aid if it’s a loan, but your child won’t have to repay grants, scholarships or work-study money. (Note that some grants may require repayment if your child doesn’t finish their degree or drops out midway through the semester.)

You don’t have to begin repaying most federal student loans until after you leave college or drop below half-time enrollment. 

A repayment schedule will explain when your first payment is due, how many payments you’ll make, the frequency and payment amounts.

You might get a grace period, a set period after you graduate, leave school or go below half-time enrollment. You don’t have to repay your loan until after the grace period. The grace period gives you time to select your repayment plan. Not all federal student loans have a grace period. Interest will build during the grace period in all cases.

How Does Need-Based Aid Affect College Affordability?

Need-based aid is crucial in making college more affordable for students from lower-income families and those with demonstrated financial need. Here’s how it affects college affordability:

  • Reduce costs: Need-based aid, such as federal Pell Grants and institutional grants, can significantly reduce out-of-pocket college costs. This can make higher education more accessible to students who might otherwise struggle to afford it.
  • Expand options: With need-based aid, your child has more options when it comes to choosing which colleges to attend. They are not limited solely to schools with lower tuition fees but can consider a broader range of institutions that may offer the programs and environment they desire.
  • Minimizing debt: By providing financial assistance upfront, need-based aid helps students avoid excessive student loan debt. This is particularly important for students from lower-income backgrounds who may be more vulnerable to financial challenges after graduation.
  • Early financial stability: Need-based aid enables students to focus more on their studies and less on financial concerns. Always a great bonus for parents, right? By minimizing the financial burden of attending college, students can start their careers on a more stable footing and work toward achieving other financial goals, such as homeownership, at an earlier stage in life.
  • Universal application: You must apply for financial aid, regardless of your perceived income level. Need-based aid programs often have eligibility criteria that extend beyond poverty lines. Many factors beyond income are considered when determining financial need. 

How to Get the Most Need-Based Financial Aid Possible 

Filing the FAFSA is the best way to get the most need-based aid possible. Be sure you know how much need-based financial aid you’re taking out and plan to pay it back when you’re through school.

  • Be intentional: Make less during the preceding years you know you’ll be filing the FAFSA
  • Don’t realize capital gains or take retirement distributions
  • Defer work bonuses
  • Decrease reportable assets

What to Do if Need-Based Financial Aid Isn’t Enough

Did you know you can get your child’s financial aid awards reevaluated if need based aid isn’t enough?

The process for requesting a reevaluation of aid packages varies among institutions but typically involves submitting a formal appeal letter to the financial aid office. 

This letter should clearly outline the changes in financial circumstances and provide supporting documentation. You should: 

  1. Adhere to the institution’s deadlines and procedures for appeals, as missing deadlines could result in missed opportunities for additional aid. 
  2. Some schools may also require students to complete specific forms or participate in interviews as part of the appeal process. 
  3. Your child should follow up with the financial aid office to ensure their appeal is processed and to inquire about the expected timeline for a decision.

Documenting special circumstances is a critical aspect of the appeal process. It involves gathering relevant documentation to support the claims of financial hardship or unusual circumstances. 

This documentation may include tax returns, pay stubs, medical records, statements from employers or any other paperwork that provides evidence of the changes in financial circumstances. 

Students and their families should thoroughly document their situation and be prepared to provide additional information or clarification if requested by the financial aid office. Clear and comprehensive documentation strengthens the appeal and the likelihood of a favorable outcome.

Your Child Can Get Need-Based Financial Aid — Just Apply!

Now that you understand the need based financial aid meaning, do you intend to apply for need-based financial aid or are you asking, “Should I apply for need based financial aid?”

Yes, you absolutely should.

Even if you don’t think you’ll demonstrate financial need or meet the qualifications for need based financial aid, you should file the FAFSA anyway.

Though it’s financial aid based on income, you may be surprised at how the institutional aid equation comes through for your child. If you’re “just on the bubble” from one aid category to another, it is possible to benefit.

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FAQs

Still have questions? Take a look at these questions and answers.

What is the difference between financial aid and need-based aid?

Financial aid encompasses all types of financial assistance available to students to help cover the cost of education, including scholarships, grants, loans and work-study programs. 

Need-based aid refers to financial assistance awarded based on a student’s demonstrated financial need, including income, assets and the cost of attendance at a particular institution. While financial aid encompasses a broader range of assistance, need-based aid is specifically awarded based on financial need.

For example, merit-based aid is also financial aid but isn’t need-based. Need-based aid typically comes from filing the FAFSA, while you can get other types of need-based aid without filing the FAFSA.

What is a need-based financial aid example?

A subsidized loan is an excellent example of need-based financial aid because it is awarded to students based on financial need, as the FAFSA determines. Unlike unsubsidized loans where interest accrues while the student is in school, the government pays the interest on subsidized loans. In contrast, the student is enrolled at least half-time, during the grace period after leaving school and during periods of deferment. 

Should I put “Yes” for need-based financial aid?

When you receive your child’s financial aid award, it’s up to you and your child whether you choose to “accept” need-based financial aid. You may have a hard policy of not taking loans, while you accept grants and scholarships. However, you may need subsidized loans to get through your child’s school years. Talk about it together.

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