How Does Financial Aid Work? (2023)

Families spent $26,373, on average, to pay for college during the 2020–21 school year, according to a 2021 survey by Sallie Mae and market research company Ipsos. Almost half of that amount (49%) came from financial aid. From this data, two things are immediately clear—first, college is expensive, and second, paying for it generally requires financial aid.

Key Takeaways

  • Start planning early for how and where to obtain financial aid.
  • Financial aid can be need-based, merit-based, or both.
  • The FAFSA form is required for federal aid as well as for most state and institutional aid.
  • The CSS Profile is required by many private colleges.
  • If the amount of aid you receive isn't enough, you can ask for more.

What Is Financial Aid?

Financial aid is any college funding that doesn't come from family or personal savings or earnings. It can take the form of grants, scholarships, work-study jobs, and federal or private loans. Financial aid can be used to cover most higher education expenses, including tuition and fees, room and board, books and supplies, and transportation.

Aid can come from a variety of sources. This can include federal and state agencies, colleges, high schools, community organizations, foundations, corporations, and more. The amount of financial aid you receive will depend on rules set by the various sources as well as federal, state, and university guidelines.

Start Early

Whether you are a potential college student or the parent of one, it's never too early to start planning. The U.S. Department of Education (DOE) Office of Federal Student Aid publishes a College Preparation Checklist that will help guide you from wherever you are—elementary, middle school, high school, or young adult—to where you want to end up—in college with a plan to pay for your education.

Ask your high school counselor about aid that may be available to you or your child from local and state organizations, including scholarships and grants that may be awarded while you are still in high school. Although you will have to declare any outside aid you receive when you apply through your college—and that aid will reduce the amount of federal, state, and college aid you can receive—it will also reduce the amount of aid you need, so the net effect is a wash.

Keep note of all financial aid application deadlines and don't let them pass before you apply. Use the DOE checklist mentioned above to build a foundation and the information in this article to guide your search for financial aid.

Need-Based Aid vs. Merit-Based Aid

The two main categories of financial aid are need-based and non-need or merit-based. Simply put, need-based aid is awarded based on the awarding organization's assessment of your ability to pay for college. Merit-based aid is awarded for special talent or demonstrated ability in academics, athletics, music, or other areas.

Whether your financial aid is need-based or merit-based (or both) does not determine whether you have to pay it back. That is determined by the specific type of aid you receive. Most scholarships and grants, for example, do not have to be repaid. Most loans do.

2 Important Application Forms: FAFSA and the CSS Profile

There are two primary pathways to financial aid as you enter college. One is the Free Application for Federal Student Aid (FAFSA) sponsored by the U.S. Department of Education and required for you to be considered for federal aid as well as for most college and state assistance.

(Video) How Does Financial Aid Work?

The second, known as the CSS Profile, is sponsored by the College Board and used by roughly 400 mostly private colleges and universities to allocate non-government financial aid from those institutions.

Each form has its own deadlines and procedures (see details below). You should submit the FAFSA even if you don't believe you will qualify for federal financial aid. That's because (a) you may be wrong, and (b) even if you're right, the FAFSA is also required for most local, state, and individual school financial aid, including merit scholarships. Whether you should submit the CSS Profile probably depends on whether the financial aid you are interested in or the school you plan to attend requires it.

Breaking Down FAFSA

Be sure to submit your FAFSA on October 1 (or shortly after) for the following academic year. That means, for example, that you would have submitted it on Oct. 1, 2020, for the 2021–22 school year. Although the federal deadline to submit is June 30 of the academic year (in this case June 30, 2022), that will likely be too late to obtain most financial aid. It will also likely be well past the deadline for aid dispersed by most states and colleges.

You must also renew your FAFSA for each academic year you are in school or you will not qualify for additional federal financial aid (including renewable aid you received the previous year). To maximize your access to aid, renew your FAFSA on October 1 of the year before the academic year you are renewing for, just as you did with your first year of college.

The renewal process is usually easier and faster than the original because much of your personal and demographic information is retained. You still need to check it to make sure it is accurate, but there is no cost to submit or renew the FAFSA.

Breaking Down the CSS Profile

Submit the CSS Profile if the college or university you plan to attend uses CSS as part of its financial aid process. Do this October 1, at the same time you submit your FAFSA, and every year after on the same date if required.

Check the College Board list of Participating Institutions and Programs for detailed information about which schools require CSS and which classifications of students or parents are required to file.

Amherst College in Amherst, Mass., for example, requires the CSS Profile for domestic and international students, as well as from noncustodial parents of either. Loyola University in Baltimore, Md., on the other hand, requires the CSS Profile for both domestic and international students but does not require information from noncustodial parents.

Most people pay a $25 fee to submit their initial CSS Profile ($16 for each additional college). Waivers may be available for first-time domestic college applicants if:

  • You received an SAT fee waiver.
  • Your parents' income is $45,000 or less for a family of four.
  • You are an orphan or ward of the court under age 24.

The open date—the soonest you can apply for financial aid—is more important than the deadline, which is the latest you can apply.

(Video) Overview of the Financial Aid Process

Check Open Dates, Not Deadlines

Procrastinators beware! Although the FAFSA, the CSS Profile, colleges, and universities all have deadlines—the last date you can apply for aid each year—the most important date to remember is the open date—the first date each year you can apply for financial aid.

As noted above, the open date for the FAFSA and the CSS Profile is October 1 of the calendar year before the academic year for which you are applying for aid. The open date for the academic year 2022–23, for example, was Oct. 1, 2021.

You can apply for federal aid through the FAFSA for the academic year 2023–24 anytime between Oct. 1, 2022, and June 30, 2024. However, keep in mind that state and college/university aid open dates and deadlines, including those through the FAFSA and the CSS Profile, are typically much earlier than June 30, with some states and schools instructing you to apply "as soon as possible" after the October 1 FAFSA/CSS open date. Others set their deadline sometime between January and March of the next year and a few even follow the FAFSA June 30 deadline. State deadlines are available on the FAFSA deadlines webpage.

Types of Financial Aid

Whether need-based or merit-based, federal or private, financial aid typically comes in one of the following forms:


A grant is "free" money that doesn't need to be paid back (except when you fail to live up to the terms of the grant, such as by leaving school). Grants can come from the federal or state government, schools, or private or nonprofit organizations. Most grants are need-based but merit-based grants are also available.

The Federal Pell Grant and Federal Supplemental Educational Opportunity Grant (FSEOG) are examples of need-based grants. Information about merit-based grants, such as the Wyoming NASA Space Grant and the Broadcast Education Association (BEA) Grant, can usually be found at your state higher education website or through your school counselor's office.


Like grants, scholarships are gifts and do not need to be repaid unless you don't live up to the terms of the scholarship. Also like grants, scholarships can come from the federal or state government, universities, or private or nonprofit organizations.

Scholarships tend to be merit-based, though there are also scholarships that are need-based or that take both merit and need into consideration. Some scholarships are aimed at specific groups, such as women, minorities, or students from military families. Learn about scholarships that may be available to you through your school counselor, college financial aid office, or even at your local library.

Work-Study/Non-Work Study

Work-study typically refers to federal work-study, a program that provides part-time work on or off-campus while you are enrolled in school. Federal work-study is only available to you if you have demonstrated financial need. Qualifying does not guarantee you a job. You will need to apply, interview, and be hired. You will earn at least the federal minimum wage (more for higher-skilled jobs) depending on when you apply, your financial need, and the school's available funding.

Another type of job, known as a non-work study, is also available at many colleges and universities. These jobs are not government-sponsored, earnings vary, and funding comes from the department doing the hiring. To learn more about both programs, contact your college financial aid office.

Federal Student Loans

Federal student loans are government loans and include terms and conditions with benefits (i.e., fixed interest rates, income-based repayment plans) that are not available with most private loans. The Federal Direct Loan Program offers four types of federal loans:

  • Direct subsidized loans for eligible undergraduate students with demonstrated financial need
  • Direct unsubsidized loans for eligible graduate or undergraduate students but not based on need
  • Direct PLUS loans for graduate or professional students and parents of dependent undergraduate students, not based on need but a credit check is required
  • Direct consolidation loans that let you combine all of your eligible federal student loans into a single loan

Private Student Loans

Private student loans are made by banks, credit unions, and other state-based organizations. These loans include terms and conditions set by the lender and are generally (though not always) more expensive than federal student loans.

(Video) 3 big FAFSA mistakes that will cost you a lot of money!

Unlike most federal loans, private loan rates are based on your credit score and lenders may offer you a variable interest rate (instead of a fixed one). You may be required to begin paying back your private loan while still in school. Federal loans allow you to wait until you leave school or graduate.

How Is Financial Aid Awarded?

Most of the details of obtaining financial aid take place at the college or university level. Importantly, while there are lots of similarities in the ways colleges award aid, each school has its unique process when it comes to open dates, deadlines, procedures, and the actual awards process.

It's especially important to understand the differences between scholarships, grants, and loans (see above) when you read your financial award letter. Some schools, for example, promise to cover 100% of your financial aid needs but do so by including student loans.

Others package financial aid with no loans and some even raise your financial aid package each year to cover tuition increases. It pays to know not only what you will get but also how it will be packaged. A big part of the financial aid awards process has to do with you and your family's ability to pay for college—that is, your expected family contribution (EFC).

Keep in mind, however, that beginning in July 2023, the term "student aid index" (SAI) will replace EFC on all FAFSA forms. In addition to some changes in the way the SAI is calculated, the change attempts to clarify what this figure is—an eligibility index for student aid, not a reflection of what a family can or will pay for postsecondary expenses.

When Will You Know How Much You Will Receive?

You will eventually receive a financial aid award letter from all colleges you applied to via your FAFSA or your CSS Profile. When the letter will arrive depends on the school, but generally, you can expect it at about the same time you receive your acceptance letter from that school.

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

What If It's Not Enough?

If you feel your federal financial aid award is inadequate, you can request a professional judgment review by the awarding school. However, you will need a legitimate reason to convince the school your award is insufficient.

One way would be to demonstrate that your family's financial situation has changed for the worse. If that's the case, the school will typically ask you to submit a letter summarizing the new circumstances. This could include a divorce, a death in the family, a job loss, or sudden high medical costs.

If another school has offered you a larger award, you could try contacting the school offering the lower award and ask if they will match the larger offer.

(Video) COLLEGE FINANCIAL AID (negotiation, college grants, scholarships, fafsa)

A New Agreement May Help You Get the Most Aid

Historically, many colleges and universities have been criticized for encouraging college candidates to commit early with the understanding they could not switch colleges, even though the understanding was not legally binding. For the candidates, early commitment could mean passing up a better financial aid package from another school.

Now, however, students will have recourse. Action taken in September 2019 by the National Association for College Admission Counseling (NACAC) to strip provisions from its Code of Ethics and Professional Practice (CEPP) lets college counselors recruit students even after they have committed to another school.

Furthermore, NACAC members are now allowed to encourage enrolled students to transfer to a school with a better financial aid package, offer perks (such as special scholarships and priority course selection for early enrollees), and recruit students beyond the traditional May 1 deadline, giving those students more time to choose the best financial aid package.

The NACAC's action, in the form of a consent decree, came in advance of a U.S. Department of Justice (DOJ) lawsuit filed in December 2019 charging the NACAC with violating antitrust laws. The NACAC has said it will follow the restrictions outlined in the consent decree, although it believes the deleted provisions of the CEPP did provide substantial aid and protection to students.

Understanding how this process works is the best way to establish as much control and choice over financing college as possible.

Do You Have to Pay Financial Aid Back?

Financial aid in the form of a loan is to be paid back. If it is a federal loan, repayment begins after a student has graduated, with a grace period of six months after finishing school. On the other hand, privately-issued loans may require repayment during the school year. Other forms of financial aid, such as scholarships and grants do not need to be paid back.

What Are Four Types of Financial Aid?

Grants, scholarships, loans, and work-study are four primary forms of financial aid. Students may be eligible for more than one type of financial aid, based on their financial need and academic, athletic, or artistic achievement.

How Is Aid Calculated?

FAFSA aid is calculated based on a number of factors. Broadly speaking, these include a student’s Expected Family Contribution (EFC) and cost of attendance. A student’s EFC is subtracted from their COA to determine the amount of need-based aid the student is eligible for. Next, to identify non-need-based aid, any financial aid already received is subtracted from the COA.

(Video) Everything You Need To Know About Student Loans

The Bottom Line

Remember that planning can never start too early. One of the basics to know is that aid can come from a variety of sources. This can include federal and state agencies, colleges, high schools, community organizations, foundations, corporations, and more. The amount of financial aid you receive will depend on rules set by the various sources as well as federal, state, and university guidelines. Be sure to look at the College Preparation Checklist published by the U.S. Department of Education's Office of Federal Student AI. This will guide you from wherever you are—elementary, middle school, high school, or young adult—to college with a plan to pay for your education.


How is the amount of financial aid you are eligible for determined? ›

The financial aid staff starts by deciding upon your cost of attendance (COA) at that school. They then consider your Expected Family Contribution (EFC). They subtract your EFC from your COA to determine the amount of your financial need and therefore how much need-based aid you can get.

How do you explain financial needs? ›

  1. What Exactly is a Statement of Financial Need? ...
  2. Start With a Brief Introduction. ...
  3. Explain How You are Paying for College Now. ...
  4. Explain Difficulties You Are Having in Meeting Your Needs. ...
  5. Talk About How You Would Benefit From the Scholarship. ...
  6. Close In a Brief and Respectful Tone.

What disqualifies you from getting financial aid? ›

Incarceration, misdemeanors, arrests, and more serious crimes can all affect a student's aid. Smaller offenses won't necessarily cut off a student from all aid, but it will limit the programs they qualify for as well as the amount of aid they could receive. Larger offenses can disqualify a student entirely.

How much financial aid should I accept? ›

However tempting it might be to use that extra money to buy a brand new $1,800 laptop or textbooks or anything else, if you can cover those expenses out of pocket then that is what you should do. Only accept enough financial aid to cover the 25% of tuition not covered by your parents' savings and your scholarship.

What do you say when applying for financial aid? ›

Be direct about what the letter is for (financial aid) Briefly talk about why the school is a great fit for you and why you need the money in an straightforward and respectful way. Provide concise details regarding your specific financial situation, even if you gave these details in your original application.

How can I convince my college to give me more money? ›

If it's a needs-based appeal, contact the financial aid office to ask for more aid. If it's a merit-based appeal, contact the enrollment or admissions office. Explain that you want to initiate a Professional Judgement Review (or Special Circumstances Review, as some schools call it).

What are 3 financial needs you have? ›

Here's a short list of some common expenses that fall under needs: Housing. Transportation. Insurance.

Will I lose financial aid if I fail a class? ›

Failing or taking an incomplete grade in courses can impact your financial aid in multiple ways. The 3 main impacts may be owing money back for the current term, losing federal aid eligibility for future terms, and not meeting the renewal criteria for scholarships and institutional aid. Q1.

What is the minimum GPA for financial aid? ›

To be eligible for federal student aid and college financial aid, a student must be making Satisfactory Academic Progress (SAP). This generally consists of maintaining at least a 2.0 GPA on a 4.0 scale (i.e., at least a C average) and passing enough classes with progress toward a degree.

How much income is too much for FAFSA? ›

What is the income limit for FAFSA 2022? In 2022, the income limit for an automatic zero expected family contribution is $27,000. But this is based on the previous tax year, which would be 2021. There is no income limit for submitting the FAFSA.

How much does the average person get in financial aid? ›

Key FAFSA statistics

For 2019-20, the National Center for Education Statistics found that the average grant and scholarship aid for full-time students at four-year institutions was $14,080.

What is the 150 rule for financial aid? ›

Financial Aid recipients will be terminated upon reaching 150 percent of the number of credits needed to complete their degree, diploma or certificate program. This regulation applies to all students, including those that have not previously received financial aid.

Does financial aid give you a warning? ›

Yes, during the Financial Aid Warning semester, you can be awarded federal financial aid for which you have applied and are otherwise eligible. You may be granted financial aid during your 'warning' status for only one semester. You are not allowed to receive consecutive “warning” semesters of federal aid.

Which type of financial aid should you accept first? ›

First, accept the financial aid funds you don't have to pay back. When your school financial aid office sends you an aid offer, they'll ask you to indicate which financial aid you want.

What are good reasons for financial aid appeal? ›

Valid reasons for an appeal include:
  • medical emergencies.
  • severe health issues.
  • severe personal or family problems.
  • financial or personal catastrophe.
  • return for a second degree or certificate.

Can I negotiate my financial aid offer? ›

If the financial aid package offered in your award letter isn't everything you hoped it would be, you can negotiate it. Yes, financial aid is negotiable. “There is very little downside to asking, so you might as well make the request,” says Shannon Vasconcelos, a college finance educator at College Coach.

How do you get hella money in college? ›

Stop Being Broke: 100+ Ways to Make Money in College – Spring...
  1. Campus Jobs.
  2. Off-Campus Jobs.
  3. One-Time Gigs.
  4. Entrepreneurial Things.
  5. Reclaim Money.
  6. Start Investing.
  7. Sell Your Old Stuff.
  8. Market Yourself.
29 Mar 2022

How much money should parents give college students? ›

According to Admissionly, depending on how strictly your student budgets, their average monthly spending will likely fall between $1,400 and $2,082 for necessity and non-necessity expenses combined.

What expenses are considered needs? ›

Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities.

What are the most common financial problems? ›

Here is a list of the most common financial problems people may face:
  • Lack of income/job loss.
  • Unexpected expenses.
  • Too much debt.
  • Need for financial independence.
  • Overspending or lack of budget.
  • Bad credit.
  • Lack of savings.

What can I spend money on? ›

5 things to spend money on that can boost your happiness
  • Spend money on self-improvement and self care.
  • Spend money on your future.
  • Spend money on experiences.
  • Give more to your loved ones.
  • Give more in general.
15 Sept 2021

What is the 67% rule for financial aid? ›

The US Department of Education requires students to complete at least 67 percent of all courses attempted for all colleges attempted to maintain eligibility for federal financial aid. PACE is calculated by dividing the earned credits by the attempted credits.

What is the highest income to qualify for financial aid? ›

Share this Article
  • There are no income limits to apply for the FAFSA.
  • The FAFSA uses several factors to calculate your expected family contribution (EFC).
  • You could qualify for maximum financial aid if you or your parents make less than $27,000.
  • A student can make up to $7,040 before it affects their FAFSA.
12 Aug 2022

What is the income limit for FAFSA 2022? ›

You may have heard the myth that if your family earns a certain amount of money, then you might not be eligible for student aid. But here's the truth: There's no FAFSA income limit, and it's possible to receive financial aid regardless of your family's income level.

How many classes can you fail with financial aid? ›

The number of attempted credits you must pass, typically around 70-75%.

How many times can you fail with financial aid? ›

If you failed one class, but received strong marks in the rest of your courses, you should be fine. Each institution has its own satisfactory academic process, but for the most part, you should maintain a “C” average to continue receiving aid. If one “F” doesn't bring you below that average, your aid won't change.

Will I lose my financial aid if I fail a class? ›

Failing or taking an incomplete grade in courses can impact your financial aid in multiple ways. The 3 main impacts may be owing money back for the current term, losing federal aid eligibility for future terms, and not meeting the renewal criteria for scholarships and institutional aid. Q1.

Does FAFSA check your bank account? ›

Students selected for verification of their FAFSA form may wonder, “does FAFSA check your bank accounts?” FAFSA does not directly view the student's or parent's bank accounts.

How do I get maximum money from FAFSA? ›

Top Ten FAFSA Tips to Maximize Your Eligibility
  1. File the FAFSA early. ...
  2. Minimize income in the base year. ...
  3. Reduce reportable assets. ...
  4. Save strategically. ...
  5. Spend strategically. ...
  6. Coordinate 529 college savings plans with the American Opportunity Tax Credit (AOTC). ...
  7. Maximize the number of children in college at the same time.
3 Oct 2022

Can you get financial aid if you make too much money? ›

Don't worry, this is a common question for many students. The good news is that the Department of Education doesn't have an official income cutoff to qualify for federal financial aid. So, even if you think your parents' income is too high, it's still worth applying (plus, it's free to apply).

Should I empty my bank account for FAFSA? ›

Empty Your Accounts

If you have college cash stashed in a checking or savings account in your name, get it out—immediately. For every dollar stored in an account held in a student's name (excluding 529 accounts), the government will subtract 50 cents from your financial aid package.

How much do parents income affect FAFSA? ›

The FAFSA formula doesn't expect students or families to use all of their adjusted available income to pay for college. The formula allocates 50 percent of a dependent student's adjusted available income to cover college expenses and anywhere from 22 to 47 percent of parents' available income.

How much are parents expected to pay for college? ›

First, in general, parents are expected to contribute up to 47% of their net income to the cost of college every year. Before you freak out, stop! That doesn't mean 47% of every dollar you earn.

Does financial aid know what you spend your money on? ›

Such expenses include tuition and fees, transportation, books, room and board, supplies and related expenses like child care. Even though you will have to sign documents that say you promise to use financial aid only for these items, most schools usually do not keep track of students' purchases.

Does FAFSA only cover 4 years? ›

For details, contact your school's financial aid office. Please note that you can receive the Federal Pell Grant for no more than 12 terms or the equivalent (roughly six years). You'll receive a notice if you're getting close to your limit.

What happens if I run out of financial aid? ›

If you've used all your federal aid, have applied for scholarships and grants, and have considered a part-time job but still don't have enough money to pay for school, private student loans may be the option of last resort. Private student loans are offered by private lenders rather than the federal government.


1. Complete Guide to College Financial Aid!
(haley kang)
2. Understanding your Financial Aid Award Letter (financial aid offer)
3. Financial Aid Disbursements and Refunds
(Blinn College)
4. how does financial aid work
(Lockwood College Planning Advisors)
5. The Financial Aid Basics: Fafsa, CSS Profile, What are Grants, What are Scholarships & student loans
(Ed Zamora College Prep Channel)
6. FAFSA Overview
(Federal Student Aid)
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