Understanding the different types of financial aid

paying for college

By Suzanne Shaffer

Those two little words — “financial aid” — can be music to a parent’s ears. I know they were to mine!

What I didn’t know as I began the college application process with my daughter was that there are a number of different types of aid available. Not only that, but the awards colleges make when they offer admission can vary tremendously.

I was surprised to find that many private colleges can be generous with merit aid because they have institutional funds to distribute as well as federal dollars, while public universities with tight budgets may offer less aid. This can result in a private college with a higher “sticker price” costing less to attend than a public university.

As its name indicates, the FAFSA (Free Application for Federal Student Aid) is free. Be sure to access it at fafsa.ed.gov and beware of copycat websites that charge a fee to help you complete and submit the FAFSA. For tips from the Federal Trade Commission about avoiding financial aid and scholarship scams, click here.

Back to the example of my daughter, who applied to a mix of public and private universities. We knew we would need help financing her education, so when she applied to college she also applied for financial aid and we completed two online forms: the FAFSA (Free Application for Federal Student Aid) and the CSS/Financial Aid PROFILE (administered by the College Board and required by many private schools and some flagship state universities).

This is what resulted. School #1, a state university, offered aid in the form of student loans (which must be repaid) — no grants or scholarships (which do not). One private college (school #2) offered her a full-ride: a four-year scholarship meeting 100 percent of the cost of attendance (tuition, room, board, books, fees). School #3, a private university which was her first choice, offered student loans, work study and parent loans.

This last financial aid package, while helpful, did not equal the difference between the cost of attending and our EFC (Expected Family Contribution; more on this below). Colleges sometimes “gap” students who are accepted but are not in the top tier and therefore considered for merit aid.

The college she chose — school #4 — offered a combination of awards: college grants, honor scholarships, student loans, and work study that fully bridged the difference between the cost of attending the college and our EFC. In other words, the school met 100 percent of our family’s “demonstrated need.” It was not the full ride or her first choice, but it was her second choice, a perfect fit for her and — thanks to the financial aid package — affordable.

Time to start answering a few of the questions you are sure to find yourself asking about financial aid!

Do colleges award financial aid automatically to accepted students?

No. In order to qualify for financial aid from the college, you must complete the FAFSA, and for some private colleges the CSS/Financial Aid PROFILE, every year your student is attendingNo FAFSA = no financial aid. Colleges use the figures on the FAFSA to determine federal aid eligibility and as a basis for distributing college/institutional aid as well.

Even if you don’t think you will qualify, fill it out. Most students qualify for some form of financial aid and, since it’s free to complete, you have nothing to lose and everything to gain. Based on data from your FAFSA, your Estimated Family Contribution (EFC) is calculated. The amount you are expected to contribute to your student’s education is basically the difference between your family’s cost of living and your income and assets. After you file the FAFSA, the EFC is generated and sent to you in a Student Aid Report (SAR).

What types of aid are available?

Some schools have their own financial aid application forms. Double check the websites for details and deadlines, or use the fast and easy online tool at InstaTuition.

There are two basic types of aid: need-based and non-need-based. Need-based aid is comprised of grants and scholarships that are issued based on the family’s ability to contribute to education costs. Non-need-based aid is allocated based on availability, not need, and includes “merit aid” — grants and scholarships offered to students whose credentials place them in the top portion of a school’s admitted class. Let’s break the categories down further and examine the following: federal aid, state aid, college aid or merit aid, and private scholarships.


The U.S. Department of Education awards about $150 billion a year in grants, work-study funds, and low-interestloans to more than 15 million students. Federal student aid covers such expenses as tuition and fees, room and board, books and supplies, and transportation. Federal student aid includes:


Grants from the government are provided based on financial need or special circumstances and generally do not have to be repaid. The amounts of these federal grants vary based on demonstrated need and the cost of the college. These grants rarely pay for the entire cost of the college and are just one portion of the federal aid package.


Believe it or not, colleges consider loans to be financial aid. They often use loans to fill in the gap between your EFC (Expected Family Contribution) and the cost to attend the college. Although it’s not the most favorable means of filling the gap, colleges use it quite often. If your student needs loans to pay for his education, be aware that not all college loans are equal. There are two types of government-based loans: subsidized and unsubsidized. Subsidized loans have lower interest rates and are awarded based on the student’s financial need with interest deferred until after graduation. Unsubsidized loans are awarded without regard to financial need with interest payments beginning immediately and regular payments after graduation. Following is a brief description of each:

  • Perkins Loan — A campus-based loan with interest paid by the government during the in-school and grace periods. This is the best student loan to accept.
  • Stafford Loan — Government-based loans that are either subsidized or unsubsidized.
  • PLUS (Federal Parent Loans for Undergraduate Students) — This loan is for creditworthy parents with payments beginning 60 days after it is disbursed with relatively low interest rates.

For in-depth information about government education loans, visit http://www.finaid.org/loans/.


This campus-based program uses federal dollars distributed to the colleges. If your student has demonstrated need, work-study might be part of the award package. Your college student may work on or off campus and be paid the amount of funds provided for work study. The amount awarded for work-study does not reduce the college bill in a lump sum, although Net Price Calculators on college websites and financial aid award letters sent to admitted students may subtract the total award as financial aid. Instead, students receive their award in the form of a paycheck from the college as they work. Work-study funds earned by your student are taxable.


During the 2012–2013 academic year, $9.7 billion was awarded by state higher education organizations. Most state programs are available only to students who attend a college within their state of residence. For more information, contact the state’s higher education agency here.


In addition to federal and state aid, colleges often award aid from their own institutional funds to students who are offered admission. This aid comes in the form of grants and/or scholarships. These awards can be need-based or non-need based and can often subsidize a huge portion of the college cost. Based on your FAFSA and the CSS/PROFILE results (if applicable), the school financial aid office may automatically consider your student for these awards when assembling the financial aid package. In other cases, your student may need to fill out additional forms and/or submit applications and other materials (such as transcripts, essays, portfolios, etc.) in order to be considered. Here are some tips for finding the most generous colleges.


In addition to the above types of aid, there are a multitude of private scholarship awards available for students who take the time to apply. Will private scholarships reduce your student’s financial aid award? They might. The government takes student awards into consideration when offering aid. However, students should not be deterred by this. The effects are not likely to be great. Many schools use student scholarship money to offset loan eligibility, not grant awards. Students who receive little aid can benefit greatly from outside private scholarships.