Deciphering College Financial Aid: A Guide to Need-Based vs. Merit-Based Aid

Needs based financial aid vs. merit based scholarships

Deciphering College Financial Aid: A Guide to Need-Based vs. Merit-Based Aid

Published November 18, 2023 | Last Updated April 1st, 2024 at 01:18 pm

Needs based financial aid vs. merit based scholarships

College financial aid falls into two basic categories: need-based and merit-based aid. It’s important to know the difference between the two.

Merit-based financial aid can come from institutional, state, federal or other sources (including unrestricted funds or gifts and endowment income) and is awarded solely on the basis of academic achievement, merit or any other non-need-based reason.

This can be academic, GPA or test scores; athletic, the ability to catch a football; social, organizing people for a cause; or some special skill like music or debate, as examples.

Need-based financial aid is based on a family’s demonstrated financial need (as determined either by FAFSA or the CSS Profile) of what they can and can not pay towards college.

Need-based aid is any college-funded or college-administered award from the institution (college), state, federal or other sources for which a student must have financial need to qualify.

It also includes both institutional and non-institutional student aid from grants, jobs, and loans.

Merit-Based vs. Need-Based Aid

It’s important to understand how the categories are derived at based on whether or not the aid is being awarded to meet financial need.

To receive need-based aid, students must demonstrate financial need, as defined by FAFSA or the CSS Profile. Unfortunately, financial need is not determined based upon what a family feels like they can or cannot pay for college.

In other words, it’s not for families to make that determination.

Given that colleges and the federal government are the major sources of financial aid, we’re going to focus on the differences of need-based and merit-based aid as it applies to these institutions.

Keep in mind that the same differences apply to outside scholarships awarded by foundations and community groups.

Some private scholarships will be based on need, while others won’t require any financial eligibility.

How to Demonstrate Your Need for Financial Aid

Need-based aid from colleges and the government requires students to prove their financial need by submitting a financial aid application based on their income tax returns.

There are two possible financial aid applications.

The most common and well-known is the Free Application for Federal Student Aid (FAFSA).

Any student who wants to receive federal financial aid, including federal student and Parent PLUS loans, must complete the FAFSA.

Most colleges use the FAFSA to decide how much of their own money, referred to as “institutional money,” to award to students.

The second financial aid form is called the CSS Profile and is used by a limited number of schools (400 colleges) to determine how they will award their institutional aid.

The CSS Profile requires families to submit a lot more information about their financial status than the FAFSA. However, CSS Profile schools tend to provide much more generous need-based aid. 

Colleges Get to Decide Your Financial Need

The point of explaining about the two different forms is that it is the colleges and the federal government that get to decide how much financial need a student and his/her family has.

The need is defined by the Student Aid Index (SAI). The difference between the SAI and the cost of the college is what colleges and the federal government consider to be the student’s need. However, families often don’t think their SAI is reasonable, so they look for merit aid to help cover their SAI.

The largest source of merit aid comes from the colleges, not the government. The federal government offers very little merit aid. The largest source of federal aid not based on need is student loans.

It’s important to realize that the amount of merit aid offered by scholarships is the second-largest source of free money, much larger in size than what students will find with private scholarships.

Most colleges will automatically consider students for merit aid when they apply for admissions.

Many incorporate potential merit aid awards as part of their Net Price Calculators. The reason for this is that most colleges offer merit aid to convince students to attend their school. Since most schools actually have to compete for students, they are essentially offering desirable students discounts to attend their institution.

Not All Colleges Offer Merit Aid

Some colleges offer merit aid to attract applicants, but others offer very little. For example, the Ivy League schools only offer need-based awards.

No one, not even the athletes, are receiving merit scholarships to attend an Ivy League school.

These colleges are likely to have a very generous definition of financial need and tend to meet 100% of need – as they define it, of course.

The majority of colleges don’t meet 100% of demonstrated need, but some do a better job than others. The chart below offers examples of the percentage of need met by a sampling of colleges. Also note how the admission rates differ, with top-ranked schools being highly competitive. However, good aid packages are also available at other colleges, which often are less expensive to attend.

Examples of Colleges and Percentage of Need Meet

College% of Need MetAvg financial aid for freshmen w/ needOverall admit rate
Harvard University100%$62,2523%
Columbia University100%$67,8184%
Stanford University100%$59,4024%
University of Virginia100%$32,06521%
University of Pennsylvania100%$54,9547%
Case Western Reserve100%$49,05427%
Carnegie Mellon100%$51,56011%
University of Florida99%$15,42130%
University of Michigan88%$26,26118%
Emory & Henry88%$36,78580%
University of California, Irvine84%$26,69721%
California State University, Fullerton82%$12,07667%
University of Georgia78%$14,04943%
University of Washington76%$16,49448%
Eastern Kentucky University74%$13,37998%
University of Colorado, Boulder71%$17,95580%
Ohio State University, Columbus70%$15,81353%
University of Alabama63%$17,57680%
Penn State, University Park61%$10,49155%
University of Connecticut61%$18,64856%
Texas Tech61%$12,55867%
University of Iowa58%$15,03486%

Source: R2C Insights

The Bottom Line

Navigating the world of college financial aid can be complex, but understanding the key differences between merit-based and need-based aid is crucial for making informed decisions. Merit-based aid rewards academic, athletic, or other talents, while need-based aid focuses on a family’s financial situation as assessed by tools like the FAFSA or CSS Profile. It’s important to remember that each college and the federal government have their own methods of determining financial need, and this often involves assessing more than just income.

The landscape of college financial aid is diverse, with various sources ranging from federal and state governments to individual institutions and private organizations. While need-based aid is often more generous in terms of meeting the financial gaps for college expenses, merit-based aid can provide substantial support based on a student’s achievements and skills.

It’s also vital to note that not all colleges offer the same level of aid. Some, like Ivy League institutions, focus solely on need-based aid, while others provide a mix of both need-based and merit-based aid. The amount and type of aid offered can significantly impact the overall cost of attending a particular college.

In summary, when exploring financial aid options, it’s essential for students and families to thoroughly research and understand the various forms of aid available. Utilizing tools like R2C Insights can simplify this process, providing a clearer picture of the financial landscape at different colleges. By being well-informed and proactive, students can find the right college at the right price, aligning their educational aspirations with their financial realities.

Using R2C Insights to Compare Colleges

Road2College offers a convenient tool to help you find the right college at the right price. With R2C Insights, you can sort through colleges by overall cost, financial aid, average test scores, admit rates, majors and much more. You can even see crowdsourced offers that our readers received. Try it for free today. 

Other Articles You Might Like:

Colleges Offering Merit Aid to 95%+ of Students Without Need

How My Daughter Got $53,000 a Year in Merit and Financial Aid Plus More in Private Scholarships

If You Receive Need-Based Financial Aid, Here’s What You Need to Know about Paying for College












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