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 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.
Why It’s Important to Know the Difference Between Merit- and Need-Based Financial 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 PROFILE requires families to submit a lot more information about their financial status than the FAFSA.
However, PROFILE schools tend to provide much more generous need-based aid.
*Some merit aid is used to cover need-based aid, but only in the case when a student qualifies for need-based aid. This is dependent on individual college policies.
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 in a number called the Expected Family Contribution (EFC).
This is the amount the family is expected to pay for college.
The difference between the EFC and the cost of the college is what colleges and the federal government consider to be the student’s need.
Unfortunately, rarely, do families consider their assigned EFC to be a reasonable amount.
This is why families start looking for merit aid to help cover their EFC.
The largest source of merit aid comes from the colleges.
The federal government offers very little merit aid.
The largest source of non-need based aid from the federal government is student loans.
It’s important to realize that the amount of merit aid offered by scholarships is the 2nd 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
Because (most) colleges need to fill their freshman class, they offer merit awards.
This means that colleges that don’t need to worry about attracting students, are unlikely to offer merit awards at all.
Keeping that in mind, it’s easy to understand why 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.
Therefore, students looking for need-based aid should check out the average net price by income on the College Navigator website.
This, along with the college’s NPC, will give them an idea if there is likely to be a large gap between their demonstrated need and the actual award.
Students looking for merit aid should also check out the NPCs to see if they estimate potential merit awards.
The College Navigator website also lists the percentage of students who receive institutional aid from the college.
Colleges where the percentage is above 85% are likely to be providing merit aid even if it doesn’t show up in the NPC.
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