Understanding Financial Aid for College: A Guide

Financial aid is any form of funding that helps a student pay for college, such as a Pell Grant or merit-based scholarship.

Many families are shocked by a college's sticker price. While the cost of tuition can be overwhelming, financial aid can make higher education affordable.

In fact, income and savings represent only a few of the resources families use to pay students' college expenses, according to the annual Sallie Mae/Ipsos survey How America Pays for College. The 2022 survey found that for a typical family, scholarships and grants covered 26% of college costs in 2021-2022. Scholarships and grants are types of college financial aid that don't need to be repaid.

With the complexity of paying for college, navigating the financial aid process can be challenging. Here are a few answers to common financial aid questions.

What Is Financial Aid?

College financial aid helps students and their families by covering higher education expenses such as tuition and fees, room and board, books and other coursework supplies, and transportation.

There are several types of financial aid:

• Grants
• Scholarships
• Federal or private loans
• Work-study and other programs

How Does Financial Aid Work?

Different types of aid are provided through various sources, such as federal and state agencies, colleges, high schools, foundations and corporations, to name a few. The amount of aid a student receives depends on federal, state and institutional guidelines.

Keep in mind that the way federal financial aid works is that a student must first apply for the aid by answering a series of questions used to determine his or her ability to pay for college.

Then, aid is awarded based on that application, and the student has the choice to accept or reject the aid offered. The type of aid offered determines whether it will have to be repaid. Sometimes, a student must complete additional applications to be considered for scholarships or private aid.

How Do I Apply for Financial Aid?

The first step is to file the Free Application for Federal Student Aid, known as the FAFSA. This application is used by many state agencies and schools to determine college aid.

The FAFSA is available through the U.S. Department of Education's website. Families can begin filling out the form as early as Oct. 1 for the following academic year.

The deadline for the FAFSA is June 30 for those attending college in the fall. For instance, the 2023-2024 FAFSA, which opened on Oct. 1, 2022, is due June 2024. But that deadline is only for federal financial aid. Many schools and colleges that use the FAFSA to determine aid set earlier deadlines.

Some schools – mostly private colleges – use a supplemental form called the College Scholarship Service Profile, or CSS Profile, to determine how to give out their own funds. This form is more detailed than the FAFSA and can be more time-consuming to complete.

The initial submission fee for the CSS Profile is $25; each additional report is $16. But fee waivers are available. Undergraduate students with a family income of $100,000 or less, for instance, can file the form at no cost.

A list of schools that require the CSS Profile can be found on the website for the College Board, the organization that administers and maintains the application.

"Bear in mind, the CSS Profile will dig much deeper into your family's finances than the FAFSA," says Joseph Orsolini, president of College Aid Planners Inc.

For instance, the CSS Profile takes into account assets that are excluded on the FAFSA. It counts the value of a family's home, small business or a grandparent-funded 529 college savings plan, to name a few differences.

What Are the Different Types of Financial Aid?

There are two types of aid: need-based and merit-based.

Federal need-based aid, for instance, is determined by a family's demonstrated ability to pay for college as calculated by the FAFSA.

Merit aid, on the other hand, can be awarded by an institution, college or private organization to a student for a specific talent or an athletic or academic ability. These awards aren't based on financial need.

College students are potentially eligible for federal, state and/or institutional aid. Institutional aid is financial assistance provided by the college and varies by school, since each college uses its own policies and formulas to determine how to award its financial aid.

According to the Department of Education, most students qualify for some type of federal student aid. For federal financial aid, there are three types of funds: loans, grants and work-study.

• Federal student loans. These are fixed-interest-rate loans from the government. The interest rate for each academic year is set on July 1, and that rate is secured for the life of the loan. The main program for federal student loans is the direct loan program, which allows qualified undergraduate students to borrow direct subsidized or unsubsidized loans up to $31,000 total if they're a dependent. An independent undergrad student can borrow up to $57,500 total.
• Federal grants. This federal money doesn't need to be repaid. The most well-known higher education grant for college is the Pell Grant. Eligibility for a Pell is based on a family's expected family contribution, or EFC, and is calculated on the FAFSA. The maximum Pell for the 2022-2023 school year is $6,895. A family with an EFC of zero, for example, will qualify for the full Pell.
• Work-study. This program provides part-time work, typically on campus, to help students cover college-related expenses. Not all students qualify for federal work-study. Students need to qualify through the FAFSA with demonstrated financial need. Work-study students earn at least $7.25 per hour, the federal minimum wage. The average amount of federal work-study earned in 2021-2022 was $1,531, according to Sallie Mae's "How America Pays for College" report.

When it comes to state aid, most states limit their aid to in-state residents.

"By and large, the student would have to be a resident of the state and stay within the state to attend higher ed to be able to receive their specific state's grants," says Marty Somero, director of financial aid at the University of Northern Colorado.

While the FAFSA should be on a student's radar to qualify for need-based aid for both federal and state funds, a college-bound student can go a step further and maximize merit-based aid, experts say. That's because merit aid is one way to close the gap between the cost of attendance and need-based financial aid.

But not all schools award merit aid. Some schools reserve merit aid only for exceptional circumstances, while others require students to maintain a certain GPA.

Beyond federal, state and institutional aid, there are a few other aid programs to consider that serve specific student groups, such as Peace Corps volunteer benefits and the Reserve Officers' Training Corps program, known as ROTC. Students who participate in ROTC can learn and train at the same time, and some receive a scholarship that covers either tuition, fees and books, or room and board instead.

There are also military benefits through which veterans, active duty service members and their dependents can pay for school, such as GI Bill benefits that cover all or some costs.

Experts advise high school students to connect with school counselors and discuss additional types of grants or scholarship options like ones from private foundations.

"Institutions offer their own endowed scholarships through their foundation but we also know that students can find resources beyond the institution," says Jane H. Dané, associate vice president for enrollment management at Old Dominion University in Virginia. "As we consider the foundation scholarships, many of those will be automatically considered with the application of admission but others might require some unique applications."

Ronald Ramsdell, founder of College Aid Consulting Services, warns families not to pay for a scholarship search service.

"There are a lot of (outside scholarship) sources out there that are not legitimate," he says. "They are worthless, so families need to do their homework."

What Should I Know About Financial Aid Deadlines?

Pay attention to deadlines, experts recommend. It's important to meet college financial aid deadlines, which vary by institution.

The University of Iowa, for example, sets its financial aid priority deadline for Dec. 1, which is early compared with many other schools. Aid at the university is distributed on a first-come, first-served basis.

"Although you can apply for financial aid throughout the year, funding for some financial aid programs may be depleted. You may meet the qualifications for certain types of aid, but not be offered that aid because the funding has run out," according to Iowa's website for the Office of Student Financial Aid.

Other colleges have later deadlines. The University of Northern Colorado, for instance, sets its deadline for March 1.

"A student wants to be aware of deadlines for each school that they are applying to," Somero says. "Missing a deadline by a day at UNC, for instance, can cost a student $5,000 to $6,000 in free aid versus a parent loan or other types of student loans they have to take out to meet the need. So deadline dates are critical, and they can vary from school to school. So students want to ensure that they file before the priority deadline date."

But it's not just institutional deadlines that parents and students should note.

"Some states have early deadlines for state grant eligibility, and some schools may not be able to provide as generous a financial aid offer if the application is late," says Brad Lindberg, assistant vice president of institutional initiatives and enrollment at Grinnell College in Iowa. "Getting organized about the deadlines and the application requirements is truly the first step in any application process."

How Do Schools Award Aid?

College financial aid officers say that while there are many similarities between how schools award aid, each has its own unique process for processing applications and awarding aid. Some schools offer larger financial aid packages than others, just like some institutions charge higher tuition rates compared with other schools.

For example, although some schools claim to meet full financial need for the cost of attendance with aid, those packages may include loans. A handful of institutions, including the University of Chicago and Pomona College in California, package financial aid awards with no loans.

When Will I Receive a Financial Aid Award Letter?

Financial aid award letters typically arrive in the mailboxes of college-bound students in early spring – usually after or at the same time as a college acceptance offer.

"A student can expect to see an award letter anywhere from December through April, depending on the school," Somero says.

How Do I Appeal a Financial Aid Award?

The process of appealing an award is known as a professional judgment review.

But according to Orsolini, "You need more than 'I need more money' to appeal a financial aid award." Families need a legitimate reason for schools to re-examine students' financial situations, he adds.

To be successful with an appeal, families need to demonstrate there's been a significant change in their financial circumstances since they submitted their application, says Dan Blednick, senior director of college guidance at TEAK Fellowship, a nonprofit organization that serves students from low-income families in New York City.

College financial aid experts say a family will usually be asked to submit a letter summarizing the special circumstance that affects their ability to pay. A qualifying special circumstance might be a recent job loss, divorce, death in the family, out-of-pocket medical expenses or care costs needed for an elderly parent, to name a few examples.

"I would recommend trying to connect with a specific person in the college's financial aid office who is assigned to your case," says Blednick, who advises providing documents that reflect a need for additional funding.