What is financial aid and how does it work?

Higher education can be a good investment in your future. Depending on if you’ve been able to save for college, it can also be quite an investment. The most recent data from the National Center for Education Statistics shows the average cost of attending a four-year university—including tuition and fees, books and supplies, and room and board—was $35,551 per year. 

Financial aid can make college more affordable. It includes scholarships, grants, work-study programs and student loans. An award could range from a small amount to a figure that covers most or all of the expenses. 

If you plan to attend college or a trade school, it could help to know about the different types of financial aid and how to qualify for them. 

Key takeaways

  • Financial aid includes grants, scholarships, work-study jobs and federal or private student loans.
  • Need-based aid is based on your family income. Merit-based aid is awarded to students for academic, athletic or creative achievements. 
  • Some types of financial aid, like scholarships and grants, can be thought of as free money and don’t have to be repaid. Other types, like federal and private loans, must be repaid. 

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A definition of financial aid

Financial aid is money that can help you pay for school costs like tuition, books and supplies and housing. It could come in the form of scholarships, grants, work-study programs or student loans. To secure the right financial aid, it can help to know the main options and which you might qualify for.

Types of financial aid

There are four main types of student aid: grants, scholarships, work-study programs and student loans. Some types need to be repaid; others don’t. 


A grant is considered gift money, so it doesn’t have to be repaid. Schools, private organizations, the federal government and state governments offer them. Grants can be need- or merit-based, so you’ll typically have to meet special requirements to qualify. For instance, some grants are offered to students based on ethnicity, family income or academic achievement. 

One of the most common grants to consider is a federal Pell Grant. Eligibility is based on a total family income of less than $50,000 and your enrollment status: you must be attending school at least half time.


More than 1.7 million private scholarships are awarded every year to students to help pay for the cost of higher education. Like grants, scholarships are gifts that generally don’t have to be repaid. Some scholarships are merit-based, so they may be awarded to students for their academic achievements, athletic performance or creative talents. Other scholarships may be based on the student’s interests, field of study or a specific quality, like ethnicity or gender. 

Scholarships that aren’t established by these factors may instead be based on financial need. No matter how you win the scholarship, though, you may need to meet requirements to keep the award. For instance, you may need to enroll in classes full time, maintain a certain grade-point average and use the funds on qualified expenses like tuition.  

Scholarships can come from nonprofits, local governments, religious groups, professional organizations or community organizations, among others. One example of a national scholarship is the United Negro College Fund, which awards more than $100 million in scholarships to African American students each year. You can check the Federal Student Aid website for tips on where and how to find scholarships.

Work-study programs

Work-study is a federal financial aid program that helps students find part-time jobs on campus to pay for school. About 3,400 colleges and universities take part in the program. To qualify, students must fill out the Free Application for Federal Student Aid (FAFSA®) and demonstrate financial need. 

If you’re awarded Federal work-study funds, you’ll need to find and apply for a job through school, then work enough hours to receive the funds allocated to you. You’ll earn at least the federal minimum wage and can typically use the money to pay for day-to-day expenses. 

Students who don’t qualify for the program can still apply for jobs on or off campus. 

Student loans

There are two general types of student loans—federal and private—that you can apply for. You begin with a starting balance, and you agree to pay it back with interest over time. 

Federal student loans are issued by the federal government via the Federal Direct Loan Program, and the lender is the U.S. Department of Education. There are four kinds of direct federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans. Within those categories, there are loan options for undergraduate students, graduate students, professional students and even parents of students. 

Some of the benefits of federal student loans include fixed interest rates, income-driven payment plans and loan forgiveness. You won’t have to go through a credit check to qualify. But you’ll need to show you’re a U.S. citizen or eligible noncitizen, have a Social Security number and be enrolled at least half time in an eligible degree or certificate program. 

You can use the Department of Education’s federal student aid estimator to check your potential aid package. You’ll need to have your two most recent federal tax returns and financial account information.

Private student loans are issued through institutions like banks, credit unions, schools and even state agencies. They can have fixed or variable interest rates and, depending on the lender, the interest may be higher or lower than on federal student loans. Private student loans can be taken out by students, but they often require a co-signer, such as a parent. That’s because lenders may want extra assurances the loan will be repaid.

Need-based aid vs. merit-based aid

Financial aid generally falls into one of two categories: need-based and merit-based.   

Need-based financial aid

Need-based aid provides financial support to students based on family income. There are other eligibility criteria, too. For instance, you may need to show that you’re a U.S. citizen or eligible noncitizen, attend an eligible school and enroll in an eligible degree or certificate program. You won’t be able to receive more aid than the amount of your financial need. So if your need-based award doesn’t cover everything, you could consider applying for merit-based aid, too.

Merit-based financial aid

Merit-based aid is funding awarded to students based on skill or ability. For instance, students may win scholarships for demonstrating academic, athletic or creative achievements. You may need to meet other requirements to qualify for and maintain the award.

How to qualify and apply for financial aid

To apply for federal financial aid like grants, scholarships, work-study and loans, you can fill out the FAFSA. For private aid, some institutions use the College Scholarship Service (CSS) Profile to determine eligibility, so it’s worth filling that out too.  

FAFSA overview

If you want to receive federal financial aid, start by filling out the FAFSA form. The federal government uses the form to work out how much you can afford to pay toward college. And colleges use that information to determine how much financial aid you’re eligible for.

You can submit FAFSA forms starting October 1, and because financial aid is provided on a first-come, first-served basis, it’s a good idea to apply as soon as possible. You’ll need to fill out a new FAFSA form each year you plan to attend college. Learn more about FAFSA and how it works.

CSS Profile

The CSS Profile is a form that some colleges and universities use to determine whether you qualify for nonfederal, school-based financial aid. The form is administered by the College Board, a nonprofit organization that helps prepare students for college. You can submit CSS applications starting October 1. But each school has a different deadline.  

Other sources

There are other ways to find information about student financial aid. You can ask your high school counselor and college financial aid office for leads. You can also look at online scholarship databases. As you get started, be mindful of deadlines. Some grant and scholarship applications are due while the student is still in high school, while others are reserved for students already enrolled in college. 

Some grants and scholarships provide a few hundred dollars. Others might pay for an entire year’s worth of tuition. But even the smaller awards can help defray the costs of books, supplies and living expenses.

Financial aid in a nutshell

Financial aid can help you pay for school, but you’ll need to find the right type for your situation. Grants and scholarships are considered gifts that don’t need to be repaid but have eligibility requirements. Federal and private student loans may have to be repaid. 

Work-study programs connect you with a part-time job so you can earn money while attending school. Some students apply for jobs outside these programs, too. 

Keep in mind that you don’t have to stick with just one form of financial aid. You can use a combination of scholarships, grants, loans and money you earn from a job. 

Having a student credit card while you’re in college can help you pay for some of your expenses while you’re in school. When used responsibly by doing things like paying your bill on time each month, it can also help you establish credit. And that can help down the road when you apply for a car loan, mortgage or apartment. 

If you’re figuring out credit for the first time, check out these tips for using a card responsibly and creating healthy financial habits.

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