How Does Financial Aid Work?

Must-read advice on how to get funds to pay for college

Families spent $26,373, on average, to pay for college during the 2020–21 school year, according to a 2021 survey by Sallie Mae and market research company Ipsos. Almost half of that amount (49%) came from financial aid. From this data, two things are immediately clear—first, college is expensive, and second, paying for it generally requires financial aid.

Key Takeaways

  • Start planning early for how and where to obtain financial aid.
  • Financial aid can be need-based, merit-based, or both.
  • The FAFSA form is required for federal aid as well as for most state and institutional aid.
  • The CSS Profile is required by many private colleges.
  • If the amount of aid you receive isn't enough, you can ask for more.

What Is Financial Aid?

Financial aid is any college funding that doesn't come from family or personal savings or earnings. It can take the form of grants, scholarships, work-study jobs, and federal or private loans. Financial aid can be used to cover most higher education expenses, including tuition and fees, room and board, books and supplies, and transportation.

Aid can come from a variety of sources. This can include federal and state agencies, colleges, high schools, community organizations, foundations, corporations, and more. The amount of financial aid you receive will depend on rules set by the various sources as well as federal, state, and university guidelines.

Start Early

Whether you are a potential college student or the parent of one, it's never too early to start planning. The U.S. Department of Education (DOE) Office of Federal Student Aid publishes a College Preparation Checklist that will help guide you from wherever you are—elementary, middle school, high school, or young adult—to where you want to end up—in college with a plan to pay for your education.

Ask your high school counselor about aid that may be available to you or your child from local and state organizations, including scholarships and grants that may be awarded while you are still in high school. Although you will have to declare any outside aid you receive when you apply through your college—and that aid will reduce the amount of federal, state, and college aid you can receive—it will also reduce the amount of aid you need, so the net effect is a wash.

Keep note of all financial aid application deadlines and don't let them pass before you apply. Use the DOE checklist mentioned above to build a foundation and the information in this article to guide your search for financial aid.

Need-Based Aid vs. Merit-Based Aid

The two main categories of financial aid are need-based and non-need or merit-based. Simply put, need-based aid is awarded based on the awarding organization's assessment of your ability to pay for college. Merit-based aid is awarded for special talent or demonstrated ability in academics, athletics, music, or other areas.

Whether your financial aid is need-based or merit-based (or both) does not determine whether you have to pay it back. That is determined by the specific type of aid you receive. Most scholarships and grants, for example, do not have to be repaid. Most loans do.

2 Important Application Forms: FAFSA and the CSS Profile

There are two primary pathways to financial aid as you enter college. One is the Free Application for Federal Student Aid (FAFSA) sponsored by the U.S. Department of Education and required for you to be considered for federal aid as well as for most college and state assistance.

The second, known as the CSS Profile, is sponsored by the College Board and used by roughly 400 mostly private colleges and universities to allocate non-government financial aid from those institutions.

Each form has its own deadlines and procedures (see details below). You should submit the FAFSA even if you don't believe you will qualify for federal financial aid. That's because (a) you may be wrong, and (b) even if you're right, the FAFSA is also required for most local, state, and individual school financial aid, including merit scholarships. Whether you should submit the CSS Profile probably depends on whether the financial aid you are interested in or the school you plan to attend requires it.

Breaking Down FAFSA

Be sure to submit your FAFSA on October 1 (or shortly after) for the following academic year. That means, for example, that you would have submitted it on Oct. 1, 2020, for the 2021–22 school year. Although the federal deadline to submit is June 30 of the academic year (in this case June 30, 2022), that will likely be too late to obtain most financial aid. It will also likely be well past the deadline for aid dispersed by most states and colleges.

You must also renew your FAFSA for each academic year you are in school or you will not qualify for additional federal financial aid (including renewable aid you received the previous year). To maximize your access to aid, renew your FAFSA on October 1 of the year before the academic year you are renewing for, just as you did with your first year of college.

The renewal process is usually easier and faster than the original because much of your personal and demographic information is retained. You still need to check it to make sure it is accurate, but there is no cost to submit or renew the FAFSA.

Breaking Down the CSS Profile

Submit the CSS Profile if the college or university you plan to attend uses CSS as part of its financial aid process. Do this October 1, at the same time you submit your FAFSA, and every year after on the same date if required.

Check the College Board list of Participating Institutions and Programs for detailed information about which schools require CSS and which classifications of students or parents are required to file.

Amherst College in Amherst, Mass., for example, requires the CSS Profile for domestic and international students, as well as from noncustodial parents of either. Loyola University in Baltimore, Md., on the other hand, requires the CSS Profile for both domestic and international students but does not require information from noncustodial parents.

Most people pay a $25 fee to submit their initial CSS Profile ($16 for each additional college). Waivers may be available for first-time domestic college applicants if:

  • You received an SAT fee waiver.
  • Your parents' income is $45,000 or less for a family of four.
  • You are an orphan or ward of the court under age 24.

The open date—the soonest you can apply for financial aid—is more important than the deadline, which is the latest you can apply.

Check Open Dates, Not Deadlines

Procrastinators beware! Although the FAFSA, the CSS Profile, colleges, and universities all have deadlines—the last date you can apply for aid each year—the most important date to remember is the open date—the first date each year you can apply for financial aid.

As noted above, the open date for the FAFSA and the CSS Profile is October 1 of the calendar year before the academic year for which you are applying for aid. The open date for the academic year 2022–23, for example, was Oct. 1, 2021.

You can apply for federal aid through the FAFSA for the academic year 2023–24 anytime between Oct. 1, 2022, and June 30, 2024. However, keep in mind that state and college/university aid open dates and deadlines, including those through the FAFSA and the CSS Profile, are typically much earlier than June 30, with some states and schools instructing you to apply "as soon as possible" after the October 1 FAFSA/CSS open date. Others set their deadline sometime between January and March of the next year and a few even follow the FAFSA June 30 deadline. State deadlines are available on the FAFSA deadlines webpage.

Types of Financial Aid

Whether need-based or merit-based, federal or private, financial aid typically comes in one of the following forms:


A grant is "free" money that doesn't need to be paid back (except when you fail to live up to the terms of the grant, such as by leaving school). Grants can come from the federal or state government, schools, or private or nonprofit organizations. Most grants are need-based but merit-based grants are also available.

The Federal Pell Grant and Federal Supplemental Educational Opportunity Grant (FSEOG) are examples of need-based grants. Information about merit-based grants, such as the Wyoming NASA Space Grant and the Broadcast Education Association (BEA) Grant, can usually be found at your state higher education website or through your school counselor's office.


Like grants, scholarships are gifts and do not need to be repaid unless you don't live up to the terms of the scholarship. Also like grants, scholarships can come from the federal or state government, universities, or private or nonprofit organizations.

Scholarships tend to be merit-based, though there are also scholarships that are need-based or that take both merit and need into consideration. Some scholarships are aimed at specific groups, such as women, minorities, or students from military families. Learn about scholarships that may be available to you through your school counselor, college financial aid office, or even at your local library.

Work-Study/Non-Work Study

Work-study typically refers to federal work-study, a program that provides part-time work on or off-campus while you are enrolled in school. Federal work-study is only available to you if you have demonstrated financial need. Qualifying does not guarantee you a job. You will need to apply, interview, and be hired. You will earn at least the federal minimum wage (more for higher-skilled jobs) depending on when you apply, your financial need, and the school's available funding.

Another type of job, known as a non-work study, is also available at many colleges and universities. These jobs are not government-sponsored, earnings vary, and funding comes from the department doing the hiring. To learn more about both programs, contact your college financial aid office.

Federal Student Loans

Federal student loans are government loans and include terms and conditions with benefits (i.e., fixed interest rates, income-based repayment plans) that are not available with most private loans. The Federal Direct Loan Program offers four types of federal loans:

  • Direct subsidized loans for eligible undergraduate students with demonstrated financial need
  • Direct unsubsidized loans for eligible graduate or undergraduate students but not based on need
  • Direct PLUS loans for graduate or professional students and parents of dependent undergraduate students, not based on need but a credit check is required
  • Direct consolidation loans that let you combine all of your eligible federal student loans into a single loan

Private Student Loans

Private student loans are made by banks, credit unions, and other state-based organizations. These loans include terms and conditions set by the lender and are generally (though not always) more expensive than federal student loans.

Unlike most federal loans, private loan rates are based on your credit score and lenders may offer you a variable interest rate (instead of a fixed one). You may be required to begin paying back your private loan while still in school. Federal loans allow you to wait until you leave school or graduate.

How Is Financial Aid Awarded?

Most of the details of obtaining financial aid take place at the college or university level. Importantly, while there are lots of similarities in the ways colleges award aid, each school has its unique process when it comes to open dates, deadlines, procedures, and the actual awards process.

It's especially important to understand the differences between scholarships, grants, and loans (see above) when you read your financial award letter. Some schools, for example, promise to cover 100% of your financial aid needs but do so by including student loans.

Others package financial aid with no loans and some even raise your financial aid package each year to cover tuition increases. It pays to know not only what you will get but also how it will be packaged. A big part of the financial aid awards process has to do with you and your family's ability to pay for college—that is, your expected family contribution (EFC).

Keep in mind, however, that beginning in July 2023, the term "student aid index" (SAI) will replace EFC on all FAFSA forms. In addition to some changes in the way the SAI is calculated, the change attempts to clarify what this figure is—an eligibility index for student aid, not a reflection of what a family can or will pay for postsecondary expenses.

When Will You Know How Much You Will Receive?

You will eventually receive a financial aid award letter from all colleges you applied to via your FAFSA or your CSS Profile. When the letter will arrive depends on the school, but generally, you can expect it at about the same time you receive your acceptance letter from that school.

The amount of aid offered can range from zero to the full cost of attending college. It will be broken down into three categories: free money you don't have to pay back, earned money (via work-study or non-work study), and borrowed money (either from federal or private student loans).

What If It's Not Enough?

If you feel your federal financial aid award is inadequate, you can request a professional judgment review by the awarding school. However, you will need a legitimate reason to convince the school your award is insufficient.

One way would be to demonstrate that your family's financial situation has changed for the worse. If that's the case, the school will typically ask you to submit a letter summarizing the new circumstances. This could include a divorce, a death in the family, a job loss, or sudden high medical costs.

If another school has offered you a larger award, you could try contacting the school offering the lower award and ask if they will match the larger offer.

A New Agreement May Help You Get the Most Aid

Historically, many colleges and universities have been criticized for encouraging college candidates to commit early with the understanding they could not switch colleges, even though the understanding was not legally binding. For the candidates, early commitment could mean passing up a better financial aid package from another school.

Now, however, students will have recourse. Action taken in September 2019 by the National Association for College Admission Counseling (NACAC) to strip provisions from its Code of Ethics and Professional Practice (CEPP) lets college counselors recruit students even after they have committed to another school.

Furthermore, NACAC members are now allowed to encourage enrolled students to transfer to a school with a better financial aid package, offer perks (such as special scholarships and priority course selection for early enrollees), and recruit students beyond the traditional May 1 deadline, giving those students more time to choose the best financial aid package.

The NACAC's action, in the form of a consent decree, came in advance of a U.S. Department of Justice (DOJ) lawsuit filed in December 2019 charging the NACAC with violating antitrust laws. The NACAC has said it will follow the restrictions outlined in the consent decree, although it believes the deleted provisions of the CEPP did provide substantial aid and protection to students.

Understanding how this process works is the best way to establish as much control and choice over financing college as possible.

Do You Have to Pay Financial Aid Back?

Financial aid in the form of a loan is to be paid back. If it is a federal loan, repayment begins after a student has graduated, with a grace period of six months after finishing school. On the other hand, privately-issued loans may require repayment during the school year. Other forms of financial aid, such as scholarships and grants do not need to be paid back.

What Are Four Types of Financial Aid?

Grants, scholarships, loans, and work-study are four primary forms of financial aid. Students may be eligible for more than one type of financial aid, based on their financial need and academic, athletic, or artistic achievement. 

How Is Aid Calculated?

FAFSA aid is calculated based on a number of factors. Broadly speaking, these include a student’s Expected Family Contribution (EFC) and cost of attendance. A student’s EFC is subtracted from their COA to determine the amount of need-based aid the student is eligible for. Next, to identify non-need-based aid, any financial aid already received is subtracted from the COA.

The Bottom Line

Remember that planning can never start too early. One of the basics to know is that aid can come from a variety of sources. This can include federal and state agencies, colleges, high schools, community organizations, foundations, corporations, and more. The amount of financial aid you receive will depend on rules set by the various sources as well as federal, state, and university guidelines. Be sure to look at the College Preparation Checklist published by the U.S. Department of Education's Office of Federal Student AI. This will guide you from wherever you are—elementary, middle school, high school, or young adult—to college with a plan to pay for your education.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Sallie Mae. "How America Pays for College 2021."

  2. Federal Student Aid. "FAFSA Application Deadlines."

  3. College Board. "CSS Profile Student Guide."

  4. U.S. Department of Education. "8 Things You Should Know About Work Study."

  5. National Association for College Admission Counseling (NACAC). "NACAC’s Code of Ethics and Professional Practices and Antitrust Provisions."

  6. Federal Register. "U.S. vs NACAC; Proposed Final Judgment."

  7. United States Department of Justice. "Elimination of Anticompetitive College Recruitment Restraints."

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