Understanding Scholarships: Need and Merit

Winning a scholarship or grant takes a bite out of college costs

More than 80% of college students today receive financial aid in the form of scholarships, grants, or low-interest loans. Scholarships are one of the most attractive types of aid because they don’t have to be repaid—unlike loans, which eventually do. Here is what you need to know about both need-based and merit scholarships and how to be considered for them.

Key Takeaways

  • Scholarships and grants reduce the cost of attending college and, unlike loans, don't have to be repaid.
  • Need-based federal grants, such as Pell Grants, are intended for students with what the government calls "exceptional financial need."
  • Merit scholarships are based on academic excellence, athletic achievement, or a range of other talents to help pay for higher education.

What Is a Scholarship?

A scholarship is money provided by the government, a college, or another organization to offset some of the costs of attending college. Technically, what many people think of as scholarships are actually grants. The federal government’s Pell Grants are one example.

"The terms ‘scholarship’ and ‘grant’ are often used interchangeably,” explains Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com. “But most scholarships are awarded based on merit—such as academic, artistic, or athletic talent—and most grants are awarded based on financial need. Some scholarships may be awarded based on both merit and need.”

Need-Based Scholarships and Grants

Federal aid

To be eligible for federal grants and other financial aid, parents and students must fill out the Free Application for Federal Student Aid (FAFSA) from the U.S. Department of Education. The FAFSA asks a series of questions about parents’ and students’ income, assets, and other relevant factors in order to determine how much need-based federal aid they might qualify for.

The information on the FAFSA is used to determine an expected family contribution (EFC), or how much a family might reasonably be expected to pay toward the cost of college, according to federal guidelines. The colleges themselves use that figure to calculate the amount and type of federal aid to offer a student. Families who receive federal aid must fill out the FAFSA each year the student is in college in order to remain eligible. When a family's financial circumstances change—say, someone loses a job or the family now has two children in college at the same time—it can also be a good idea to fill out a new FAFSA, even if it didn’t result in any aid the first time around.

Families who aren’t ready to fill out the FAFSA can get a preview of their likely EFC by using the Department of Education’s Federal Student Aid Estimator. It asks a series of questions similar to the FAFSA and determines the types and amounts of federal aid a student might qualify for, in addition to an expected family contribution.

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 actually is—an eligibility index for student aid, not a reflection of what a family can or will pay for postsecondary expenses.

Possible components of federal aid

Federal student aid can take the form of Pell Grants, work-study programs that provide students with paid part-time jobs and low-interest direct Stafford loans. Pell Grants are reserved for students with what the government calls “exceptional financial need.” The maximum Pell Grant for 2022–2023 is $6,895. A lesser-known program for students with exceptional need, the Federal Supplemental Educational Opportunity Grant (FSEOG), allows participating colleges to provide additional grants of $100 to $4,000 a year.

Colleges often offer students not just one form of federal aid but a package that might consist, for example, of work-study and a loan. Those aid packages can differ from college to college.

Non-federal aid

Several hundred colleges and private scholarship programs also use the CSS Profile to determine eligibility for need-based non-federal financial aid. The CSS Profile is an online aid application administered by the College Board. Unlike the FAFSA, signing up for it isn’t free. Families pay $25 for the first school they apply to, then $16 for each additional school. Those fees are waived for some low-income families.

For families who expect to receive some federal aid, the Department of Education’s College Scorecard can be a useful comparison tool. The College Scorecard provides average annual net costs at each college for students who receive federal aid. It’s based on the school’s published cost of attendance (COA) minus the average amount of federal grants and scholarships (but not student loans).

Non-need–based Federal Aid

The federal government also offers non-need–based financial aid. Colleges calculate a family’s eligibility for non–need–based aid by subtracting any need-based aid for which the student qualifies from the school’s published cost of attendance.

Most non–need–based aid comes in the form of loans—direct unsubsidized loans for students or PLUS loans for parents. There is also a separate program for students who plan to become teachers in high-need fields and low-income areas called the TEACH Grant.

Merit Scholarships

Colleges also offer merit aid to supplement federal aid. In some cases, colleges use merit aid to compete with other schools for students with unusual academic promise or exceptional talents. In others, however, merit aid is largely a marketing tool—a way to reduce their published tuition costs in order to compete with less-expensive schools (or those offering less merit aid) for desirable, but not necessarily stellar, students. Schools that have little trouble meeting their enrollment quotas are less likely to offer merit aid for that purpose.

Colleges have their own individual criteria for awarding merit scholarships and may require a separate application from the student.

Each college has its own criteria for deciding how much merit aid to offer. Grades, test scores, the student’s home state—even their prospective major—are among the many variables that can figure into the equation. Colleges may use information from the FAFSA, and some have separate scholarship applications for students to fill out. 

In addition to colleges, merit aid is available in the form of scholarships sponsored by corporations, states, civic groups, philanthropic foundations, and others. These scholarships typically require separate applications. 

Merit aid also gives students and parents some leverage in appealing to college financial aid offices for a better offer. A recent change in the ethics code of the National Association for College Admission Counseling may make that even easier. It allows schools to offer additional incentives to early decision applicants, in addition to applicants who have already accepted an offer from another school—a recruiting tactic that was previously considered off-limits.

What is the difference between need vs. merit-based scholarships?

Need-based scholarships are awarded based on financial need. They are eligible for each year of college enrollment. By contrast, scholarships based on merit are granted to students who illustrate academic or athletic achievement, along with a range of other talents and criteria. 

How do I apply for a need-based scholarship?

Begin by filling out the Free Application for Federal Student Aid (FAFSA), the most commonly used form for applying for a need-based scholarship. FAFSA applications open October 1, and students who apply early have a higher likelihood of receiving aid as funds are administered on a first-come, first-serve basis. 

What GPA do you need to get a merit-based scholarship?

Most often, merit-based scholarships are awarded based on high GPAs, with each college having different requirements. Some scholarships require students to maintain a certain GPA throughout college in order for them to remain eligible.

The Bottom Line

Scholarships are typically awarded based on need, merit, or a combination of both and given by governments, college, or private and civic organizations. Grants are different and are based almost exclusively on financial need.

Each college has its own criteria for deciding how much scholarship money to hand out. Grades, test scores, the student’s home state—even their prospective major—are among the many variables that can figure into the equation. For federal grants, students must fill out the FAFSA form.

Article Sources
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  1. National Center for Education Statistics. "Fast Facts: Financial Aid."

  2. Federal Student Aid. "Estimate your Federal Student Aid."

  3. Federal Student Aid. "Federal Pell Grants."

  4. Federal Student Aid. "Federal Supplemental Educational Opportunity Grants (FSEOG)."

  5. College Board. "2022-2023 CSS Profile Student Guide."

  6. U.S. Department of Education College Scorecard. "Glossary."

  7. Federal Student Aid. "TEACH Grants."

  8. NACAC. "Guide To Ethical Practice In College Admission," Page 7, Section II. A.

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