Colleges and universities have access to a wide array of financial aid programs to assist families in funding the cost of a college education. These financial aid programs exist for a variety of reasons including: improving college access (i.e. making it possible for all qualified students to attend a college or university), rewarding outstanding academic achievement and encouraging the enrollment of the number and kind of students who have the special characteristics, talents and abilities desired by the college. Unfortunately, the financial aid area is one of the most complex and often confusing aspects of the entire search process. One of the first questions often asked by families beginning the college search process is, "What are the different kinds of financial aid?"

What is the difference between need-based and merit-based financial aid?

Many colleges offer both kinds of financial aid and the difference between these two kinds of assistance is sometimes unclear. Need-based aid refers to the funds awarded to a student to make up the difference between what it costs to attend an institution and what the family can afford to pay. Need-based aid comes into play only when the family cannot afford to pay the full cost of attending. The existence of need-based programs is based on the principle that the primary obligation for funding a college education rests with the family. Need-based aid exists to promote access to college. In awarding these funds, the ability to pay is the primary, if not only, consideration.

Merit-based aid programs were created to assist colleges in reaching objectives in addition to access. The intent of these programs often involves bringing academically superior students into the student body at the college or enticing students with special abilities to enroll at the college.  In awarding merit-based aid, the ability of the family to pay for the cost of attendance is of secondary consideration.

Colleges that offer merit-based and need-based financial aid programs will often use funds from both programs to assist a student. For example, a student with outstanding academic abilities may receive a merit-based scholarship but have financial need in excess of the value of the scholarship.  In these cases most colleges address the remaining need through need-based programs.

Not every college offers both kinds of aid.  Some colleges offer only need-based financial aid.

Where does financial aid come from?

There are four primary sources of financial aid:  the federal government, state governments, private foundations and corporations and the colleges themselves. The amount of aid available for the 2003-2004 was approximately 122 billion dollars. Of that amount, about 70 percent comes from the federal government, 10 percent from state governments, and 20 percent from colleges, foundations and corporations. These funds are awarded to students in the form of grants or scholarships, loans, or in the form of work-study arrangements in which the student receives an hourly salary for work while attending the college or university.

What is the difference between grants or scholarships, loans and work-study?

Grants and scholarships are generally considered the most desirable form of financial aid. These are often referred to as gift aid. The recipient of gift aid is under no financial obligation to repay the provider for the use of these funds. Given the nature of these awards, the funds received through grant and scholarship programs represent a true discount on the cost of attendance - a direct reduction in price.

Student loans provide the student with immediate access to funds to cover the cost of attendance, but the use of these funds carries with it the obligation of repayment, with interest, over a period of time. Loan funds reduce the immediate burden on the family but they do not reduce the true overall cost to the family as the total repayment obligation exceeds, by the amount of interest applied, the loan proceeds are used to cover college costs. In fact, loans have the effect of increasing overall college costs. The advantage of using a student loan, as opposed to other kinds of commercially available loans, is that the interest charged on student loans is often subsidized by the federal government (both in terms of the actual amount of interest charged and the deferral of interest accrual during the time when the student is in college) and the conditions of repayment (payments do not commence until after the student completes college.) These kinds of loans are referred to as subsidized loans. Unsubsidized loans are also available. For these loans, interest begins to accrue as soon as the funds are used, but repayment does not begin until after the student ceases to attend a college or university.

College work-study involves the student in a work relationship with the college or other approved agency. The federal government provides the college with funds to be used as salary payments to eligible students who perform services for the college. The hourly rates vary with the kind of job performed and the number of hours weekly that a student may work is limited. Payments are made directly to the student in the form of a paycheck.

Where do I get more information about these programs?

Virtually every college or university provides information about its financial aid programs on its Web site and in its publications. In addition to the information provided by the colleges, you may also want to take a look at the following Web sites.