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Need-based financial aid: What it is and how to qualify

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If you can’t pay for college out of pocket, you can apply for need-based financial aid. Need-based financial aid is college funding that is awarded based on your financial situation. Federal need-based aid is available through the Free Application for Federal Student Aid (FAFSA); here’s how to apply.

Loan Student
Key takeaway
Need-based aid can help you pay for college if you can prove financial need. All college students can apply, but how much you’ll get will depend on factors like family income and cost of attendance.

What is need-based financial aid?

Need-based financial aid is money that’s awarded to you based on your family’s income and finances. If you need money to pay for school and can prove that you don’t have enough to pay for it yourself, you could qualify for different types of need-based federal aid, including:

  • Pell Grants. Pell Grants are awarded to undergraduate students who display strong financial need. How much you get depends on your course load and cost of attendance. Not all students who get a Pell Grant will get the same amount, but you can get up to $6,895 for the 2022-23 award year.
  • Work-study. Work-study programs are part-time jobs available to students to earn money to pay for school. Jobs can be on or off campus, and you’ll earn at least the federal minimum wage. Your total work-study award depends on when you apply, your need and your school’s funding level. Unlike with Pell Grants and loans, which go straight to your school, work-study usually pays you directly. It’s also worth noting that unlike regular part-time jobs, work-study doesn’t count toward your expected family contribution, so your financial aid won’t be negatively impacted by it.
  • Direct Subsidized Loans. Direct Subsidized Loans are a type of federal student loan where the interest is paid for by the federal government while you’re enrolled in school at least half time. Unlike Direct Unsubsidized Loans, subsidized loans are given to students with financial need. Regardless of the cost of your education, you’re limited to $23,000 in subsidized Direct Loans for your entire undergraduate studies, with annual limits from $3,500 to $5,500.

Need-based vs. merit-based financial aid

Financial aid comes in two forms: need-based and merit-based. Need-based is just that: aid given to people with financial need. Merit-based, on the other hand, is given to you based on your achievements, whether they’re academic or extracurricular (think sports, music, theater, arts, hobbies — even gaming). Most scholarships are merit-based, while grants and work-study jobs are need-based.

How to qualify for need-based financial aid

When you complete your Free Application for Federal Student Aid, or FAFSA, you’ll receive an award letter that details your expected family contribution, or EFC. If your EFC is below a certain threshold, you may be eligible for need-based financial aid.

Completing the FAFSA determines only whether you’re eligible for federal aid — it’s not a guarantee that all of your costs will be covered. Some grants and scholarships have maximum award amounts, and student loans may limit how much you can borrow based on what year you are in school, if you’re a dependent or independent student and the type of loan you’re getting.

Many types of need-based financial aid are given on a first-come, first-served basis, so it’s best to complete the FAFSA as soon as possible.

How to apply for need-based financial aid

The first place you’ll go for need-based financial aid is the Federal Student Aid website. From there, you’ll:

  1. Create your FSA ID.
  2. Gather all necessary documents, including tax and financial documents.
  3. Complete your FAFSA as soon as the enrollment period opens (Oct. 1 every year) to maximize your financial aid.
  4. Review your Student Aid Report and make any corrections, if necessary.
  5. Accept your award letter, including grants, scholarships, work-study and – if you absolutely need them – student loans. You can deny any or all of your aid offer.
  6. Get your aid sent directly to your college or university.
  7. Renew your FAFSA every year to continue receiving aid.

You can also explore other types of need-based aid through grants at the federal, state, local and institutional level that aren’t directly tied to the FAFSA. Many organizations, nonprofits and companies offer grants and scholarships to students who need the money and can’t otherwise afford school.

What is the maximum income to qualify for need-based financial aid?

Even if you don’t think that you stand a chance at earning financial aid, it’s important to always fill out the FAFSA. “Many families may assume their income is too high for them to qualify for any federal need-based aid,” says Erin Powers, a spokesperson for the National Association of Student Financial Aid Administrators (NASFAA). “But in actuality there is no income cutoff to qualify.”

In terms of how much you’ll get, that will depend on your expected family contribution, which is calculated using the following information:

  • Your parents’ taxed and untaxed income (if you’re a dependent student).
  • Your taxed and untaxed income (if you’re an independent student).
  • Your household’s assets (savings and investments).
  • Your family size.
  • The number of students in your household who will be attending college during the year.
  • Your parents’ ages (if applicable).

When you fill out the FAFSA, the system will take this information to calculate your EFC, which will be anywhere from 22 percent to 50 percent of your available household income (aka how much money you have left after paying for basic expenses, like housing and food).

This number will then be sent to your school, where the financial aid office will use it to determine your financial need and how much financial aid you’ll get. Your financial need is your cost of attendance minus your EFC, which means that you may have more financial need at more expensive colleges.

For instance, if your school’s overall cost of attendance for the year is $20,000 and your EFC is $6,000, your financial need would be $14,000. If your school’s cost of attendance is $40,000, your financial need would be $34,000.

If you’re interested in crunching the numbers before filling out the FAFSA, check out Finaid’s EFC Calculator. Although this won’t tell you your exact financial need, you can subtract the resulting figure from your school’s cost of attendance to get that number.

Next steps

If you haven’t already, prepare your documents to complete the FAFSA as soon as you’re eligible. The sooner you apply, the faster you’ll get your award letter and your expected family contribution. You can see how much free money you’re getting through grants and scholarships, as well as how much you’re eligible to borrow through student loans.

Outside of federal aid, check out scholarships and grants regularly and keep a list of awards you’ve already applied for and won. The more free financial aid you earn, the less you’ll have to borrow and pay back after you’ve graduated.

Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
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Student loans editor