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.

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 can earn grants, scholarships and need-based student loans to cover the costs.

How to qualify

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 dependent or independent 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.

Need-based vs. merit-based financial aid

There are different kinds of free financial aid. Need-based is just that: aid given to people with financial need. Merit-based financial aid is based on your academic record and standing. Most scholarships are merit-based, while grants tend to be need-based.

Types of need-based aid

There are a few different types of federal need-based financial aid:

  • 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 $6,495 for the 2021-22 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.
  • 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.

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 necessary, 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.

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.

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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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