Guide to Need- and Merit-Based Financial Aid

Written by: Kristyn Pilgrim
Updated: 6/24/20

It is never too early to start planning on how to pay for postsecondary education. For most, applying to college will also mean finding various forms of financial aid. As you and your family plan for college, it is a good idea to educate yourself on how to pay for school and to lower the amount you have to borrow. When looking at financial assistance for school, two options include need- and merit-based aid.

Need-based aid only takes into account the financial need of the student and the student’s family. Test scores and achievements outside of academics will not factor in here.

Merit-based aid is financial assistance that looks at different kinds of skills, talents, and interests. The list includes anything from music, athletics, academics, and much more. There are several types of merit-based aid.

Once you are ready to begin applying to schools, it is a good idea to talk with your school counselors and the financial aid office about the types of aid available – and then plan to meet application deadlines. 

Need-Based Financial Aid

There are several types of need-based aid. It’s important to understand each one so you can make informed decisions about costs and repayment obligations.

  • Grants: Grants can come from the federal or state governments. They can also come from the school you plan on attending. Grants are financial aid that does not need to be repaid. Federal grants include the Federal Pell Grant and the Federal Supplemental Educational Opportunity Grant (FSEOG). 
  • Federal Work-Study: Work-study is an opportunity to earn money by working part time while you are in school. Work-study programs are available for full- or part-time students and are administered by the school, so be sure to ask your school’s financial aid office if they participate.
  • Federal Student Loans: Direct Subsidized Loans are based on financial need, with the government subsidizing the interest during certain periods. For instance, when the student is enrolled in school at least half-time. Federal student loans can offer more benefits than private loans, including lower interest rates and more flexible repayment plans. However, you need to make sure you understand the terms of the loan and what your obligations are before accepting because you will have to pay this money back.

Applying for Need-Based Financial Aid

To qualify for any need-based aid, you need to apply. Applying is how colleges will determine the aid you receive – including federal aid or aid from the college. Here is how the application process works:

  • Complete the FAFSA. This step is one you will have to do annually before the school year begins. The Free Application for Federal Student Aid (FAFSA) is used by your college to find your eligibility for federal aid. 
  • Review the offer. Your school will provide you an offer that lists the types of aid and respective amounts that you qualify for. It will also include expected costs for the year. If you are choosing between several schools, make sure to compare their offers and determine which offer works best for you. 
  • Start the school year. Once you begin school, the financial aid office will take care of applying your aid to your account. If there is any left over, they will send it to you to use for other school-related expenses. 
  • Repayment. If you have accepted loans as part of your financial aid package, once you graduate, it is time to begin repayment. Federal student loan borrowers will have six months before they have to begin making payments. It is wise to use this time to prepare and determine your payment plan. 

Merit-Based Financial Aid

Merit-based aid typically comes from a private source and can include grants, scholarships, and non-need-based financial aid awarded by the school you plan to attend. Because there is no financial need requirement, merit-based aid can be awarded for a variety of reasons. Don’t assume this means only academic or testing achievements. Merit-based financial aid is commonly awarded because of certain activities like music or athletics. It can also be awarded by community groups. 

Merit-Based Financial Aid From Schools 

When it comes to merit-based financial aid, most of the awards are given directly by the colleges. Be aware that not every school offers this type of aid. If you do apply to a school that offers merit-based financial aid, here are some tips.

  • Know the application process. At some schools, you will be considered automatically, but other schools do have an application process – and that process differs between schools both in deadlines and steps to complete the application.
  • It won’t be an apples-to-apples comparison. When you are considered for merit-based financial aid, be aware that every school is different in the type and amount of aid they offer.
  • Ask if it is renewable. If you receive merit-based financial aid, ask the financial aid office if it is renewable and what the requirements are to renew. For example, ask if you need to complete an application each year or if you need to maintain a certain GPA or enrollment status. 

Merit-Based Financial Aid From States

While most states with financial aid programs offer need-based programs, don’t discount that your state might offer a merit-based program. In fact, of the 50 states, 18 have a merit-based program, and 14 offer a combination of both. Make sure you look for these programs early enough to meet the application process – most states require an application because the number of students requesting funding typically exceeds the amount of funding available through the program. 


Because a scholarship is basically a gift and does not need to be repaid, it is good to research this option thoroughly. Some scholarships have a need-based component, but many are strictly merit-based. As long as you meet their deadlines, apply to as many as you can. Finding them, though, can be a challenge. 

Look at schools you are attending or plan to attend, employers, community groups where you live, nonprofits, religious groups, professional organizations, and more. You may also find it helpful to check in with school counselors, as they may have lists of local organizations that provide scholarships. 

Be aware of scams: You don’t have to pay to find scholarships. Remember, any scholarships you receive will affect your financial aid package because student aid is added together and cannot amount to more than the cost of attendance. If you receive scholarships, you will need to inform your financial aid office.

The National Merit Scholarship Program awards millions of dollars each year to students with high academic achievement. Students who participate in the program can qualify for a National Merit Scholarship of $2,500, a corporate scholarship, or a college-sponsored merit scholarship. 

To participate, students need to be currently enrolled in high school and take the PSAT during the specified year. It is a highly competitive program with approximately 7,600 awards given out among 1.6 million students participating. 

Understand the Offer Letter

Whatever kind of aid you receive, when the college of your choice sends you an offer letter, take time to read it thoroughly and make sure you understand what it says before you accept. If you have been accepted to multiple schools, take time to compare the letters. Currently, there is no standardization for how these letters look, and terms can be confusing. If you don’t understand something, ask questions.

Finding the Right Options 

Financing the education you desire can be complicated, but can help. Our experts can provide the resources and knowledge to help you and your family make informed choices and reduce the financial burden of paying for school. If you are looking at financial aid, loans, or more, is here to help you achieve your dreams.