Financial Aid Terminology Trap: Understanding Need-Based Aid

Learning financial aid is like speaking a foreign language: financial need, merit aid, need-blind, and more. 

There is an alphabet soup of different words and acronyms. You may think you understand the babble, but it is easy to get confused. Misunderstanding the terminology can present students with a trap that may mislead them into enrolling at an unaffordable college.

Learn what these financial aid words really mean and what to watch out for so that you know what to expect when you’re applying to college.

There’s financial aid, and then there’s financial aid.

Financial aid is money to help pay for college. But, it comes in many types. Some types are more valuable than others. There are three main types of financial aid. 

Gift Aid. Gift aid is free money, like grants and scholarships, that do not need to be earned or repaid. Examples include Federal Pell Grants and private scholarships.

Student Employment. Student employment is money earned by the student as payment for work on or off campus.

Student Loans. Student loans are borrowed money that must be repaid, usually with interest. Examples include the Federal Direct Stafford Loan, Federal Direct PLUS Loan, and private student and parent loans.

Student employment and student loans are sometimes collectively referred to as self-help aid.

Financial aid comes from several sources, including the federal government, state government, colleges and universities, and private companies, foundations, associations. and employers.

Related: Find Scholarships and Grants by State

Financial need is the difference between total annual college costs and the family’s ability to pay for one year of college. Note that it is not the total cost of college, but the difference between the costs and the ability to pay. 

Financial Need = Cost Of College – Ability To Pay

Ability to pay is calculated by the Free Application for Federal Student Aid (FAFSA) as the Student Aid Index (SAI), formerly known as the Expected Family Contribution (EFC). The SAI is a measure of the family’s financial strength. It is based on income, assets, and demographic factors.

Eligibility for need-based financial aid is based on financial need. One way to demonstrate greater financial need is to have a lower SAI. The other is to enroll at a higher-cost college. Wealthier students may qualify for need-based financial aid at a higher-cost college when they might not qualify for any need-based financial aid at a lower-cost college.

Some forms of financial aid are based on merit instead of financial need. Some are based on a combination of merit and need.

Grants are money awarded based on financial need, while scholarships are usually awarded based on academic, artistic, or athletic talent. But, sometimes the terms are used interchangeably.

Some private scholarships with a need-based component base it on the student having an SAI or family income that is below a specific threshold.

Most colleges provide a financial aid package that covers all or part of  a student’s financial need. This is done through a combination of gift aid, student employment, and student loans.

Very few colleges meet a student’s full demonstrated financial need, even with loans.

Many colleges leave the student with a gap of unmet need between financial aid and financial need. 60% of students at 4-year colleges are left with unmet need if one counts student loans as meeting need, and 75% if only grants and scholarships are counted as meeting need. These averages drop by only about 3 percentage points at the most selective and wealthiest colleges.

Only 82 colleges claim to meet full need, including five who meet full need just for first-year students. Of the colleges that meet full need, 43 have “no loans” financial aid policies that replace loans with grants in the financial aid package. The others include loans in the financial aid package. 

But, this doesn’t mean that they meet full need according to the federal definition. 71 of these colleges effectively redefine financial need by using the CSS Profile (rather than the SAI) to calculate financial need. The CSS profile typically shows less need by looking at additional forms of income such as student income and the income from non-custodial parents. Most have a minimum student contribution or summer work expectation that puts a cap on the definition of financial need. They then claim to satisfy financial need according to this reduced definition of financial need.

This is why it is important for families to compare college costs using the net price. The net price is the difference between total annual college costs and just gift aid. It is the amount the family will have to pay from savings, income, and student loans. It is the real bottom line cost of college, a kind of discounted sticker price.

Other metrics, such as the amount of grants, the percentage of financial aid provided through grants and the percentage of college costs covered by grants are misleading. A higher-cost college might provide more grants but still have a higher net price. 

You may actually pay more at a college that claims to meet full need than at an in-state public college, even though many meet-full-need colleges are among the more generous colleges.

Beware of colleges that present a net cost figure that subtracts the full financial aid package, including loans, from total college costs. This is not the same as the net price.

Students and their families often wonder whether applying for financial aid will affect their chances of college admission.

Only 102 colleges claim to provide need-blind admission for U.S. students. They admit students without regard to their ability to pay for college. Of them, only 78 provide need-blind admission for transfer students and 26 provide need-blind admission for international students. Most of these colleges are not need-blind when it comes to admitting students off of the wait list.

The rest typically start considering financial need when they’ve admitted about three-quarters of the incoming class, switching to need-sensitive admissions when they start running out of money in the financial aid budget.

Related: Undermatching: Why Do Smart Low-Income Students Not Enroll In Selective Colleges?

There are other ways that college financial aid packages mislead families about the true college costs beyond just gapping unmet need and redefining financial need. These include front-loading of grants and scholarship displacement.

More than 80% of colleges practice front-loading of grants, where students are offered a better mix of grants vs. loans during the first year than during subsequent years. This is a form of bait and switch, where the college appears to be more affordable when students are applying for admission.

The net price of these colleges will increase significantly after the first year, even if the family’s financial circumstances have not changed. More of the college costs will be met with loans and the gap will increase. On average, the net price increases by about $3,000 to $4,000.

Families may mistakenly believe that scholarships can help them pay for their share of college costs. However, sometimes scholarships will reduce the need-based financial aid package, such as grants, they’ve already received. This is called scholarship displacement. About half of all scholarship recipients report being affected by scholarship displacement.

Six states have passed laws banning scholarship displacement: California, Maryland, Minnesota, New Jersey, Pennsylvania, and Washington.

Don’t try to game the system by not applying for financial aid the first year. Maybe you can handle paying full college costs for a year, but that doesn’t mean you can apply for financial aid in subsequent years. Most colleges with need-sensitive admissions will not provide their own grants to students who did not apply for financial aid the first year, unless they can demonstrate that their financial circumstances have changed significantly.

In other words, don’t try to game the system when the dealer holds all the cards. If you’re not sure about the financial aid offer you’ve received, consider submitting it to TuitionFit and seeing how it compares to other financial aid offers awarded by the school to similar students.