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What Is Need-Based Financial Aid?

What Is Need-Based Financial Aid?
Nancy Bilyeau
Nancy BilyeauUpdated August 2, 2023
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One of the most pressing questions anyone has when facing college is how to pay for it. Will financial aid be available?The need-based financial aid definition is pretty straightforward. Need-based aid is financial aid that you can receive if you have financial need and you meet other eligibility criteria, says the Department of Education.With colleges’ average tuition and fee rates increasing 130% since 1990 (after adjusting for inflation), need-based aid can be urgently required. Statistics show that about 86 percent of college students benefit from some form of financial aid.

Need-Based Financial Aid Explained

Your college or career school will first determine whether you have a financial need by using a formula. The Calculation for Financial Need is this: Cost of Attendance (COA) minus Expected Family Contribution (EFC) equals financial need.Your eligibility depends on your Expected Family Contribution, your year in school, your enrollment status, and the cost of attendance at the school you will be attending. The financial aid office at your college or career school will determine how much financial aid you are eligible to receive.What’s important to understand is that, even if you qualify, need-based aid is not automatic. There is a “first come, first serve” aspect to some financial aid. Also, you may receive loans, but not enough to cover your tuition completely.To get going on this challenge, focus on understanding the requirements and the deadlines for the programs and be as proactive as possible.For example, you can estimate your eligibility for federal student aid and your Expected Family Contribution with the Department of Education’s Federal Student Aid EstimatorRecommended: Discover the Benefits of Tuition Waiver Programs

What Does Need-Based Aid Include?

Need-based financial aid is awarded through the federal government, the state government, the colleges themselves and private sources.The place that most students start when seeking financial help for college is the federal government. Direct Subsidized Loans are federal loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school.As for state aid for school, you should check out the state grant agency chart.Also, be sure to visit your school’s financial aid page on its website, or contact the financial aid office.Recommended: Average Student Loan Debt in the United States 2023

How Is Need-Based Financial Aid Determined?

To find out whether you are eligible for federal aid and for how much, you will have to fill out the Free Application for Federal Student Aid (FAFSA) form. Based on the results of your FAFSA, your college or career school will send you a financial aid offer, which may include federal student loans. Your school will tell you how to accept all or a part of the loan.The FAFSA questions ask for information about you (your name, date of birth, address, etc.) and your financial situation. The Department of Education says that depending on your circumstances (for instance, whether you’re a U.S. citizen or what tax form you used), you might need the following information or documents as you fill out the application:
  • Your Social Security number
  • Your parents’ Social Security numbers if you are a dependent student
  • Your driver’s license number if you have one
  • Your Alien Registration number if you are not a U.S. citizen
  • Federal tax information or tax returns, including IRS W-2 information, for you (and your spouse, if you are married), and for your parents if you are a dependent student, their 1040.
  • Records of your untaxed income, such as child support received, interest income, and veterans noneducation benefits, for you, and for your parents if you are a dependent student
  • Information on cash; savings and checking account balances; investments, including stocks and bonds and real estate (but not including the home in which you live); and business and farm assets for you, and for your parents if you are a dependent student
Some states will determine your need-based student loans solely based on a FAFSA, but others have their own forms. It’s important to find out what your state’s requirements are as soon as possible, because with many states, it’s first-come, first-served.Recommended: Do You Need To Register for the Selective Service To Receive FAFSA?

Paying Back Need-Based Financial Aid

Federal loans are just that–loans. They will have to be repaid. This will not come as news to anyone who has a loan. Before they receive those federal funds, students must sign a promissory note and complete “entrance counseling” to ensure that obligations are understood.After graduation, the average federal student loan debt is $36,510 per borrower, according to will have a student loan servicer that will handle all billing regarding your federal student loan. Holders of federal loans are eligible for programs such as loan forgiveness based on job type, disability or military service. In March 2020, the Department of Education instituted a freeze on student loan payments because of hardship caused by the coronavirus. That freeze is scheduled to be lifted in fall 2023.State loans will have their own systems for repayment, as will college-based loan programs and private sources of loans.It’s different for work-study. You earn money through campus-based jobs, so that money isn't repaid.And for any grants or scholarships you receive to pay for school, those will not need to be paid back.

Other Types of Financial Aid

If you don’t qualify for need-based aid or it’s not enough, you may still be able to get merit-based aid. It doesn’t always consider your family’s income or assets. This aid is usually based on abilities, talent or achievements. 


Many nonprofit and private organizations offer scholarships to help students pay for college or career school. This type of free money, which is sometimes based on academic merit, talent or a particular area of study, can make a real difference.


A grant is a form of financial aid that doesn’t have to be repaid (unless, for example, you withdraw from school and owe a refund). A variety of federal grants are available, including Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), Teacher Education Assistance for College and Higher Education (TEACH) Grants, and Iraq and Afghanistan Service Grants. States also offer grants.

Personal Loans

You can take out a personal loan from a bank or financial institution to help pay for college.Note: If you are already carrying federal or state student loan debt, it may be more difficult to qualify for a personal loan. Creditors will look at your credit score and income history to evaluate. Higher scores and incomes tend to get the best rates, unsurprisingly. However, that’s not easy to produce in the middle of college. Some lenders may be receptive to students applying with a cosigner. A student loan cosigner is an adult who signs along with you. It’s a legally binding agreement stating that they’re willing to share the responsibility of repaying the loan on time and in full.

Other Federal Loans

Not all federal loans are based solely on financial need.
  • Direct Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students, but eligibility is not based on financial need.
  • Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. Eligibility is not based on financial need, but a credit check is required. 
  • Direct Consolidation Loans allow you to combine all of your eligible federal student loans into a single loan with a single loan servicer.

Student Loan Refinancing

Once you have graduated from college and have a job history and credit score to show, refinancing your student loan with a private server may hold appeal.The choice of private vs. federal student loans has many aspects to it. When you refinance, a bank or other financial institution buys your loan from the federal government. You may be able to receive a lower interest rate and more favorable payment schedule this way. However, you will no longer be eligible for federal student loan forgiveness programs.

The Takeaway

Need-based student loans are available for covering the rising cost of a college education. The first stop is usually the federal government, with a FAFSA form the gateway to finding out whether students qualify and for how much. States and colleges also offer loans based on financial need.The federal government also offers aid not based on financial aid. Scholarships and grants based on merit can be key sources of money for college. Personal loans are available during college. After graduation, holders of federal loans may wish to explore refinancing by comparing loan rates.
Photo credit: iStock/ADragan

About the Author

Nancy Bilyeau

Nancy Bilyeau

Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.
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