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What Is Need-Based Financial Aid?

What Is Need-Based Financial Aid?
Nancy Bilyeau
Nancy BilyeauUpdated December 12, 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 U.S. Department of Education.With the annual average cost of tuition, fees, room, and board at U.S. colleges going from $10,097 in 1980–81 to $26,903 in 2021–22 (after adjusting for inflation), need-based aid can be urgently required. Data from the National Center for Education Statistics (NCES) confirm the average cost of college increased 166% over the last four decades using 2022 constant dollars based on the Consumer Price Index.About 73% of full-time undergraduate students received need-based state grant aid in 2021–22, according to the College Board.

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 cost of attendance (COA) minus expected family contribution (EFC) equals financial need.Beginning in the 2024–25 award year, however, federal law requires that schools transition from the EFC to the Student Aid Index (SAI). The SAI is a number that will determine each student’s eligibility for federal student aid.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 SAI 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. It includes federal grants and loans.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: Subsidized vs. Unsubsidized Student Loans

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 2024–25 FAFSA form — expected to be available by Dec. 31, 2023 — will expand eligibility for federal student aid and offer a more streamlined user experience compared with prior FAFSA forms.To complete the FAFSA form, you might need the following information or documents:
  • Your Social Security number
  • Your parents’ Social Security numbers if you are a dependent student
  • 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.You will have a student loan servicer that will handle all billing regarding your federal student loan. Holders of federal loans are eligible for federal income-driven repayment plans, and some federal student loan borrowers may be eligible for federal loan forgiveness programs based on job type, disability, or military service.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.Recommended: 23 Grants for Student Loan Repayment

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. You may pay more interest over the life of the loan if you refinance with an extended term.There are pros and cons to student loan refinancing. You may qualify for a lower interest rate, but you’ll forfeit access to Public Service Loan Forgiveness if you refinance federal student loans with a private lender.

The Takeaway

Need-based student loans are available for covering the 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 financial aid based on financial need.After graduation, holders of federal loans may wish to explore refinancing by comparing loan rates. If you’re interested in student loan refinancing, Lantern by SoFi can help. Just fill out a simple form and compare your student loan refinance options.Lantern can help you find student loan refinance offers.
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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