What Is Need Based Financial Aid?

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• Most students need some sort of financial assistance to pay for college.
• Need-based financial aid is just one option students can explore.
• There are need-based options available through federal, state and individual school programs.

With the cost of college higher than it’s ever been, it’s now wonder that most students need help paying. In the 2020-2021 school year, 87% of college students were awarded some sort of financial aid, according to the National Center for Education Statistics.

If you need help paying for college, need-based aid — assistance that’s tied to your financial capabilities and the cost of your school — is one common type of financial aid you might explore.

Here’s what to know about need-based financial aid and how to apply for it.

What is need-based financial aid?

Need-based financial aid is a type of financial assistance designed to help students bridge the gap between the funds they can comfortably devote to college and the remaining costs of attending their school. As a whole, it helps make college more accessible, particularly to students who come from lower-income families. 

“Need-based means that aid is granted based on the finances of the families,” says Jack Wang, a wealth and financial aid advisor at Innovative Advisory Group. “It uses a specific formula, taking into account the family’s income and assets.”

That formula looks like this: A school’s cost of attendance (COA), minus the applicant’s Student Aid Index (SAI), minus any other financial assistance (OFA) a student is receiving.

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Types of need-based financial aid

Need-based financial aid comes in several forms. The federal Pell Grant, issued by the federal government to undergraduate students, is one type. These go up to $7,395 and do not need to be repaid. To be eligible, you must display “exceptional financial need” and have not earned your degree yet. Some incarcerated students may also be eligible. 

There is also federal work study, which allows you to work and earn money to put toward your education while in school. The exact amount you’ll get depends on your financial need and your school’s funding level. 

There are also state aid programs you can apply for. In New York, for example, there’s the Tuition Assistance Program; California has the Cal Grant program. You can check with your state’s education department to find potential options you might be eligible for.

Need-based aid can also come from your school. “The vast majority of aid is from colleges themselves,” Wang says.

How to apply for need-based financial aid

To apply for needs-based financial aid, you’ll need to fill out the Free Application for Federal Student Aid (FAFSA). This application requires financial and tax data, information about the schools you’re applying to, and other important details, and you can fill it out online at FAFSA.gov. 

Once submitted, the federal government and colleges will use it to determine your financial need and how much aid you’re eligible for.

Depending on what school you attend, you also may need to complete a CSS Profile, a separate application with The College Board. This is often used by schools to determine need for non-federal student aid. This requires income and tax information, including copies of bank statements, W-2s, and other records, and can be submitted starting Oct. 1, the year before entering college.

How does need-based aid affect college affordability?

The big perk of need-based aid is that it can significantly lower the costs of attending college for many students. It makes “college actually doable” for lower-income families, as Danilo Umali, principal at Game Theory College Planners in Atlanta, aptly puts it.

Here’s an example to demonstrate: Say Sally wants to attend the University of Texas, where the cost of attendance is about $31,000 to $34,000 per year. If she were awarded a full federal Pell Grant, she could take those costs down to just $23,000 to $26,000. With additional aid, the balance would shrink even more. 

Need-based aid also gives students more options in the schools they attend, according to Umali. That can help them avoid student loans, or at least minimize the number they’re forced to take out. In the long term, that means less debt (and stress on their finances). It can also help them save more and achieve other financial goals earlier in life, like buying a home, for example, earlier.

“Families should always apply for financial aid, even if they think they are ‘too rich,'” Wang says.  

Need-based financial aid frequently asked questions