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Last updated March 8, 2023

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Financial Aid for Colleges: Our Basic Guide

Key Takeaway

The two main kinds of financial aid are merit aid, which is based on academic performance, and need-based aid, which is based on your financial situation. Being informed about how different kinds of aid work at different schools is important in the college application process. 

Here’s something you already knew: attending college is an expensive investment.

Scholarships come in many forms, and different schools allocate funds in different ways. It’s important to have a basic understanding of financial aid so you are familiar with the relevant terms and can make an informed decision. Not understanding financial aid can result in leaving money on the table.

I put this article together with our team of former admission officers to explain what you need to know about merit scholarships. I’ll also discuss fake merit aid and how to know the difference.

(By the way, I use “merit scholarships” and “merit aid” interchangeably here to reflect the way colleges discuss this topic. These terms mean the same thing for our purposes.)

What is merit aid?

Financial aid falls into two broad categories:

  1. Merit aid: scholarship dollars that are allocated based on “merit”, which usually refers to academic achievement like GPA or test scores. Merit aid is used by universities to attract academically skilled students.
  2. Need-based aid: scholarship dollars from either the university or the government meant to make it more financially feasible for students to attend college. Given the rising cost of college, need-based aid doesn’t just support low-income families. Many middle and even high-middle-income families qualify as well. Need-based aid is almost always applied based on the information the family submits in the FAFSA and/or CSS Profile, the two major financial aid forms.

Merit aid may be a general scholarship that any student could qualify for, or one related to a specific major, program, or demographic.

For example, a school might try to attract more students to their college of business by awarding a $3000 scholarship to any admitted student who applied to the college of business with a 3.8 GPA or higher. Or, perhaps a state school wanting to attract high-paying out-of-state students awards a scholarship to out-of-state students with a 1300+ on the SAT.

Let’s take a look at the types of merit aid.

Types of merit aid

Institutional scholarships

Institutional scholarships are often “endowed” or “named” scholarships awarded by the university to admitted students who earn them. If you receive a scholarship with someone’s last name on it, that’s probably an institutional scholarship that was created through a gift to the university.

These are “real dollar” awards, meaning there is a finite amount of money that can be awarded for these scholarships, and each student who accepts the award gets a piece of that money. Some institutional scholarships are awarded to only a single student, whereas others could be awarded to many students each year.

Some institutional scholarships require a separate application, while others automatically consider qualified applicants for the award. See the later section on “how to get merit aid” for more.

Tuition discounts a.k.a. “fake merit aid”

We could write a book on how colleges use tuition discounts as part of their strategic enrollment planning, but for the purposes of this article, we’ll keep it simple and to the point: colleges lower their tuition prices for some students through tuition discounts.

If you’ve ever bought a car, you know that the listed price or “sticker price” isn’t what most people pay. The second you walk on the lot, it is expected that you’ll negotiate down to a lower rate. While college prices aren’t negotiated in the same way (though it does happen), your net price (the amount you actually pay) is likely lower than the advertised price of tuition + room and board.

Tuition discounts may come in the form of a scholarship with a particular name (e.g. the ever-popular “presidential award”), an automatically assigned award based on GPA, test scores, or both, or even just show up on the financial aid award as a discount. But in all cases, these are not “real dollar” awards, but rather a discount.

Here’s an example of a tuition discount at a public school where I used to work, University of Mary Washington. UMW automatically awards scholarships (i.e. discounts tuition) for in-state students with particular GPA + test score combinations. They do the same thing in different amounts for out-of-state students, too.

Note that there’s nothing wrong or less desirable about tuition discounts. I’m calling them “fake” because they don’t come out of an actual pool of money like an endowed scholarship. In the example above, UMW doesn’t have a pool of money that they spend to help cover tuition for each in-state student that meets their requirements. Like a car getting discounted during a holiday, it’s money off the asking price to make the purchase more appealing.

Outside aid

Students may also apply for and earn aid from outside organizations. This could be a large national organization like National Merit Scholars or Coca-Cola Scholars, a local scholarship from your church, community organization, or parent’s job, or skills-based scholarship competitions like an essay-writing contest.

These types of scholarships typically send money to the school of your choice on your behalf and are applied towards tuition.

Note that outside aid may affect your family’s need-based aid. In other words, an outside scholarship could alter your estimated family contribution (EFC), the number on which your financial aid package is based. You can ask a financial aid office, “Will XYZ outside scholarship affect my need-based aid?” to learn more.

How to get merit aid

As you probably gathered from the earlier sections, some scholarships require a separate application while others are either automatically awarded to eligible students (like in the UMW example) or through a committee process without requiring a separate application. We recommend searching “X University merit scholarships” and reading up on the type of merit aid each school you’re interested in makes available.

Be aware of important deadlines! Some schools have deadlines for institutional aid that happen before their regular application deadline. For example, Vanderbilt’s merit scholarships have a separate application due on December 1, a month before their January 1 deadline. Students must also submit their application before they are able to apply for merit scholarships!

When I worked in admissions at Vanderbilt, every year some students would miss the scholarship deadline. You can imagine how not understanding deadlines could result in leaving money on the table.

Applying for aid can’t be boiled down to one specific recommendation. Ultimately, the best thing you can do is to stay organized. We recommend keeping track of relevant merit scholarship application deadlines in the same spreadsheet or document where you track your applications and due dates.

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