Financial Aid: How It Works

What is Financial Aid? 

Financial aid is any type of assistance used to pay college costs. It’s intended to make up the difference between what your family can afford to pay and what college costs. The majority of full-time students currently enrolled in college receive some type of financial aid to help pay college costs.

Overview of Financial Aid

The financial aid system is based on the idea that all students should have equal access — that you should be able to attend college, regardless of your financial circumstances. Here’s an overview on how the system works:

  • You and your family are expected to contribute to the cost of college to the extent that you’re able.
  • If your family is unable to afford the entire cost (like most families), financial aid is available to help you pay for college.

Who Decides How Much My Family Is Able to Contribute?

The amount your family is able to contribute is often referred to as the expected family contribution (EFC). This figure is determined by the organization that is awarding the aid — usually the federal government or individual colleges and universities.

These groups use formulas that analyze your family’s financial circumstances and compare them with other families’ financial circumstances. The formulas use your income, assets and family size to calculate your EFC, and expect that your family can meet the EFC through a combination of savings, current income and borrowing.

Three Main Types of Financial Aid

Grants and Scholarships

Grants and scholarships, which are also called gift aid, don’t have to be repaid and you don’t need to work to earn them. Grant aid comes from federal and state governments and from individual colleges. You can also locate and apply for scholarships which are usually awarded based on merit.


Some financial aid comes in the form of loans, aid that must be repaid. Most loans that are awarded based on financial need are low-interest loans sponsored by the federal government. The government subsidizes these loans, so no interest accrues until you begin repayment after you graduate. There are other loan options available that are not need-based.

If you need to borrow money to attend college, be sure your federal loan options are exhausted before considering private loans. And don’t borrow more than you need or can afford to pay back. Our Student Loan Calculator tool can help you figure it out.


Student employment and work-study aid also help you pay for education costs such as books, supplies and personal expenses. Work-study is a federal program that provides you with part-time employment to help meet your financial needs and gives you work experience while you serve your campus and the surrounding community.

Colleges with Higher Costs Can Be Affordable

You might think that colleges with higher published prices will cost you more, but that’s not necessarily the case. Imagine that your EFC is determined to be $5,000. At a college with a total cost of $8,000, you’d be eligible for up to $3,000 in financial aid. At a college with a total cost of $25,000, you’d be eligible for up to $20,000 in aid. Your family would be asked to contribute the same amount at both colleges. In this situation you should review and compare your aid awards carefully to determine which is the best option for you.


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