If you are applying for college financial aid, then you may be wondering what the differences are between merit-based and need-based financial aid. The primary difference between these two types of financial aid is that merit-based scholarships, unlike need-based financial aid, are awarded to students based on academic or other merit rather than demonstrated financial need. Happily for many students, your parents’ salaries typically have no bearing on your eligibility for merit-based aid. In addition, while need-based financial aid can take many forms, such as grants, scholarships, work-study positions, and loans, merit-based financial aid is typically only awarded in the form of grants and scholarships.
Need-based financial aid is awarded strictly based on a student’s financial profile, which takes into account the student’s family assets and income, with no consideration of the student’s academic merit. (Colleges, of course, will consider academic merit when deciding whether or not a student should be admitted.) Merit scholarships are typically, though not always, need-blind, meaning that a student’s financial profile is not considered when determining his or her candidacy to receive a merit award. Instead of evaluating financial need, merit scholarship sponsors can consider any combination of merit-based factors. Some sponsors of merit scholarships only evaluate academic performance, in the form of grade-point averages, SAT or ACT scores, or class rank. Other sponsors may consider your academic performance in addition other criteria such as teacher recommendations, your region or state of residence, high school of attendance, community involvement, level of dedication to a specific field of study, gender, race, or ethnic background. Especially if the scholarship sponsor is a religious or cultural organization, or an organization dedicated to a certain field of study such as math or art, scholarship applicants must be significantly involved in the activities of that group to potentially receive any student assistance.
Sources of Funding
Need-based financial aid and merit scholarships also differ in how they are funded. Much need-based financial aid is issued by the government, while merit-based aid is awarded by colleges or by private sponsors. Almost all financial aid provided by federal and state governments, with few exceptions, is need-based financial aid. Many different private sponsors award merit scholarships, ranging from religious groups, community groups, cultural organizations, national foundations such as the Bill & Melinda Gates Foundation and the Coca Cola Scholars Foundation, and private individuals, such wealthy alumni who endow scholarship programs via their alma maters.
Students who wish to apply for need-based financial aid must complete the Free Application for Federal Student Aid (FAFSA), and perhaps the College Board’s CSS Profile for private colleges that require it. The U.S. Department of Education utilizes the Federal Need Analysis Methodology to determine a student’s Expected Family Contribution (EFC), while the College Board employs its own Institutional Methodology to calculate a student’s EFC. (The difference between a school’s cost of attendance and a student’s EFC, minus any other need-based financial aid that the student receives, equals the amount of total need-based aid that the student may obtain from the federal government.) Applying for need-based financial aid is relatively straightforward, typically only requiring completion of the FAFSA, while applying for merit-based aid can be a time-consuming and lengthy process. Some colleges automatically consider students for merit scholarships, or require submittal of only a very simple application; applying for other private scholarships, on the other hand, can be quite onerous. Private scholarship sponsors may require candidates to write essays, sit for interviews, and perhaps more. Many otherwise qualified students are loathe to spend significant amounts of time applying for scholarships with paltry monetary awards, and instead choose to prioritize those merit awards for which the application process is the simplest.
Merit scholarships are frequently, though not always, awarded on a one-time basis, while need-based financial aid is available to students for every year that they attend college. Students are required to complete a FAFSA for every year that they wish to receive federal student assistance.
Potential for Scholarship Displacement
As noted above, the amount of federal need-based financial aid that a student is eligible to receive is calculated as the difference between a school’s cost of attendance and the student’s EFC, minus any other need-based financial aid that the student receives. If a student receives a private scholarship, whether need-based or merit-based, then he or she is required to report that scholarship to the colleges to which the student has been offered financial aid. Need-based scholarships may be subject to scholarship displacement, whereas merit-based scholarships are typically exempt. Schools practice scholarship displacement, whereby the amount of need-based federal financial aid on offer is reduced based on the value of private need-based scholarships received, to avoid “over-awarding” need-based financial aid. Students who need to apply for private scholarships to cover remaining school expenses should prioritize merit-based scholarships, since these types of awards are generally not subject to scholarship displacement.
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