Sarah Farbman, senior admissions consultant, frames it simply: “There are essentially three sources of aid — the college itself providing need-based or merit-based awards, and then external scholarships from outside organizations. Within those sources, the aid takes different forms that families need to understand.”

Below, we break down each type, explain how they appear on award letters, and share the insider strategies our counselors use to help families maximize their financial outcomes.

1. Grants: Free Money Based on Financial Need

Grants are the gold standard of financial aid because they are free money — no repayment required. They are sometimes referred to as “gift aid” and are typically awarded based on a family’s demonstrated financial need as calculated through the FAFSA or CSS Profile.

The major federal grant programs include:

• Pell Grants are awarded to students with exceptional financial need, with a maximum award of approximately $7,395 per academic year. Pell Grants are an entitlement — if you qualify based on the government’s criteria, you will receive the funds. Once a family’s Student Aid Index (SAI, formerly called the Expected Family Contribution or EFC) exceeds a certain threshold, the student becomes ineligible.
• Supplemental Educational Opportunity Grants (SEOG) are also federally funded but distributed by colleges themselves from a limited annual allocation. These need-based grants can range up to $4,000 per year. Because each school receives a finite amount, the funding can be depleted — students who apply late may miss out even if they qualify. This is one reason Sarah Farbman stresses filing early: “The sooner you get in line for money, the more money you are going to get. Schools at some point will max out their financial aid budget, so you want to be first in line before they max it out.”
• State grants vary by state and may require enrollment at an in-state institution. Check your state’s higher education agency for specific programs and deadlines.

2. Scholarships: Merit-Based and Criteria-Based Awards

Like grants, scholarships do not require repayment. The key difference is how they are awarded: while grants are need-based, scholarships are typically merit-based or criteria-based, rewarding academic achievement, athletic talent, artistic ability, community involvement, or other specific qualifications.

Sarah Farbman draws a clear line between the two: “Need-based aid is based on an algorithm. You fill out a form — whether it’s the FAFSA or the CSS Profile — and the colleges are going to package you how they want. Merit-based aid is what we like to think of as a discount. People call it a scholarship, and it is, but from the college’s perspective, it is a recruitment tool to attract strong students. It is not related to the FAFSA.”

Scholarships can come from colleges themselves (institutional merit scholarships) or from external sources such as corporations, foundations, community organizations, or religious institutions. External scholarships range widely — from small one-time awards of $500 to $2,000 from local organizations up to rare full-ride scholarships from major foundations like the Coca-Cola Scholars Program.

However, families should be aware of “stacking” policies before investing significant time pursuing outside awards. In some cases, colleges will reduce the merit scholarships they offer you by the amount you receive from a third party — especially if the third party scholarship is paid directly to the institution. Always contact a school’s financial aid office to ask how outside scholarships will affect your institutional aid.

For a deeper look at scholarship strategy, see our guide on whether applying for financial aid affects admissions chances.

3. Loans: Borrowed Money You Must Repay

Loans are a common component of financial aid packages, but they are fundamentally different from grants and scholarships — they must be repaid with interest. As Sarah explains, when helping families decode award letters, loans fall into the category of “your money later,” and should be considered separately from gift aid when evaluating an offer.

It is important to remember: taking out a loan is always optional. It is entirely at the family’s discretion, regardless of what appears in the award letter.

The main types of student loans include:

• Subsidized Loans (Direct Subsidized Loans) are available only to students who demonstrate need on the FAFSA. The federal government pays the interest while the student is enrolled at least half-time and during the six-month grace period after graduation. These are taken out in the student’s name.
• Unsubsidized Loans (Direct Unsubsidized Loans) are available to any student regardless of need. Interest begins accruing immediately from the date of disbursement. Students can defer payments until after graduation, but the unpaid interest will capitalize (be added to the principal), increasing the total amount owed. These are also in the student’s name.
• Parent PLUS Loans are federal loans taken out in the parent’s name. They generally carry a higher interest rate than student loans, and repayment begins as soon as the loan is fully disbursed unless the borrower requests deferment. Families must have filed the FAFSA to access Parent PLUS Loans.
• Private Loans from banks or private lenders are typically a last resort after all federal options have been exhausted. Interest rates vary and may be higher than federal loan rates, and terms are less flexible.

Annual Federal Student Loan Limits (Dependent Students)

Sarah warns families to look carefully at award letters because schools often group loans alongside grants under a single “Total Aid” figure: “Financial aid letters can be very confusing. That total they’re giving you needs to be broken down carefully, because in some cases those are loans with interest rates that you’re going to have to pay back, and in other cases they are grants, which are free money.”

4. Work-Study: Earning Money Through Campus Employment

Federal Work-Study (FWS) provides eligible students with part-time employment, typically on campus, funded jointly by the federal government and the college. Unlike grants, work-study money is earned — the student receives a regular paycheck for hours worked.

Key things families should understand about work-study:

Having work-study in your aid package does not guarantee a job. It makes the student eligible to apply for designated positions, but the student must find and secure employment. Sarah notes that the experience varies by school: “Some colleges will assign you a place you’re going to work — a guaranteed position. In other cases, it’ll say you need to go find a job. My son at a public university — it said he could get a job on campus, but he had to go out and get the job.”

Work-study earnings are typically modest — often around $2,000 per semester at roughly minimum wage. At $15 an hour, it’s going to take a while to make a considerable dent in your college bill. Plus that is still your money. You are working for it.

One parent in the Great College Advice community shared a helpful realization: work-study should be viewed as a budgeting tool for personal expenses rather than a meaningful offset to tuition.

5. Institutional Funds: The College’s Own Money

In addition to federal and state programs, colleges and universities use their own institutional funds to round out financial aid packages. These funds — generated from endowment income, tuition revenue, and fundraising — are among the most powerful tools available to families seeking to reduce college costs.

Institutional funds take two primary forms:

Institutional grants are need-based awards from the college’s own budget. Some schools use the CSS Profile alongside their own internal algorithms to assess a family’s financial situation and determine whether institutional grant money will be provided. These grants can be a significant source of additional aid when federal funds alone are not enough.

Institutional merit scholarships are discounts colleges use to recruit students they want on campus. This is where strategic college list-building becomes a family’s most powerful financial tool.

Sarah Farbman is direct about the landscape: “Elite schools like Yale, Princeton, and Stanford do not need to use discounting as a recruitment tool. You could be the best student in the entire universe — you are not going to get a merit-based scholarship at Yale. They don’t do it.” However, she adds: “There are many high-quality public and private institutions that regularly offer students $20,000 to $35,000 off the sticker price because they are using it as part of their recruitment strategy.”

Jamie Berger, veteran college admissions expert, reinforces this point: “Having us help you do everything just right for a year — the sticker price for us might seem large, but it might save you $20,000 a year by getting more merit aid at a college.” He emphasizes that the number one strategy for maximizing institutional merit aid is building the right college list — one that includes schools known for generous discounting where your student will be competitive for those awards.

Understanding which schools use institutional funds generously — and building a balanced college list that accounts for cost considerations — is one of the most important financial decisions in the entire admissions process.

How to Tell the Difference on Your Award Letter

When award letters arrive, the most critical skill is separating “other people’s money” from “your money later.” We recommend families start by identifying the full Cost of Attendance (COA) — not just tuition and fees, but food, housing, travel, books, supplies, and personal expenses — and then categorize every line item in the aid package.

Quick Reference: Financial Aid Categories

At Great College Advice, families use a proprietary comparison spreadsheet that standardizes every school’s offer. 

It All Starts With the FAFSA

To be considered for any federal or need-based institutional financial aid, families must file the FAFSA (Free Application for Federal Student Aid). The FAFSA opens on October 1 each year, and early filing is critical.

Even families who believe they will not qualify for need-based aid should strongly consider filing. The Great College Advice Family Handbook puts it this way: “Over 70% of college applicants apply for financial aid. Although applying for financial aid can present many challenges and can be a tedious process, you definitely should not shy away from applying because you assume that it won’t be fruitful.”

Filing the FAFSA also establishes a financial benchmark — an insurance policy of sorts. If circumstances change (job loss, medical emergency), having a baseline on file makes it easier to request a reassessment. Additionally, the FAFSA is required to access federal student loans and, at some schools, to be considered for merit-based scholarships.

Some private colleges additionally require the CSS Profile, which collects more detailed financial information — including home equity — and uses institutional algorithms to determine how much of the college’s own funds to award. Check each school’s requirements well in advance, especially if applying Early Decision or Early Action.

For a complete month-by-month guide, see our Financial Aid Timeline for High School Seniors.

The Bottom Line: Build the Right College List

Understanding the five types of financial aid is essential, but the families who get the best financial outcomes are those who use this knowledge strategically from the very beginning of the college search. At Great College Advice, our team of counselors with over 100 years of combined admissions experience helps families navigate this complex landscape every day. 

Great College Advice counselors leverage experience, proprietary data, and deep knowledge of institutional aid patterns to help families build lists that balance reach, target, and likely schools with realistic financial expectations.

Ready to build a financial aid strategy tailored to your family? Schedule a free consultation with our team.

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