A Guide to Understanding Financial Aid for College

Many families are shocked by a college's sticker price. While the price of tuition can be overwhelming, college financial aid can make higher education affordable.

In fact, income and savings represent only a few of the resources families use to pay students' college expenses, according to the 2020 Sallie Mae/Ipsos survey How America Pays for College. The survey found that for a typical family, scholarships and grants covered 25% of college costs in 2019-2020. Scholarships and grants are two types of college financial aid that don't need to be repaid.

With the complexity of paying for college, navigating the financial aid process can seem challenging. Here are a few answers to common financial aid questions.

What Is Financial Aid?

College financial aid helps students and their families by covering higher education expenses, such as tuition and fees, room and board, books and supplies, and transportation.

There are several types of financial aid:

-- Grants.

-- Scholarships.

-- Federal or private loans.

-- Work-study and other programs.

How Does Financial Aid Work?

Different types of aid are provided through various sources, such as federal and state agencies, colleges, high schools, foundations and corporations, to name a few. The amount of aid a student receives depends on federal, state and institutional guidelines.

Keep in mind that the way federal financial aid works is that students must first apply for the aid by answering a series of questions used to determine their ability to pay for college.

Then, aid is awarded based on that application, and students have the choice to accept or reject the aid offered. The type of aid offered determines whether it will have to be repaid. Sometimes, students must complete additional applications to be considered for other scholarships or private aid.

[Read: See the Average College Tuition in 2020-2021.]

How Do I Apply for Financial Aid?

The first step is to file the Free Application for Federal Student Aid, known as the FAFSA. This application is used by many state agencies and colleges and universities to determine college aid.

The FAFSA is available for free through the Department of Education's website. Families can begin filling out the form as early as Oct. 1 for the following academic year. The deadline for the FAFSA is June 30. But that deadline is only for federal financial aid. Many schools that use the FAFSA to determine aid set earlier deadlines.

Some schools -- mostly private colleges -- use a supplemental form called the College Scholarship Service Profile to determine how to give out their own financial aid funds. The form is more detailed than the FAFSA and can be time-consuming to complete.

The initial submission fee for the CSS Profile is $25; each additional report is $16. A list of schools that require the CSS Profile can be found on the website for the College Board, the organization that administers and maintains the application.

"Only about 250 colleges require the CSS Profile. Generally, it's more elite colleges that require the CSS Profile," says Joseph Orsolini, president of College Aid Planners Inc. "Bear in mind, the CSS Profile will dig much deeper into your family's finances than the FAFSA."

The CSS Profile, for instance, takes into account assets that are excluded on the FAFSA. It counts the value of a family's home, small business or a grandparent-funded 529 plan, to name a few differences.

What Are Different Types of Financial Aid?

There are two types of aid: need-based and merit-based.

Federal need-based aid, for instance, is determined by a family's demonstrated ability to pay for college as calculated by the FAFSA.

Merit aid, on the other hand, can be awarded by an institution, college or private organization to a student for a specific talent or an athletic or academic ability. These awards aren't based on financial need.

[Read: 12 Things to Know About Merit Aid Scholarships.]

College students are potentially eligible for federal, state or institutional aid. Institutional aid is financial assistance provided by the college and varies by school, since each college uses its own policies and formulas to determine how to award its financial aid.

According to the Department of Education, most students qualify for some type of federal student aid. For federal financial aid, there are three types of funds: loans, grants and work-study.

-- Federal student loans. These are fixed-interest-rate loans from the government. The interest rate for each academic year is set on July 1, and that rate is secured for the life of the loan. The main program for student loans is the direct loan program. Under the program, undergraduate students can borrow direct subsidized or unsubsidized loans up to $31,000 in total if they're a dependent. An undergraduate student classified as an independent can borrow up to $57,500 in total.

-- Federal grants. This federal money doesn't need to be repaid. The most well-known higher education grant for college is the Pell Grant. Eligibility for a Pell is based on a family's expected family contribution, or EFC, and is calculated on the FAFSA. Most Pell Grant recipients have an adjusted family income of $40,000 or less. The maximum Pell for the 2020-2021 school year is $6,345. A family with an EFC of zero, for example, will qualify for the full Pell.

[Read: What EFC Is and How it Relates to Paying for College.]

-- Work-study. This program provides part-time work, typically on campus, to help students cover college-related expenses. Not all students qualify for federal work-study. Students need to qualify through the FAFSA with demonstrated financial need. Under work-study, students earn at least $7.25 per hour, the federal minimum wage. The average amount of federal work-study used to pay for college in 2019-2020 was $1,847, according to the How America Pays for College report.

When it comes to state aid, most states limit their aid to in-state residents. "By and large, the student would have to be a resident of the state and stay within the state to attend higher ed to be able to receive grants," says Marty Somero, director of financial aid at the University of Northern Colorado.

While the FAFSA should be on a student's radar to qualify for need-based aid for both federal and state funds, a college-bound student can go a step further and maximize aid with merit-based potential, college aid experts say. That's because merit aid is one way to close the gap between the cost of attendance and need-based financial aid.

But not all schools award merit aid. Some schools reserve merit aid only for exceptional circumstances. Among the ranked schools that submitted data to U.S. News in an annual survey, the average percentage of full-time students who were awarded merit aid in 2019-2020 was 16%. A few schools, such as Middlebury College in Vermont and Amherst College in Massachusetts, do not award merit scholarships.

Beyond federal, state and institutional aid, there are a few other aid programs to consider that serve specific student groups, such as Peace Corps volunteer benefits and the Reserve Officers' Training Corps program, known as ROTC. Students who participate in ROTC can learn and train at the same time, and some receive a scholarship that covers either tuition, fees and books, or room and board instead. There are also military benefits through which veterans can pay for school, such as GI Bill benefits that cover all or some costs.

What Should I Know About Financial Aid Deadlines?

Pay attention to deadlines, experts advise. It's important to meet college financial aid deadlines, which vary by institution.

The University of Florida, for example, sets its financial aid deadline for Dec. 15, which is early compared with many other schools. In fact, the school's site encourages students to apply before the deadline. "Apply well before December 15 to ensure that the federal processor has time to analyze and send the results of your FAFSA to UF Student Financial Affairs," according to UF's website for the Office for Student Financial Affairs.

Other schools hold later deadlines. The University of Northern Colorado, for instance, sets its deadline for March 1.

"A student wants to be aware of deadlines for each school that they are applying to. Missing a deadline by a day at UNC, for instance, can cost a student $5,000 to $6,000 in free aid versus a parent loan or other types of student loans they have to take out to meet the need," Somero says. "So deadline dates are critical, and they can vary from school to school. So students want to ensure that they file before the priority deadline date."

But it's not just institutional deadlines that parents and students should note and consider.

"Some states have early deadlines for state grant eligibility, and some schools may not be able to provide as generous a financial aid offer if the application is late. Getting organized about the deadlines and the application requirements is truly the first step in any application process," says Brad Lindberg, assistant vice president for enrollment at Grinnell College in Iowa.

How Do Schools Award Aid?

College financial aid officers say that while there are many similarities between how schools award aid, each has its own unique process for processing applications and awarding aid. Some schools offer larger financial aid packages than others, just like some institutions charge higher tuition rates compared with other schools.

"Each college and university is unique in its approach to distributing aid. Working with the individual college and university is the best way to understand how aid works at that particular school," says Rob Durkle, who recently retired after serving as chief recruitment and admissions officer at Wright State University in Ohio.

Durkle encourages families to ask about each school's award methodology. For example, some schools claim to meet full financial need for the cost of attendance with aid, but those packages may include loans. A handful of institutions, including Brown University in Rhode Island and Princeton University in New Jersey, package financial aid awards with no loans regardless of a family's annual household income.

[Read: 14 Schools That Meet Full Financial Need With No Loans.]

At the University of Dayton, where Durkle previously worked, he says the school raises a student's financial aid each year to match any tuition increases. In essence, the net price of tuition for students' freshman year will be the same as their senior year.

When Will I Receive a Financial Aid Award Letter?

Financial aid award letters typically arrive in the mailboxes of college-bound students in early spring -- usually after or at the same time as a college acceptance offer.

"A student can expect to see an award letter anywhere from December through April, depending on the school," Somero says.

How Do I Appeal a Financial Aid Award?

The process of appealing an award is known as a professional judgment review.

However, students may not know appealing an award decision is a possibility. According to a 2019 College Ave Student Loans survey conducted by Barnes & Noble College Insights, about a third of students would have reached out to the financial aid office to ask for more aid in hindsight.

But according to Orsolini, "You need more than 'I need more money' to appeal a financial aid award." Orsolini says families need a legitimate reason for schools to re-examine students' financial situations.

To be successful with an appeal, families need to demonstrate there's been a significant change in their financial circumstances since they submitted their application, says Dan Blednick, director of college guidance at TEAK Fellowship, a nonprofit organization that serves students from low-income families in New York City.

College aid experts say a family will usually be asked to submit a letter that summarizes their special circumstance that affects their ability to pay. A qualifying special circumstance might be a recent job loss, divorce, death in the family, out-of-pocket medical expenses or care costs needed for an elderly parent, to name a few examples.

"I would recommend trying to connect with a specific person in the college's financial aid office who is assigned to your case," says Blednick, who advises providing documents that reflect a need for additional funding.

What's the Impact of COVID-19 on Financial Aid?

The coronavirus pandemic may result in more students applying for financial aid, including those who have had a significant change in their families' finances, experts predict.

Prospective and returning students applying for financial aid for the 2021-2022 academic year may need to notify their college of any changes in their financial situation through a special circumstances form, Orsolini says.

"The FAFSA form asks nothing about the impact of Covid, so families need to reach out to the colleges individually if they have been impacted," he wrote in an email. "The CSS Profile (used by the more elite colleges) does give you a chance to address the Covid impact on its form. It asks if your family was impacted and allows a section for explanation. Although it is still a good idea to follow up with the college individually to make certain they know."

Blednick says he anticipates a significant rise in the number of students filing financial aid appeals because of the pandemic, and certain types of financial aid, like work-study, may be affected.

"Everyone's trying to be optimistic. I think kids are going to get packaged optimistically with work-study jobs and then if they fall through, then I hope the colleges will do the right thing and pay those students anyway," Blednick says.

It's important for students to have a backup plan to pay for college in case resources are limited, Blednick says, regardless of the impact of COVID-19 on their family finances.

"Keep an open mind, keep your options open. There should be a financial aid safety net for all students -- consider state universities, consider community colleges, and in New York, we have the CUNY system as well," Blednick says. "For those middle income families, think outside of the box to look at colleges that offer additional merit aid, which can be figured out by checking the financial aid websites."

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.