Financial Aid Award Letter: What is the difference between a Scholarship and Grant

Understanding Scholarships and Grants

Due to the FAFSA issues, college financial aid award letters are delayed, but they should arrive shortly for college-bound students. The PayForED series on Understanding the Financial Award Letter was developed to help students and parents diffuse some of the confusion regarding the financial award letter. One key area is understanding the difference between the various types of scholarships and grants.

Colleges promote the amount of financial aid they issue each year to prospective students and their parents as an easy decision to understand. However, it is very different once a student receives their college acceptance and the financial aid award letter. If you need help organizing your award letters into a standard four-year format, PayForED Cost Analyzer helps families compare award letters easily and navigate the “How” to pay problem.

What is the difference between a Scholarship and a Grant?

Before we delve into the details, I want to describe the general scholarship. Paying for college includes the cost of tuition, fees, housing, meal plans, books, supplies, transportation, and personal expenses. A college scholarship is free money that a student can use to offset these expenses.

Scholarships can be need-based or merit-based. Understanding that difference is critical in analyzing the financial award letter and needs to be done correctly by families. Most scholarships come from the school, but private scholarships can be earned from outside sources.

A grant is also free money. These are typically need-based financial aid items that come from various sources. In most cases, they do not need to be paid back. Students should understand the requirements. For example, if a student is given a grant based on their major and then changes that major, the grant may become a loan. An excellent example of this is the Federal Teacher Grant.

Grants can come from the college, the federal government, or a state program. In most cases, the college financial aid office determines grants since they are need-driven and have strict guidelines that must be followed before they are issued.

Due to FAFSA simplification, significant changes were made to the 2024-25 school year rules. Some families with returning students may see significant changes in student award letter amounts. The EFC/SAI calculation changed, and for many families, last year’s method allowed for a multi-child discount. That part of the calculation may increase many families’ SAI and disqualify them for some federal and state grants this year.

What is the difference between Merit Scholarships and Need-Based Scholarships?

Families often need clarification about scholarships offered by a college. This confusion is mainly due to the complexity of the financial aid process and the need for more transparency. When evaluating the financial award, many colleges will only list the item as a scholarship and the dollar amount. Many assume this number will be available for all four years of college. That is true for a merit scholarship but is only sometimes valid for need-based scholarships.

To make things worse, colleges only provide financial information one year at a time for various reasons. This process is one of the primary reasons for the student debt crisis. Students and parents need the information or knowledge to make informed decisions on their college selection with a projection of the outcome.

Merit-based scholarships

A merit-based scholarship is free money not determined by your financial aid position or financial need. These scholarships can be awarded to a student for various reasons, usually for academics, a need of the school, or a particular skill that the student will bring to that college. Students typically receive a separate letter explaining a merit scholarship and the amount they will receive over the four years of college. A student can receive both merit-based and need-based scholarships as part of their financial award letter.

For example, the scholarship letter will state, “Congratulations! You have received the Presidential Scholarship worth $40,000. It will result in a $10,000 reduction of tuition per year.”

This merit scholarship rewards the students for their hard work and incentivizes the college to attract the best students or target specific students. Each school tries to create a particular class profile that is not disclosed to the public each year. Colleges use merit awards to attract the students they want based on the institution’s direction for the coming years. These are only discussed by the college’s administration and the admission office and are never disclosed to the public.

For example, a college is trying to build its business school this year. It may offer more scholarship money to the business major than the science major. The science major may have better grades but receive less scholarship money since the college aims to attract better business majors this year.

If your child receives a merit scholarship, you must do additional work. Some awards will describe the minimum requirements, such as maintaining a certain GPA level. The student needs to understand the rules and consequences of each award. Depending on the college, the entire scholarship may be at risk or prorated if that GPA level is not maintained. Either way, it will cost the student more money to attend that college in that year and possibly the next.

In most cases, merit scholarship money is only applied to full-time students. If this is the case, learn what full-time means at your child’s college. Falling below full-time status could affect the scholarship. For example, students who take an internship during the school year may need to enroll in evening or online courses to keep the credit criteria for their scholarship. Problems can also arise if a student drops several classes without picking up new ones. It is essential to know the details of merit scholarships.

 Need-Based Scholarships

After completing the Free Application for Federal Student Aid (FAFSA), a family will qualify for federal financial aid and many state aid programs. Completing the FAFSA will give the family their Expected Family Contribution/Student Aid Index or EFC/SAI. This number indicates whether the family will receive any need-based aid. Need-based financial aid is sometimes called a need scholarship. The FAFSA must be completed each year to qualify for the need-based scholarships, which could impact a family’s ability to be eligible in the future. Therefore, understanding the difference between merit-based and need-based scholarships is critical.

When comparing colleges on your child’s college lists, engaging your child in the cost of college is important. Many need to realize the implications of taking on a loan and understand that this is not free money. As part of this engagement, searching for private scholarships could help the student reduce the cost of college.

It is essential to realize that the financial aid calculation will change due to FAFSA Simplification starting in the school year 2024-25. As stated above, some returning students could see a reduction in need-based financial aid due to this change.

Private Scholarships Impact

Students can be awarded private scholarships based on need, merit, hobbies, field of study, ethnicity, religion, and more. Various organizations, local communities, websites, and companies are just a few examples of places where students can get private scholarships.

Most private scholarships are only for one year. In most cases, a private scholarship could impact a student’s need-based financial aid award. As a general statement, a student’s financial aid package, including private scholarships, cannot exceed the student’s total financial need.

What is a Grant?

The financial aid process includes a list of items called need-based aid. As stated above, the lack of standardization can make it confusing for families. Grants, certain types of student loans, and work-study are issued within the need-based section of the financial award. The college’s financial aid office typically controls this format.

Grants are free money within the need-based section that can change yearly since they come from various sources. For example, a change in a state or federal budget can result in a change in the financial grant amount received by the student. In most cases, there is a grid that the college needs to follow to deploy grant funds properly.

A family’s financial position change can also impact the student’s ability to qualify. It is based on the student’s Expected Family Contribution/Student Aid Index, which can change each year. As stated above, FAFSA Simplification could impact these grants in the outer years.

Scholarship and Grants Conclusion

As you can see, marketing a college education is presented to most families as a simple process. However, the college financial decisions that students and their parents make will affect their financial lives for many years. If the process were so easy, we would not have a student debt crisis.

When comparing colleges, it is important to engage your child in the net cost of college and the debt at graduation. This decision is very emotional, yet the financial consequences are not realized until after the debt is incurred. Our goal at PayForED is to provide smart and efficient college funding and student loan solutions.

Should you need a more comprehensive review of your award letter, PayForED is here to help with both software and consulting opportunities. Get the clarity you need for a better picture of the four-year college cost and understand your debt structure before obtaining the loans.

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