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

The college financial aid award letters are starting to arrive 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 their prospective students and their parents as an easy decision to understand.  The reality is 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 has student loan solutions that can help you understand the details of the award letter.   

Difference between a Scholarship and Grant?

Before we delve into the details, I want to give a general description of a 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 is often not 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.   A good example of this is the Federal Teacher Grant.  Grants can come from the college, federal government, or a state program.  In most cases, grants are determined by the college financial aid office since they are need-driven and have strict guidelines that need to be followed before being issued.

Due to FAFSA Simplification changes planned for 2024-25 school, this year’s families will really need to understand the difference between these types of financial awards.  The FAFSA calculation changes may reduce the financial aid that these students will receive in the outer years.  A proper understanding of the differences could impact the total cost and debt to the student.

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

Families often get confused about scholarships offered by a college.  This is mainly due to the complexity of the financial aid process and the lack of 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 not always true for need-based scholarships.

To make things worse, colleges only provide financial information one year at a time for a variety of reasons.  It is our belief that this is one of the major reasons for the student debt crisis.  Students and parents do not have the information or knowledge to make informed decisions on their college selection without a projection of the outcome.

Merit-based scholarships

A merit-based scholarship is free money that is not determined by your financial aid position or financial need. These scholarships can be awarded to a student for a variety of reasons, usually for academics, a need of the school, or a special skill that the student will bring to that college. Students normally 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 a merit-based scholarship and a need-based scholarship as part of their financial award letter.

As an example, the scholarship letter will state something like “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 serves as an incentive from the college to attract the best students or targeted students. Each school tries to create a certain 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 not often presented at the admission meetings.

As an 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 since the college’s goal is to attract better business majors this year.

If your child receives a merit-award letter, you need to do some additional work. Some awards will describe the minimum requirements of the merit scholarship, for example, maintaining a certain GPA level. The student needs to understand the rules and consequences of each award. Depending on the college, if that GPA level is not maintained, the entire scholarship may be at risk, or it may be prorated. 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 the college your child attends. Falling below full-time status could affect the scholarship. For example, students who decide to 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 decides to drop a couple of classes without picking up new ones. It is important to know the details of merit scholarships.

Need-Based Scholarships

After completing the Free Application for Federal Student Aid or FAFSA, a family will qualify for federal financial aid and many state aid programs.  The completion of 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 needs to be completed each year to qualify for the need-based scholarships which could impact a family’s ability to qualify in future years.  Therefore, understanding the difference between merit-based and need-based scholarships is so important.

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

It is important to realize that there will be changes to the financial aid calculation due to FAFSA Simplification starting in the school year 2024-25.  Some families could see their future need-based scholarships be eliminated which would raise the total cost of college in the outer years.

Private Scholarships Impact

Students can be awarded private scholarships based on need-based, merit-based, or based on things like 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?

Within the financial aid process, there is a list of items called need-based aid.  As stated above, the lack of standardization can make it confusing for families.  Within the need-based section of the financial award: grants, certain types of student loans, and work-study are issued.  This is normally controlled by the college financial aid office.

Grants are the free money within the need-based section that can change each year since they can come from a variety of sources.  As an 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 properly deploy grant funds.  A change in a family’s financial position 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 have an impact on these grants in the outer years.

Scholarship Conclusion

As you can see the marketing of a college education is presented to most families as a simple process.  The college financial decisions that a student and their parents are making will affect their financial life for many future years.  If the process was 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 is a very emotional decision, yet the financial consequence is 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 cost of college and understand your debt structure before the loans are obtained.

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