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The 4 Different Types of Financial Aid: Expert Guide


There are so many different types of financial aid out there, with some serving you better than others. This guide will demystify everything you need to know about the types of aid available to students.

I’ll start with the various options available to you and include examples that you can check out for yourself. Then, I’ll tell you exactly where and how you can get your hands on this financial aid money. Finally, I’ll explain which types of aid you should take advantage of - and which types you should stay away from.

Let's get started! 


What Are the Different Types of Financial Aid? 

Tackling financial aid can be overwhelming, but you might be relieved to know that there are only a few different types of aid out there. Once you get the basic info on each category of aid, you’ll be much better informed when it comes to getting the most (and the best) funding.

The main differentiating factors between each aid category are:

  • How you get the money
  • Why you get the money
  • Whether you have to pay the money back

Here are the main aid types you should know about before you start looking for funding for college:



Grants are monetary awards that are typically based on financial need. If you receive a grant, you don’t have to repay the money at any point.

Example: Pell Grant



Loans are sums of money that you borrow and then pay back on a monthly basis after you graduate. In addition to the original amount that you borrow (the principle), you’ll also be responsible for paying back an extra percentage of the loan amount (interest).

Examples: Direct loans (subsidized and unsubsidized), Stafford loan, Perkins loan, Private loan



Scholarships are monetary awards similar to grants - you don’t have to pay them back at any point. Unlike grants, however; they’re often based on factors other than financial need, although need may be taken into account. Ultimately, scholarship eligibility can be based on almost anything depending on the goals of the person or entity that’s funding the scholarship.

To give you some examples, here are some student characteristics that many scholarship programs tend to look for in their applicants:

  • Strong academic records
  • Volunteer experience
  • Particular ethnic background
  • Artistic skill
  • Sports prowess
  • Entrepreneurial interests
  • Political ambitions
  • Career goals
  • Some combination of the above

Examples: Gates Millennium, McDonald’s, Coca-Cola, Tylenol, Florida Bright Futures, Hispanic Scholarship Fund, Minority scholarships



A work-study award is a type of need-based “self-help” financial aid in the form of a wage subsidy. Ultimately, it’s meant to help students get jobs (especially on campus) because the subsidy makes the students less expensive for certain employers to hire.

Some student jobs only hire people who have work-study awards. The work-study award pays for part of your hourly salary, and your employer pays the rest. You only “get” the money if you get a student job, and you don’t get any extra funding on top of your salary.

The average work-study award is about $1,500, but the annual maximum tops out at $7,000.

 Check out our guide to the federal work study program to learn more. 



A student job might not be the most exciting way to get financial aid, but it can come with some perks. 


What Are the Most Important Sources of Financial Aid? 

Although there are only a few types of aid, funding for school can come from a bunch of different sources. The way you go about getting aid depends, of course, on where the money’s coming from.

The main sources of student aid in the US are the federal government, state governments, the schools themselves, private organizations, and banks. Here, I’ll break down how you’d go about getting aid funding from each of these sources.


Federal Financial Aid

Types of aid given: Grants, loans, and work-study

Aid eligibility criteria: There are quite a few eligibility criteria when it comes to accessing federal student aid. Although they may seem complicated, most of them aren’t hard to meet - the big things are that you have to have a high school diploma or GED, and you have to be accepted to a degree or certificate program. 

To make sure you meet all the necessary eligibility criteria, read our comprehensive guide to getting federal financial aid

How to apply: You apply for federal aid with the Free Application for Federal Student Aid, or FAFSA. You only have to submit this one application in order to be considered for any and all forms of federal aid. 

You can even estimate your aid eligibility before you submit your FAFSA if you’re interested in knowing beforehand how much (and what types) of aid you’re likely to be awarded by using the FAFSA4caster

Examples: Pell Grant, federal loans


State Financial Aid

Different states have their own protocols, budgets, and eligibility criteria when it comes to state-based financial aid. Some states may use the FAFSA whereas others may have their own processes for determining aid eligibility (like Florida). 

You'll have to do your own research on your state of residency. Read more about state financial aid options here.


Aid From Your School

Types of aid given: Primarily grants and scholarships, sometimes loans

Aid eligibility criteria: Some schools offer only need-based financial aid in the form of grants. If you get into the school, then you’re automatically eligible for need-based aid as determined by the school’s financial aid policies. The most generous financial aid policies are often based solely on need. 

Some schools offer need-based and merit-based financial aid. Eligibility criteria for merit-based scholarships might depend on your GPA, standardized test scores, or sports performance.

How to apply:Many schools use the FAFSA to determine eligibility for need-based financial aid. Schools automatically get your FAFSA info if you list them on your application.

Your college applications will also often serve as an automatic scholarship application - the admissions or financial aid office will offer scholarships to particularly competitive students in order to persuade them to attend that school.

Some school-based scholarships have separate applications, however. I’d encourage you to check out the school’s financial aid website (or contact their financial aid officer) if you have questions about additional scholarship opportunities that might be available.


Aid From Private Organizations or Nonprofits

Types of aid given: Primarily scholarships and grants

Aid eligibility criteria: Eligibility criteria varies widely based on the type of student that each scholarship or grant program is targeting. The most common criteria centers around US citizenship and academic performance, but check out the scholarships listed earlier for more examples.

How to apply: There are some umbrella organizations where one application will allow you to be considered for multiple scholarships (e.g. the Hispanic Scholarship Fund). Most of the time, though, you have to submit a separate application for each scholarship program that you’re interested in. Often there’s overlap in what information scholarship applications ask for, so you may be able to recycle parts of your applications (like essays, for example). 

ExamplesCheck out our lists of top scholarships for high school juniors and seniors 


Aid From Banks and Financial Institutions

Types of aid given: This is where you go if you need access to private loans

Aid eligibility criteria:  This will vary based on which institution you go to and how much money you’re looking to take out. Basically, you'll have to show that you’re responsible and reliable so that banks trust that you’ll pay the money back. You can do this with a good credit history.

The problem is that most young people don’t really have a credit history, which means that most students who want to take out private loans need someone else (usually a parent) with good credit to cosign on the loan. 

How to apply:  You’d have to work directly with a bank to apply for the student loans you hope to take out. It involves submitting personal and financial information to the financial institution. 

For more information, check out our step-by-step guide to getting a student loan



What Are the Best Types of Financial Aid? What Are the Worst? 

Although all of the above forms of financial aid can help you pay for school, not all of them come with the same perks and benefits. There are some types of aid that’ll serve you better in the long run.

I’ve organized categories of aid into tiers, with Tier 1 being the most desirable and Tier 3 being the least desirable. You should pursue aid in this order - seek out Tier 1 aid first before filling any gaps with Tier 2 and 3.



Think of your financial aid options like tiers on a really delicious cake: you shouldn't start cutting just anywhere!


Tier 1: Grants and Scholarships

Grants and scholarships are the most desirable forms of financial aid because they come in the form of free money, often with no strings attached.

Some grants and scholarships are applied right to your bill - you often see this with federal and school-based aid. When this happens you don't actually see the money - you just see a lower (or even non-existent) bill. 

Other grants and scholarships are given directly to you. This means you have more freedom with how the money's spent, but it also means you have to be responsible with money management. Ultimately, it's best to apply grant and scholarship money to academic bills first before using funds to pay for other things. 


Tier 2: Federal Loans and Federal Work Study

Tier 2 offers some solid options for students and families who still need to cover costs after looking into grants and scholarships. These options don’t come in the form of “free” money, but that doesn’t mean they don’t come with some benefits.


Federal Loans

You have to pay federal loans back, so they’re obviously not as desirable as grants or scholarships. That being said, federal loans can come with perks that you won’t find with any other borrowing options. 

Many federal loan options come with competitive interest rates, lengthy grace periods, options for forgiveness or cancellation, and flexible repayment plans. If you have to borrow money, borrow federal loans first before turning to any private lenders.


Work Study

With a work study award, you don’t have to borrow any money at all. You do, however, have to get a job in order to see any cash. The good news is that the money you earn is yours to spend or save as you see fit. Check out our guide to the federal work study program to learn more. 


Tier 3: Private Loans

You should only look into private loans if you can’t cover your expenses after getting as much Tier 1 and Tier 2 money as possible. You can borrow responsibly with private loans, but borrowing terms tend to be less favorable than what you’d see with federal loans.

First, it's pretty much necessary to have a cosigner on a private loan if you don’t have a credit history - this means that someone else is on the hook for your debt if you're unable to pay back what you borrow. They don't come with options for loan cancellation or forgiveness. Finally, private loans tend to have higher interest rates than federal loans because they're not subsidized

The bottom line: you ending up paying more in the long run with private loans than with other forms of financial aid


Final Thoughts: Paying for College Responsibly 

The average sticker price for a college education is pretty high these days - too high for the typical student to take on by herself. As a result, most US college students relies heavily on financial aid to help fund their education.

Sometimes, it’s a bit too easy to take out large amounts of student loans (especially private loans) to cover high college expenses. Although this investment can pay off in the long run for some students, student loans can turn into a frustrating burden for many others. It’s important to take a long-term perspective when considering student loan options. For example, you may want to ask yourself the following:

  • How much do you anticipate making after graduation, given your career goals?
  • How much would your total monthly payment (principle + interest) be for all your loans after you graduate?
  • Could you afford to make this monthly payment after covering all anticipated living expenses?

Before you take on large student loans, talk to potential cosigners, parents, and guardians. Finally, it would be wise to get the perspective of a trusted college counselor or financial advisor before committing to paying back large sums of money. People with this type of experience may be able to point you in the right direction when it comes to paying for your education. 


"Paying for college responsibly" is code for "not taking out more loans than you can handle."


What's Next?

Now that you've covered the basics, you can start thinking strategically about how to budget for a college education. 

You might want to begin by learning about how, when, and why to save for college. After that, you should check out our complete guide to covering your college expenses. Knowing how to apply for financial aid is an important part of covering college expenses, of course.

Maybe you have more complicated challenges ahead of you. If so, you might want to read more about how to pay for college without parents' help and how to pay for college without loans.



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Francesca Fulciniti
About the Author

Francesca graduated magna cum laude from Harvard and scored in the 99th percentile on the SATs. She's worked with many students on SAT prep and college counseling, and loves helping students capitalize on their strengths.

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