Merit and need-based aid are the two major types of college funding that do not require repayment. Understanding the difference between them can save a family time and money, and help with college selection. This knowledge also helps a family save on the cost of college. As you know, we have been reviewing and discussing three aspects of creating a college funding program: saving for, shopping for, and saving on the cost of college. Saving for college employs a combination of 529 accounts, taxable accounts in the parents’ and/or child’s name.
Shopping for a college means finding the right fit academically, socially, and financially. Parts of the social and academic apply to the financial side. For example, a student’s GPA and test scores may help qualify him or her for a scholarship. The social component may have added costs, such as fraternity or sorority dues. Other types of clubs may be free. A family must also know how much it can afford to pay before the child attends a higher education institution. In performing this first task, feel free to download my college funding snapshot report. This report offers insights into the current funding status of the student’s higher education.
Saving on the cost of college means understanding the resources beyond savings that you can use to create price breaks. We typically call this bargain hunting or smart shopping to ensure you do not overpay. For example, while looking for deals online, you likely have come across a promotional code to receive a discount on a product or service. Perhaps while buying your last vehicle you received a rebate or 0% financing. You should pursue saving on the cost of college with the same vigor and skills. One way to create a price break for college, as mentioned before, involves merit. A second way to create a price break bridges shopping for college by strategically applying to universities with favorable need-based practices.
Understanding Merit-Based vs Need-Based Financial Aid
What is merit-based financial aid?
Merit-based aid is money based on something other than financial need. We often hear about sports or academic scholarships. For the latter, students must commonly maintain a minimum GPA. To qualify for the academic scholarship, the student must typically have met certain academic standards. An example may be a school that gives an automatic scholarship to students who earn a minimum SAT/ACT score with a certain GPA upon high school graduation. Other times, students must write essays or participate in civic activities or interviews. For more prominent universities, the student may have to provide a combination of all these.
As the definition suggests, merit-based money may be awarded for many types of actions. When considering merit aid, a family must be aware of a few things. If the scholarship is private, is it a one-time payout? How much effort will the student be exhausting for the scholarship? For example, if two scholarships are under consideration and require equal amounts of effort, students should apply for the higher payout. For multiyear scholarships, what standards must be met? If the student does not finish his or her degree or meet the standards, will the student be required to pay it back? Families may want to consider scholarships that “prepare” a student for the college application, which may require an essay. Specifically, does the scholarship essay ask the student to state what makes him or her different and the best fit? The student may be able to use this material later for the application essay. Make changes to fit the specific need; the more the student tells his or her personal story, the stronger his or her confidence will become and the more easily he or she will be able to tell the story in the future. This also creates efficiencies in the application process for other scholarships and college applications.
Merit aid may come packaged in a few ways. The first is a competitive scholarship. Here, students compete against one another in a range of areas, including interviews and essays. The second merit aid is more like a grid of test scores and GPA. If you earn a certain score and graduate from high school with a certain GPA, you may receive the funds automatically. Following is the merit scholarship from Miami University.
The last form of merit aid is a package from the university. Here, the student may receive funds based on a combination of factors, like extracurricular activities, interviews, GPA, and test scores.
A merit-based conversation would not be complete without a discussion of sports scholarships. I left these out for two reasons. First, many parents expect their children to receive some type of aid if the student was a better player on his or her sports team. However, the numbers don’t bear this out. Eight million high school athletes compete each year in the United States. Only 480,000 of those athletes will compete on a collegiate level (1.). That means roughly 1 in 16 high school athletes will compete at this higher level. Further, only 150,000 students in Division I and II schools receive athletic scholarship offers. Even then, they may not be full rides, leaving parents and students with some out-of-pocket costs. Division III schools do not give out athletic scholarships. However, it is not uncommon for a small group of student-athletes to receive some other type of merit-based aid.
What is need-based financial aid?
Need-based financial aid reflects the student’s and family’s ability to pay tuition. This does not stem from anything other than financial need. The driver for need-based aid directly reflects the basis college funding formula.
If you recall from my other article outlining the EFC, this is what the government thinks your family may pay based on the student’s income and assets as well as the parents’ income and assets. Typically, the largest driver in the EFC is parental income. Decreasing the EFC is one way a family can try to increase need. A second and often overlooked alternative involves increasing the cost of attendance. Typically, this involves bringing out-of-state state schools and private schools into the picture for consideration. On a side note, more out-of-state schools are offering in-state tuition prices for neighboring states. For example, I learned that several Ohio universities, both private and public, were offering in-state tuition to incoming Indiana students. A later blog post will provide more details about this pricing reciprocity.
Remember, you are trying to get the lowest net price possible. Combining the EFC and attendance strategies may be another option. However, most upper-middle-income families do not consider these tactics because they do not fill out the FAFSA or CSS, which also serves as an application for many school-based grants and scholarships.
Understanding merit-based and need-based aid does not stop here. Families must also understand the differences between institutional and private scholarships
Private and Institutional Scholarships
One of my favorite activities is fly fishing. Admittedly, I am not good, but the simple act of casting a line over moving water with a smooth movement of the rod back and forth is beautiful. I make a few special trips each year to earmarked locations simply to engage in this activity. The experience creates the proverbial fishing stories we hear, tell, and share with friends. In my case, though, I can count on one hand the number of fish I have caught with a fly rod.
What does this have to do with scholarships? It seems that families have the same experience with scholarships. We hear and share stores about the “big money” given to the boss’ nephew’s daughter, or maybe our student even gets a few scholarships himself or herself. Often, it will be a few one-time hits for a few hundred to a couple thousand dollars from a specific nonacademic source, like a community foundation or business. These nonacademic sources provide private scholarships.
Institutional scholarships are given through the big players, like universities and the government. In fact, undergrads receive a much higher dollar amount from institutional money than from private scholarships.
I make this point not to say that private and employer-based grants are not important, but rather to explain where the large pool of money sits. Back to the fishing analogy. If I want to catch several fish, I should stop using my fly rod and instead fish with a stick of dynamite. Families may gain more aid money for their efforts if they refocus on where the large pool of money sits.
An important side note: If your family plans to use a college financial aid company or individual, make sure you understand what they are providing. Last year I attended a seminar that promised to get my daughter scholarships and get her into “great institutions.” However, the burden of the work for getting the scholarship still rests on the student’s shoulders; the aid company may simply screen for scholarships for which they suggest the student apply. The student must still write the essay. Some free sites match the student and the scholarship opportunity. Many of the best opportunities come from specific scholarships at the school. When you are shopping for schools, it is a good idea to ask about grants and aid at the university and department levels.
Merit vs. Need Tendencies
Colleges often favor one form of merit or need-based financial aid. Knowing how your prospective school favors aid will help you create a college funding strategy. Let’s take a look at two examples.
The University of Notre Dame has 100% of financial need met, with 79% of the funds coming from scholarships and grants and the remaining 21% coming from loans and/or jobs. Miami University meets only 59% of a student’s financial need, with 59% coming from scholarships and grants and 41% coming from loans and/or jobs.
In a nutshell, Notre Dame focuses more on meeting the student’s financial need while Miami seems to focus on the grid system. Does this make Notre Dame better? No; the two universities simply take a different approach to scholarships.
How do I take advantage of need-based or merit-based financial aid?
Hopefully, you have picked up on the fact that most schools lean one way or the other in dispensing financial aid to students. Families should become familiar with where the schools on their list lie. The best way to perform this task is to lay out a grid for the student as a means of understanding where to focus.
It is not enough to say that a school leans more toward merit or need aid; after all, the student will be the one attending school. A family’s best aid option does not lie on a clear path. Rather, a continuum exists. Income shows the point. The parent’s income will most likely be the biggest driver in controlling the Expected Family Contribution or EFC. We know families make $0 to millions.
The continuum exists on the GPA and test side of merit aid. There is no pass/fail.
The best way to understand where a school sits is to create a grid style of analysis, like the one below.
Start by asking, “Where does the student fall on the chart?”
Are you high need and high merit (quadrant II)? Or maybe low need and low merit (quadrant III)? This will in large part determine the tactics you can leverage to help with your college funding.
Let’s imagine we have two students, Jonny and Suzy. Suzy was diligent in keeping a high GPA, was part of the band, and joined a few clubs to round out her extracurricular activities. She also scored well on her SAT. Jonny was not as active and did not keep a high GPA, nor did he score well on the ACT or SAT. As you can see, we have a high-merit student and a low-merit student.
Let’s further assume that Suzy was raised by a single parent who worked three jobs to make ends meet. Jonny’s parents work in middle management at the local Fortune 500 company, making at least $100,000 each.
Now we know where each student lies. Suzy will be in quadrant II as a high-need and high-merit student. Jonny will be in quadrant III as a low-need and lower merit student.
What comes next?
Each student should continue plotting his or her list of schools on the graph. Do the schools meet a high percentage of need? What about merit? Students should take note of the schools located in their quadrant. While acceptance is not guaranteed, these schools will likely be the easiest for the student financially.
While we have clearly divided the graph into quadrants for discussion purposes, a fuzzy divider exists as you move from one quadrant to another. Students and families must ask the following two questions:
– Which factors move the student around in the quadrant the most?
– Which levers must we pull to get us closer to the school we want?
The first question identifies those factors on which a family may work to improve its college funding plan. The second question introduces action the family can take to move the student to a better position relative to the school.
Let’s get back to Johnny and Suzy.
With Johnny being in quadrant III, he can focus on selecting a favorable school, getting a higher test score, and receiving “tax scholarships.” The latter point means using the tax code to find funds that help pay for school. The two most common examples are the state tax benefits provided by contributing to a 529 and the American Opportunity Tax Credit (if the parents qualify.) Selecting favorable schools means paying more attention to the choice of in-state vs. out-of-state and public vs. private. Price will be a bigger factor. The last component, higher test scores, helps the student work on merit. Not all scholarships are given to high-merit students, but higher test scores help as the university seeks to bring in the best freshman class it can; test scores are a key ingredient for creating a great incoming class.
Suzy, being in quadrant II, has many alternatives. High need means focusing on those schools that meet a large percent of the need. If Suzy and her mom can get the Expected Family Contribution down even lower, her need increases. Lowering their EFC may be another way of helping with college funding. Merit money based on GPA and test scores open the door to those schools that provide merit-based aid. Working on her test prep to gain a few extra points on the SAT/ACT may mean thousands of additional dollars in institutional aid.
The small difference each student makes in his or her plan can yield larger cumulative savings and cost reduction.
Have questions about where to start your college funding plan? Download the College Funding Snapshot Report and watch the video on how to effectively use it.