What are Scholarships and How Do They Work? (Guide)

Scholarships are a smart way to pay for your college education, but many students are confused about how the whole process works. How is scholarship money awarded, and what can you spend it on? How can you find outside scholarships? If you have questions like these, we're here to help.

What is a Scholarship?

Scholarships are financial aid awards designed to help students pay for an undergraduate or graduate degree. Sometimes a scholarship is a one-time check. Other school scholarships are renewable and provide money for students each semester or school year.

These financial awards differ from student loans in that they don’t have to be repaid. So, to answer a question we often hear, if you get a scholarship, you do not have to pay it back.

Students might receive the money directly as a check in their name. In other cases, the money is given to the student’s school. When that happens, the student would then pay the school for the difference in any money owed for tuition, fees, room, and board. If the scholarships and other forms of financial aid are enough to cover the direct college costs, the excess money is refunded to the student.

Where Do Scholarships Come From?

Scholarships come from a variety of different sources, including clubs, organizations, charities, foundations, businesses, colleges and universities, the government, and individuals. Colleges and universities offer financial assistance in the form of merit aid as well, so don’t forget to contact the schools you are considering to see if you qualify for any merit aid scholarship money.

What Are the Main Sources of Scholarships and Grants? 

There are four major types of free money available to college applicants. We will list and discuss them below with the percentage of total grants and/or scholarships that comes from each source:

• Federal grants: 47%
• State grants and scholarships: 8%
• Scholarships and grants from schools: 35%
• Private scholarships: 10%

1. Federal Aid (47%)

It’s estimated that the federal government gives out $120 billion each year in federal aid. But if you are looking for merit scholarships from the federal government, you’re going to be out of luck. Almost all grants from the federal government require demonstrating financial need. To qualify for any federal grants, you must complete the Free Application for Federal Student Aid (FAFSA). 

Expert tip: We recommend submitting your FAFSA to any school you think you might possibly be interested in attending, even if you haven’t applied there. It’s easy to do this – you just add these schools to the School Section of the FAFSA.

Here are the two major grants that fall under Federal Aid.

• Pell Grant 

By far, the Pell Grant is the biggest federal grant. Pell Grants are available to students with demonstrated financial need. For context, during the award year 2020-2021, 78 percent of Pell Grant recipients had a family income of less than $40,000 a year.

The current full grant, which is adjusted annually, is $6,895 for the 2022-2023 award year.

Is FAFSA a Pell Grant?

Answer: No. The FAFSA is the application, and a Pell Grant is one type of financial aid available to students who complete the FAFSA.

• Federal Supplemental Educational Opportunity Grant 

The FSEOG is available for students who have “exceptional financial need.” If you don’t qualify for a Pell Grant, you won’t be eligible for this grant that ranges from $1,000 to $4,000 annually. The FSEOG will not be available on all campuses and the money can run out.

• Education Tax Benefits 

The federal government provides several education tax benefits, which are claimed on your federal income tax return. Some are based on tuition and textbook costs. These include the American Opportunity Tax Credit (AOTC), Lifetime Learning Tax Credit (LLTC), and Tuition & Fees Deduction.

Of these, the AOTC yields the greatest tax savings per dollar of qualified higher education expenses, but it is limited to four years. The LLTC is used mainly by graduate and professional students and continuing education students after they exhausted eligibility for the AOTC.

Another popular education tax benefit is the Student Loan Interest Deduction, which provides an above-the-line exclusion from income for up to $2,500 in interest paid on federal and private student loans. 

• Veterans and Military Student Aid 

The federal government provides several types of military student aid to members of the U.S. Armed Forces and veterans. These include ROTC Scholarships, the Montgomery G.I. Bill, the Post-9/11 G.I. Bill, the Yellow Ribbon Program, U.S. Armed Forces Tuition Assistance (TA) and the Student Loan Repayment Program.

• Federal Loans

If you aren’t eligible for federal grants, you can turn to federal loans.

• The Direct Loan is for those who file the FAFSA and are attending school at least half time. During a five-year period, students can borrow a maximum of $31,000.
• The PLUS Loan is designed for parents of undergraduate students, as well as graduate and professional students. Parents can borrow the difference between the cost of the school and what their child received in financial aid.

2. State Aid (8%)

Almost every state education agency has at least one grant or scholarship program available to state residents. Some offer several programs.

States in the South are more likely to award money based on grade point average and possibly test scores. States on the East and West coasts are more likely to provide awards based on financial need.

An easy way to learn more about aid programs in your state is to head to the website of the National Association of Student Financial Aid Administrators (NASFAA).

On the NASFAA website, you can find links to your state aid programs by following these steps:

• Click on Students, Parents & Counselors link
• Then click on Financial Aid in Your State link
• Next, choose the State Financial Aid Programs link
• Once you call up the U.S. map, click on your state

Some state programs, such as those in California and New York, have centralized systems, which means that awards are set by state-level formulas. In other states, the government sets basic criteria, but they allow public universities to exercise some discretion when making the awards. States in this category include Texas and Virginia.

3. Institutional (School) Grants and Scholarships (35%)

Here is how the award process often works. A student applies to a school and the admission office decides whether to accept the applicant. If the school gives merit scholarships, the decision typically will be made during the acceptance process, usually based on the student’s grades and test scores.

This often happens before the school knows if a student qualifies for need-based aid. When the school reviews the financial aid form, the admission staff decides whether a child still needs assistance, even after taking merit scholarships into consideration.

If the school is willing to give additional assistance, it would award a need-based grant on top of the scholarship. The most highly ranked research universities and liberal arts schools give no merit scholarships.

Their aid is exclusively in the form of need-based grants. Consequently, if you don’t qualify for need-based aid, you will pay full price at these institutions. Because of the wide variety of assistance that you can encounter, it’s important to use a net price calculator when evaluating the generosity of any school.

4. Private Scholarships and Employer Grants (10%)

Outside groups such as foundations, civic groups, companies, religious groups, professional organizations, and charities award private scholarships. Many people assume that private scholarships represent the biggest source of school money, but as you learned, they are among the smallest sources.

Unlike other sources, these scholarships typically last for just one year, and most of these awards are under $4,000. The odds of winning a scholarship are about one in eight. Prestigious scholarships can have odds of one in 250 or one in 500.

How Can Scholarship Money Be Spent?

Scholarship checks awarded in your name can be spent on anything, but you would be wise to look at this as an investment and not a free pass to splurge on video games or concert tickets. This money is for school expenses. This could mean tuition, but it could also be books, pencils, housing, food (you can’t study on an empty stomach), or even computers and software.

When you receive the scholarship money depends on the scholarship you won. Sometimes you get the money in one chunk before school begins, and in other cases, the money is distributed in installments. Sometimes a scholarship may be paid out in the middle of a semester.

How are Scholarships Awarded? Who Can Qualify for Them?

Scholarships aren’t awarded just to students with a 4.0 GPA. Each scholarship has its own criteria. Some scholarships are awarded based on need. For others, you must be a member of an organization, studying a certain field, an exceptional athlete, or fit whatever guidelines the group awarding the money decides upon.

Regardless of whether you excel in academics or sports, you should be able to find several scholarships that work for you. There are even scholarships intended for students living in a particular state or town. You can continue to apply for scholarships during your collegiate years all the way up to your Ph.D. studies.

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