What is a Scholarship & How Do They Work?

Paying for your college education with scholarship money is smart. But many students are confused about what scholarships are and how they work.

How is scholarship money awarded? What can you spend scholarship money on? How can you find scholarships? If you have questions like these, we're here to help.

What are scholarships?

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

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

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 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 various sources, including clubs, organizations, charities, foundations, businesses, colleges and universities, the government, and individuals. These scholarships can be merit-based, need-based, or a combination of both, giving you opportunities to continue your education without taking on a significant financial burden.

Merit-based scholarships are granted based on your academic or extracurricular achievements, including high grades, test scores, athletic or artistic accomplishments, or community service. These scholarships reward and encourage excellence and usually require students to meet specific eligibility criteria to be considered.

On the other hand, need-based scholarships are awarded according to your financial need. Therefore, factors such as your family income, assets, and other circumstances that may impact your ability to pay for college are factored into the eligibility decision. 

Eligibility for need-based scholarships is typically determined after you complete the Free Application for Federal Student Aid (FAFSA) or other financial aid applications like the CSS Profile. Need-based scholarships can help cover tuition, fees, room and board, and other college expenses for students who may not have the financial means to pay for college independently.

In some instances, scholarships may encompass merit-based and need-based components, considering your academic achievements and financial needs. Therefore, it is crucial to research the specific eligibility criteria for any scholarship you're interested in so you'll know if you're eligible to apply.

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% of all financial aide
• State grants and scholarships: 8% of all financial aide
• Scholarships and grants from schools: 35% of all financial aide
• Private scholarships: 10% of all financial aide

1. Federal Aid (about 47% of all aid)

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 will be out of luck. Almost all grants from the federal government require demonstrating financial need. You must complete the Free Application for Federal Student Aid (FAFSA) to qualify for any federal grants. 

Expert tip: Complete the FAFSA, even if you don't think you'll qualify for aid. Each year money goes unawarded simply because students fail to complete the application.

In 2023 alone, $3.6 billion in Pell Grants went unclaimed because students didn't complete the FAFSA. According to the National College Attainment Network (NCAN), 47% of the class of 2022, who would have been eligible for the Pell Grant, did not complete the FAFSA. 

Soon, you'll see the new and improved Better FAFSA, which you can read about by clicking the link. 

Types of Federal Student 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 most significant tax savings per dollar of qualified higher education expenses, but it is limited to four years. As a result, the LLTC is used mainly by graduate and professional students and continuing education students after they exhaust 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

You can turn to federal loans if you aren't eligible for federal grants.

The Direct Loan is for those who file the FAFSA and attend school at least half the time. During five years, students can borrow a maximum of $31,000.

The PLUS Loan is designed for parents of undergraduate students and 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 (about 8% of all aid)

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 the 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, meaning state-level formulas set awards. In other states, the government sets essential 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 (about 35% of all aid)

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. Then, when the school reviews the financial aid form, the admission staff decides whether a child still needs assistance, even after considering merit scholarships.

If the school is willing to give additional assistance, it will award a need-based grant on top of the scholarship. Unfortunately, the most highly-ranked research universities and liberal arts schools offer 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 the total price at these institutions. Because of the wide variety of assistance you can encounter, it's essential to use a net price calculator when evaluating the generosity of any school.

4. Private scholarships and employer grants (about 10% of all aid)

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 most significant 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; most of these awards are under $4,000. As a result, the odds of winning a scholarship are about one in eight. Prestigious scholarships can have odds of one in 250 or one in 500.

Scholarship FAQs for high school students and parents

If you've made it this far and still have questions about scholarships, we have the answers here. 

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; 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, as we mentioned above. For example, some scholarships are awarded based on need. For others, you must be a member of an organization, studying a specific 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. In addition, you can continue to apply for scholarships during your collegiate years up to your Ph.D. studies.

We encourage you to apply for as many scholarships as possible so you don't miss out on any free money. 

Who can apply for scholarships?

Scholarships are available to high school students, current college students, and even adults returning to school. Each scholarship has its own set of eligibility requirements, so it's essential to research and read the guidelines carefully before applying.

When should I start applying for scholarships?

It's never too early to start researching and applying for scholarships. Many scholarships are available to high school students in their junior and senior years, but some are also open to younger students. It's a good idea to begin your search early and create a calendar to track application deadlines.

Where can I find scholarships?

Scholarships can be found through a variety of sources, including:

• Your high school guidance office
• College and university financial aid offices
• Online scholarship search engines, such as Fastweb, Scholarships.com, and Appily
• Community organizations, such as local clubs, foundations, and businesses
• Professional associations related to your field of study

How do I apply for scholarships?

Each scholarship has its own application process, including submitting an online or paper application, writing essays, providing letters of recommendation, or submitting transcripts and test scores. Be sure to carefully follow the application instructions and submit all required materials by the deadline.

What is the difference between need-based and merit-based scholarships?

Need-based scholarships are awarded based on a student's financial need, as determined by their family's income, assets, and other factors. Merit-based scholarships are awarded based on a student's academic, athletic, artistic, or other achievements, regardless of their financial situation.

Can I win multiple scholarships?

Yes, students can apply for and win multiple scholarships. However, it's important to note that some colleges and universities may reduce your financial aid package if you win a large enough scholarship. That's because a considerable scholarship can decrease your financial need, so the school may think you don't require as much aid.

Do I have to pay taxes on my scholarship?

Scholarships for tuition, fees, and required books or supplies are generally tax-free. However, if you use your scholarship funds for other expenses, such as room and board, travel, or optional equipment, those scholarship funds are usually taxable. Again, it's good to consult a tax professional or the IRS website for more information.

Can international students apply for scholarships?

Yes, many scholarships are available to international students studying in the United States. However, research scholarships are specifically for international students, as eligibility requirements may differ from those for U.S. citizens.

What should I do if I don't win a scholarship?

Don't get discouraged if you don't win a scholarship right away. Keep searching and applying for scholarships throughout your high school and college years. Additionally, you can explore other financial aid options, like grants, work-study programs, and even student loans, to help fund your education.

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