What Is Financial Need — and How to Calculate it

Decoding the financial aid process can be intimidating at first. But taking the time to understand the basics — like what is financial need and its complexities, like different student aid options — can set you up for success.

Qualifying for financial aid can make your dreams of post-secondary education possible, covering expenses, like tuition, room and board, and books. Between grants, scholarships, and even work-study opportunities, there are many different ways to access financial aid.

However, how much aid you qualify for all comes down to your financial need. What qualifies as “financial need” depends on a few factors. Here’s what you need to know.

What is financial need?

A lot of federal student financial aid, like federal work-study programs or subsidized Direct loans, depend on financial need. To determine your financial need, the federal government calculates the difference between your cost of attendance (COA) and expected family contribution (EFC).

Cost of attendance

Your COA is the amount it will cost you to attend your school of choice, usually calculated as a total cost for the entire school year. This estimate includes tuition and fees, plus room and board, transportation, books and other expenses.

Expected family contribution

Your EFC is calculated using information from your FAFSA plus tax calculations of family income. Federal law has established the exact formula used to come up with the EFC, which is then used to help determine your financial need.

Factors influencing financial need

What’s considered financial need can also vary by education level. For example, financial need for an undergraduate student might not be the same as what qualifies as financial need for a Ph.D. program. Ph.D programs are typically more expensive and take longer than undergraduate degrees so a Ph.D student might have greater financial need. Not to mention, even among undergraduate students, your amount of financial need can vary between institutions.

How is this possible?

It all comes down to your COA, which changes depending on where you decide to go to school. If you go to a school with a higher COA, your financial need will be greater.

Here’s an example, with numerical estimates, of what financial need might look like for undergraduate students attending different institution types.

Even though your EFC stays the same in each category, you could qualify to have a greater financial need depending on how expensive your school and program are.

Can financial need change each year?

Just when you thought you had financial need figured out, we have one more concept to throw at you — your financial need could change from year to year.

That’s right, your financial need isn’t a given throughout your entire degree. There are many factors that could impact your financial need from one year to the next, like:

• Tuition increases
• Housing increases or a rise in the cost of books or meals
• Increase in fees
• Decrease in the value of family assets or income
• Inflation, which could change the formula used to calculate EFC

Due to this possibility, always plan each year by making your own calculations for your EFC. Download the Department of Education's EFC Formula guide for the latest formula used by the federal government.

You’ll also want to calculate the COA from all of your prospective schools. This cost of attendance calculation resource makes that simple. Weighing the COA of each school you want to attend could be a critical part of deciding which college to attend.

Remember that although some financial aid doesn’t need to be repaid — like grants and scholarships — other financial aid comes in the form of loans which you’ll need to repay, eventually. Even if you qualify as having higher financial need, you might still want to consider a school with a lower COA to minimize any potential loans.

Related: Do You Have to Pay Back Financial Aid?

What if you need student loans?

What if it’ll cost your more to attend school than the amount of federal aid you qualified for? You have options for student loans that are not need-based. To find out how much non-need-based financial aid you qualify for, simply subtract the amount of aid you’ve received so far from your school’s COA.

For example, let’s say it’ll cost $18,000 to attend your school. You’ve received $6,000 in financial aid so far. That means you could qualify for up to $12,000 in non-need-based aid through loans such as a direct unsubsidized loan or a federal Direct PLUS Loan.

You could also consider private student loans — but you should exhaust all of your federal options first. Federal loans typically have lower interest rates and offer borrower protections such as deferment or forbearance and income-driven repayment programs.

If you’re still in financial need for the upcoming school year, have tapped into all of your federal aid, and need to fill the gap, find out how to apply for private student loans.