What is Financial Need?

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Mark Kantrowitz

By Mark Kantrowitz

August 15, 2023

Financial need is the difference between cost and ability to pay. Demonstrated financial need formalizes this concept as the difference between a college’s cost of attendance (COA) and the Student Aid Index (SAI). The SAI, known as the Expected Family Contribution in previous years, is calculated from information provided by the student on the Free Application for Federal Student Aid (FAFSA).

Thus, financial need is defined by the formula: Financial Need = COA – SAI.

Financial Aid Depends on Financial Need

Eligibility for financial aid, such as the subsidized Federal Stafford Loan and Federal Work-Study, is based on demonstrated financial need. The Federal Pell Grant is the only exception. The Federal Pell Grant is based on factors such as whether an applicant is not required to file taxes, the Student Aid Index, and adjusted gross income relative to the poverty line.

Based on this formula, financial need increases when the cost of attendance increases and the SAI decreases. So, financial need will increase when a student enrolls at a higher-cost private college as opposed to a lower-cost in-state public college. Financial need can also increase as income decreases, since this yields a lower SAI.

Consider a low-income student with an SAI of 1,775, a middle-income student with an SAI of 10,225 and a high-income student with an SAI of 38,695. Combine this with cost of attendance data from the College Board’s Trends in College Pricing 2022 to yield the following table.

As this table illustrates, financial need increases as college costs increase. Financial need also increases as the SAI decreases. For example, financial need for a low-income student at a community college is greater than financial need for a high-income student at a private non-profit 4-year college. A high-income student probably doesn’t qualify for need-based financial aid at a community college or in-state public 4-year college, but might qualify for some financial aid at a private non-profit 4-year college.

Type of College
Cost of Attendance
Financial Need for Low Income
Financial Need for Middle Income
Financial Need for High Income
Community College
In-State Public
Out-of-State Public
Private Non-Profit
Estimated Financial Need at different SAI and COA levels

Even high-income students may qualify for some need-based financial aid, if they enroll at a high-cost college. Financial need depends not just on the income, but also on the cost of the college attended by the student.

Financial Need Depends on the Cost of Attendance

The cost of attendance includes tuition, fees, books, supplies, equipment (including the cost of a computer, peripherals, software and internet access), housing, meals, transportation, and miscellaneous personal expenses. The cost of attendance may also include dependent care costs, special needs expenses and the cost of a study abroad program.

As the cost of attendance increases, the student’s financial need will increase.

Each college has a different cost of attendance, so a student’s financial need will be different at each college.

Financial Need Can Change Each Year

Financial need may also change each year, since the cost of attendance and SAI may change each year.

The cost of attendance typically increases from one year to the next. Even if a college has a tuition freeze, other costs, such as housing, meals and textbooks, may increase. Some colleges freeze tuition but not the fees.

The SAI will change with fluctuations in the family income and assets. Also, the formula that is used to calculate the SAI may change due to inflationary adjustments.

Also, even if the amount of financial aid increases as the cost of attendance increases, many colleges practice front-loading of grants. This may cause the mix of grants vs. loans in the financial aid package to shift to a greater proportion of loans after the freshman year.

If you need to borrow student loans, choose federal loans first. Federal student loans come with certain perks, such as eligibility for student loan forgiveness and income-driven repayment plans. If you’re borrowing private student loans, compare lenders for the lowest interest rate. 

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