Financial aid may be classified into two types based on the criteria through which the financial aid is awarded: merit-based or need-based.

Merit-Based: Merit-based scholarships include both scholarships awarded by the individual college or university and merit scholarships awarded by outside organizations. Merit-scholarships are typically awarded for outstanding academic achievements, although some merit scholarships can also be awarded for special talents, leadership potential and other personal characteristics. Merit scholarships are sometimes awarded without regard for the financial need of the applicant. At many colleges, every admitted student is automatically considered for merit scholarships. At other schools, however, a separate application process is required. Athletic scholarships are a form of merit aid that take athletic talent into account.

Need-Based: Need-based financial aid is awarded on the basis of the financial need of the student. To receive federal need-based financial aid in the United States, the student must file a FAFSA application. The FAFSA uses a calculation taking into account income and assets to determine a student's "Expected Family Contribution (EFC)" toward his or her college education for that year. Colleges use the EFC to decide what types of financial aid a student is eligible to receive. Students must complete the FAFSA each year in order to be considered for financial aid.