Financial aid is a system put in place by schools, and funded in part by the government, to make attending school more affordable for those who don't have the money to pay the full cost of tuition, plus other costs. Basically, you fill out three applications: The FAFSA, a federally administered financial profile, the Profile, the College Board's version of the FAFSA, and the school's financial aid application. Scools use these applications to determine how much your family and yourself, the student, can contribute to the cost of education. The school then offers you discounts in the forms of grants, outright discounts to the cost of education, and loans, discounts which must be paid back, including interest, after the student graduates.

So yes, financial aid is basically a system of discounts that the school applies to your cost of education based on several assessments of your financial situation.

There are some costs that financial aid can cover that aren't part of the bill charged by your school. These include books, travel expenses, and health insurance fees. If you receive enough financial aid that your aid exceeds the cost of things billed directly by the schools (tuition, room and board, administrative fees, etc.) then there is nothing else left for the school to discount, in the sense described by JaeYoon above. In this case, the school helps you by giving you a stipend in the form of a check which should be applied to the other costs of education. The school may or may not require you to submit receipts or a financial account of how you spent the money to verify that you spent the money as intended.

Merit-based financial aid is different than need-based financial aid, which is described in the above two responses. Merit-based aid is in the form of scholarships and monetary awards that must be applied for or are awarded based on merit from the regular application.

These awards are also usually applied to your tuition, room and board, etc., as a discount. In some cases, scholarships are specifically supposed to be awarded as stipends, in which case they will be in the form of a check given to the student for scholarly expenses. This is especially the case for study abroad scholarships, which often cover airfare and the like.

There is also financial aid available apart from what your school gives you. There are third-party scholarships, which are offered by organizations such as businesses or foundations. These can be applied for, but many have eligibility requirements. A good place to start looking for these kind of scholarships is www.fastweb.com.

You can also find loans from banks that have special student interest rates or allow you to defer repayment of the loan until after graduation. These are also legitmate forms of financial aid that can supplement the aid your school gives you.