A federal grant in aid is basically a grant awarded to states, local municipalities, or individuals. These grants are awarded for specific projects. The government places restrictions on how grant money can be spent. The government is able to monitor how grant money is used based on information from grant applications. Grant recipients are required to indicate on their application how the money will be spent. Grants are not loans and therefore do not need to be paid back. Federal grants are funded through income taxes paid to the government. Many grants require recipients to meet certain requirements and, in some cases, demographics. The pursuit of grant money is very competitive.