These type of grants are given by the U.S. Congress. They funding can only be used for specific purposes. Generally, these purposes are narrowly defined. While it may already seem restrictive, the recipients are normally required to match a part of these grants. However, it should be known that the categorical grants constitute about 90% of awarded federal aid funds.

As these grants are defined with a narrow set of purposes, they are distributed on a project or formula basis. Formula grants are provided via standard formulas prepared by the U.S. Congress. States compete for the project grant funding with which the federal government awards based on their merit.