How to Read Between the Lines of a Financial Aid Award Letter

Loans, Student Loans

Now that you have your financial aid award letter in hand, you’re probably pretty glad you filled out the FAFSA. Who doesn’t love free money, right?

But before you purchase that new college sweatshirt, it’s crucial to understand what’s free and what needs to be paid back. Not all financial aid award letters are created equal, after all.

Here’s what you should know about award letters to make the best financial decision for you:

Calculate the total cost of attendance

The cost of attendance, or COA, will likely be listed on your financial aid award letter, and it should include the tuition, fees, and room and board for your first year. That’s a good starting point, but you should also factor in expenses such as textbooks, travel, transportation, and basic necessities and incidentals. Keep in mind that cost of living varies by location, so those costs may be higher or lower at different schools.

Another important factor to consider is access to required courses. If it’s difficult to get into your intro classes, you could end up taking more than four years to graduate — and that will cost you. Contact each school for information on registration and graduation rates. You can also talk to current students about their experiences.

Even after adding in all possible expenses, however, you can’t rely too heavily on your estimate beyond the first year. Why? The COA isn’t fixed. In fact, tuition has increased 39% at public colleges and 27% at private nonprofit colleges from 2002-03 to 2012-13, according to the National Center for Education Statistics. And an increase in tuition doesn’t always translate to an increase in your financial aid.

Another important aspect of your aid award related to the COA is your estimated family contribution. The EFC, calculated based on the information from your FAFSA, is an estimate of how much you can afford to pay for college out of pocket. Here’s a basic formula for calculating your unmet need:

COA – (EFC + Aid Award) = Need

If there’s a gap, you may have to take out federal or private loans, a parent PLUS loan, or apply for additional private scholarships to make up the difference.

Know your aid types

It sounds simple: Grants and scholarships are “free money,” while student loans have to be paid back with interest. But in a financial aid award letter, labels can get in the way of clarity. For example, work-study and loans may be referred to as “self-help aid,” while scholarships and grants may be listed as “gift aid.”

Here’s a breakdown of your main aid types:

  • Grants and scholarships: Awards that do not have to be repaid. These can come from your school or your state’s grant agency and may be need- or merit-based.
  • Work-study: Money you can earn (usually based on an hourly rate) that’s funded by the government. It isn’t necessarily guaranteed: You have to find a qualifying job that works with your academic schedule, and the amount on your award letter is the maximum you can earn. If you choose to defer for a semester, as many freshmen do, you’ll lose half of your quoted work-study funds for the year.
  • Loans: Borrowed money you must pay back, plus interest.
    • Federal: Loans taken out through the government. These often have lower interest rates and more borrower protections than private student loans. No credit check is required.
    • Private: Loans taken out through private companies (Sallie Mae, Discover or Wells Fargo, for example). These require a credit check, and student borrowers often need a co-signer to qualify or to get a lower interest rate.

Understanding how your financial aid offer breaks down is critical to understanding how much debt you’re taking on. You can use this shopping sheet to break down your offers and compare them side by side.

You also can compare your potential debt to the average starting salary in your field of interest if you know what you want to do after graduation. As a rule of thumb, it’s best not to borrow more than your starting annual salary. And if you have to take out loans, max out your federal loans before taking out any private loans.

Ask the right questions

Find out the average student loan debt for each school and what percentage of graduates finds a job in their field within six months of graduation. That’s typically when the grace period for your student loans ends. Ask if you can expect the same scholarships from year to year, too. Some schools practice front-loading, meaning that scholarships will gradually be replaced with loans as you go from freshman to senior year. Some scholarships also have specific GPA requirements to requalify.

If you’ve been awarded outside scholarships, find out how each school will apply them to your financial aid package. Some schools use outside aid to reduce your internal scholarships and grants before they reduce your loans, which can have a big impact on your post-grad finances.

Next steps

Once you’ve gathered all the important information, compare your offers to see which school will give you the best education and experience and leave you with the least debt. Remember, you don’t have to accept all offered financial aid.

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This article was updated. It was originally published April 4, 2013.