This is the season for excited high school seniors to rip open the thick envelopes (or congratulation emails) from colleges, see they have been accepted into a college and shriek with delight. Then comes the financial aid award, and often the response is less dramatic. Frankly, confusion or concern might be the most common reaction to a financial aid award. So here’s how to decode the financial aid awards and figure out just what they mean.
First you need to know what the Cost of Attendance (COA) is for the college. Most colleges have this information listed, but you should verify that the COA includes both direct costs, like tuition and fees, and indirect costs, such as room and board, books, school supplies, travel expenses, and miscellaneous items. Once the COA is determined, you can then apply the information from the financial aid award to figure out your net price, or the amount you’ll actually be paying.
The financial aid award will likely list several types of aid. The best kind of aid is the “gift aid” which includes scholarships and grants that do not need to be repaid. Scholarships and grants are either “merit” meaning that you earned them because of some level of achievement, or “need-based” meaning that the amount is based on your financial need established by the FAFSA or other financial reporting forms. The merit scholarships are usually reoccurring but may require some level of academic or activity achievement in order to maintain. Usually there is information provided as to what is needed to maintain merit awards. The need-based scholarships and grants may fluctuate each year if the family’s financial situation changes. These grants can be offered through the college, state or federal programs.
The other category of aid is self-help aid, which includes work-study and loans. Work study is a program that allows a student to work and earn the money which is then turned over to the college to pay part of the student’s bill. There can also be several types of loans included in the award letter. The federal loans include subsidized (don’t accrue interest until you leave school) or unsubsidized, PLUS (parent) loans, and Perkins loans. Federal loans are preferable over private loans as they typically have a low fixed interest rate and have repayment plans based on income levels. Some states also offer some advantageous loan programs as well.
So, now you understand the basics of what’s in the award letter. Next you need to figure out really what your out-of-pocket cost will be for the college. If the award letter doesn’t do the math for you, take the COA and subtract any of the gift aid (scholarships and grants) that don’t need to be repaid. What is left over is how much you will have pay, eventually, for one year of college. If some of that amount is off-set by loans and work-study, you still end up paying for it in the end, through working during college and after leaving school through loan repayment. You can choose to accept or decline all or parts of a financial aid award. For example, you could accept the scholarships but choose to decline the loans (or certain loans) if you have the means to figure out how to pay that portion without loans.
When comparing financial aid awards from colleges it is important to compare types of aid you receive, as well as amounts. An award from College A might look like they are giving you more money, but if they are actually giving you twice the amount in loans as College B, it could mean that the net price for College A is actually more because you will have to pay more in loans in the end.
Something to consider when viewing a financial aid award is that this award is for one year of college. What will be the cost for four years? Five or more? Will your family’s financial situation be changing in the next three years (i.e. more or less students in the family in college, projected retirement, etc.) that could change the amount and types of aid you might receive? What about the level of debt you are willing to take on? If your loans are $5000 for one year, that’s $20,000 over four years. But what if your loans are $20,000 for just the first year? Is the college worth accruing $80,000 of debt for your education there? What is the outlook for the career area you are considering post-college, if you even know at this point?
Celebrate your admissions into college but be savvy when viewing and comparing your financial aid awards!