After your acceptance letter, it’s the second-most important piece of mail you’ll get from your college of choice – the financial aid award letter. A generous financial aid package from the school of your choice is cause for rejoicing, while a stingy award may mean a last-minute change of college plans.
Yet the financial aid award letters students receive may leave the scratching their heads, especially if they’re trying to decide which school is the best value. There’s no standard format all schools use for their award letters, despite the federal government’s efforts to encourage standardization. Sometimes, it can be hard to distinguish gift aid from loans. In other cases, it’s not even clear how much a school really costs – information that plays a big role in the true value of a financial aid award.
“Fundamentally, award letters aren’t really a counseling tool. They are marketing documents,” Mark Kantrowitz, senior vice president and publisher of Edvisors Network, told CNBC. “Their goal is to show you how you can afford the school, even if you really can’t.”
The lack of transparency means that parents and students are on their own when evaluating award offers. Confusion over what a school is really offering can have major consequences down the road, including crippling debt. To help students and parents who are weighing offers from different colleges, we’ve put together this list of six tips for deciphering your financial aid award letter.
1. Find out the true cost of attendance
You wouldn’t buy a car without knowing how much it cost. Likewise, you shouldn’t make a decision about a college without knowing the true cost of attendance. Yet that may not be immediately apparent. “Not all award letters state the cost of attendance for a college,” Jodi Okun, the founder of College Financial Aid Advisors, told The Cheat Sheet.
If your financial aid letter doesn’t state the cost of attendance upfront, you may need to do some legwork to find out what that number is. The college’s website should provide that information, or you can call the financial aid office and ask. Knowing the cost of attendance will help you determine the school’s net price, after subtracting any grant aid you’ve been offered.
2. Understand the different types of financial aid
When it comes to getting help paying for college, some types of aid are better than others. You’ll probably see three main kinds of support included in your award letter.
The best is need- or merit-based scholarships and grants. This is “free” money that you don’t have to pay back. Ideally, you want an aid package that’s heavy on grants.
Work-study awards don’t need to be paid back, but they do need to be earned. When considering the value of your work-study award, remember that this money won’t come off your tuition bill, said Okun, though it can help you cover miscellaneous living expenses while in school.
Loans are money that you borrow to pay for school. Your award letter may include a mix of different types of loans, including federal student loans, loans offered by your state or through the college, or private student loans. Each loan has its own terms, which may not be disclosed in your award letter.
3. Determine if you’ve been gapped
A handful of schools promise to meet 100% of all students’ demonstrated financial need. Many others will cover only a portion of a student’s need, leaving them to make up the difference, either by coming up with extra cash or taking on private loans. This is called “gapping” and it happens a lot. In a 2014 survey of college admissions directors, 55% admitted to gapping at least some admitted students.
To find out if you’ve been gapped, subtract your expected family contribution (which should be shown on your award letter) from the total cost of attendance to discover your demonstrated need. Then, compare that number with your total financial aid award. One caveat: “Do not include any PLUS loans, which are not need-based aid,” Paul Wrubel, a financial aid expert and executive director of MindWorksUSA, told The Cheat Sheet. These loans are taken out by parents, not students, and when colleges include them in an award letters, it may hide that a student has been gapped, as reported by PBS.
If there’s a difference between your demonstrated need and your financial aid award, you’ve been gapped. “In short, you are being treated as though you have more money (income and assets) than you really have,” said Wrubel.
4. Beware of big loans
Not all financial aid is created equal. Say you get a letter from a school that says you’re getting an aid package worth $40,000. The school costs $50,000 to attend, so you figure 80% of your costs are covered. But look closer. Three-quarters of that aid, or $30,000, may in the form of loans, with only $8,000 in grants and $2,000 in work study. With that kind of aid package for four years, you could easily graduate with $120,000 in student loan debt. Suddenly, that great financial aid package doesn’t look so great after all.
“You want to try for a financial aid award that has some balance between self-help aid and free money or grant aid,” said Wrubel. “As a general rule, a small demonstrated need is usually met with mostly if not all self-help aid … If the award, particularly a large one, seems too skewed on the side of self-help aid, then you may want to discuss this with the financial aid administrator at the college.”
5. Read the fine print
Scholarships and grants are great, but they may come with strings attached, like having to maintain a certain GPA to continue receiving the award. In other cases, grants may be front-loaded, so that a student receives more free money in their first year of college and less in subsequent years. Up to 50% of colleges may front-load grants, according to the Wall Street Journal.
Some schools may not clearly differentiate between loans and grants. For example, you may see something called a “Stafford” in your aid package, and the letter may not make it clear that this actually a loan you will have to pay back, for example.
6. If you’re confused, call the financial aid office
Not sure what the real cost of attending a school is? Unclear about whether you’re receiving a grant or a loan? Want to negotiate a better aid package? Don’t hesitate to call the financial aid office and ask.
“Now is the time to get in touch with the financial aid office,” urged Okun. Aid officers may be busy, but you should be persistent about getting the information you need. Parents shouldn’t hesitate to make multiple calls if that’s what it takes to get all their questions answered, she added.
“For incoming freshman, you should understand that assuming your family’s financial situation doesn’t change dramatically in the next few years, the offer to a college freshman is likely to establish a template for all four years,” said Wrubel. “It is worth the trouble of trying to forge the best offer in year one.”