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Understanding College Financial Aid Awards

Posted: May 5, 2015

Helping your son or daughter choose a college is a complex process. Your student likely applied to several schools and completed the Free Application for Federal Student Aid (FAFSA) to see, based on your family's income and expenses, what you're expected to pay out of pocket for his or her first year of college. That amount is called the expected family contribution (EFC).

Each college that accepts your student sends a financial aid award letter that specifies what federal and institutional grants, institutional scholarships, federal loans, and work study funds your son or daughter would receive for attending that school freshman year. Be aware that financial aid offers might expect your family to pay more out of pocket than your EFC specifies. (See sidebar for definitions).

You compare the letters to determine which school is offering the best award package so you can make an informed decision about which college to attend. Sounds simple, right? Well, not really.

Different formats, different information

Many schools have their own award letter formats. Some list only direct costs the school bills you for like tuition, fees, and possibly room and board, while others include indirect costs for the things your student buys like books, transportation, and personal expenses. The school estimates the indirect costs, but sometimes not very accurately for you—the transportation estimate might be based on driving across town when you live across the country, for instance.

Confusing labels

The letters also might abbreviate line items, making it difficult to tell if an amount is a grant or a loan. Mark Kantrowitz, senior vice president and publisher at, Las Vegas, a company that maintains websites that help people plan and pay for college, has seen families confuse the two.

"It makes a huge difference," he says. "I've seen students who thought they were getting grants they didn't have to pay back, when they actually received loans they'd have to pay back with interest." He says some of them had to drop out or graduated with more debt than they could pay.

An amount on a letter might read "Staff L Sub," which is a subsidized federal Stafford Loan. But sometimes people just look at the total for the financial aid package and assume it's all grants.

Net price

It's critical to understand the difference between the "cost of attendance (COA)" and the net price, Kantrowitz notes. "Some schools just subtract the entire aid package—grants, loans, scholarships, work study—from the direct and/or indirect costs of attending the school.

"The net price subtracts only free money—grants and scholarships—but not loans, because you pay those back with interest, or work study, because you're not guaranteed to find a qualifying job."

The net price is a much more accurate measure of what the college is offering you, so you know what you'll pay out of pocket and how much debt you're taking on. If you just look at the COA, you may underestimate how much of your financial offer is a "gift."

Self-help financial aid

Another term to know is "self-help" financial aid, which means loans and work study. Some schools' letters that have separate sections for free money versus loans and work study use this somewhat misleading term. It's also important to understand the interest rates charged for various loans.

Private scholarships

If you apply for and receive one or more scholarships from private organizations, colleges might reduce your financial aid offer by that amount. If a school reduces the amount of loans offered, that lowers your net price. But if the school lowers the grants offered, your net price remains the same, so it's important to understand the school's policies.

Front-loading of free money

Remember that your student's initial financial aid offer is only for freshman year. There's no guarantee that a grant or scholarship you get for that year will be available in subsequent years. Some schools tend to offer more free money the first year, and then reduce the amounts and allow more loans for the following years. You'll have to fill out the FAFSA for each year your child is in school and applying for aid.

The net price for freshman year can be thousands of dollars lower than for junior and senior years. "You need to educate yourself about the school's grant and scholarship policies," says Matt Summer, vice president of business development for Student Aid Services Inc., Sacramento, Calif. "Some people figure out the first year's net price and then are shocked at how much it is for later years. The easiest way to get information is to ask the school's financial aid advisers."

Frozen tuition

Some colleges offer to freeze tuition over the four years a student attends, but this too can be misleading. "They don't freeze financial aid," Kantrowitz says. "If tuition stays the same, but you get fewer grants and more loans, your net price still goes up."
"I've seen students who thought they were getting grants...when they actually received loans they'd have to pay back with interest."
If tuition isn't frozen, find out how much it generally increases each year. The federal government hosts College Navigator, a website that includes information about various colleges. You might be able to find tuition rate trends there, or from the college's financial aid department or its financial aid Web pages.

Compare apples to apples

To accurately evaluate all financial aid letters your student receives, Summer recommends putting the information from all of them in a spreadsheet, so you can compare specifics side by side. First you'll have to ensure you're entering the correct numbers. "If you look at them separately it can be confusing," he says. "One school might offer $25,000 and another $12,000 but the costs might be lower for the second one or the free money might be higher—[the lower offer] might actually be the better deal."

Summer suggests creating a column for each school, and rows for tuition, fees, other expenses, grants and scholarships, and the amount of debt you'd have to take on. Kantrowitz also suggests including rows for criteria you've determined are important to you, such as location—urban or rural—number of faculty members in your field of study, prestige, academic excellence, sports or music programs, or whatever will make your college experience more valuable.

It's not all or nothing

Be aware that you can decline some or all of the financial aid a school offers, Summer reminds. "It's not all or nothing—you might choose to decline some or all of the loans offered. Be sure to factor that into your comparison."

Changing circumstances

Another thing some people don't realize, he adds, is that if you've had a significant change in financial circumstances—if one parent has lost a job, for example—since you submitted your FAFSA, you can appeal your financial aid award and ask the school for a judgment. The college may improve your award, or it may choose not to.

The bottom line, Kantrowitz observes, is that college is a major lifecycle event, like getting married or buying a house. "It's worth taking the time to understand the costs and make an informed decision about cost and quality—financial fit, academic fit, and social fit," he says. "The most affordable school is the right one for some students, but not for all."

Glossary: Understand Financial Aid Definitions

The terminology used in college financial aid award letters can be confusing. Here's a quick guide to some frequently used terms:

FAFSA: The Free Application for Federal Student Aid tells you, based on your family's income and expenses, what you're expected to pay out of pocket for your son or daughter's first year of college.

EFC: Expected Family Contribution, or the amount you and your student are expected to pay out of pocket for his or her first year of college.

Grant: An amount awarded for financial aid, either from the federal government (federal grant) or from a college (institutional grant) to attend that college. A grant is "free money," meaning you don't have to pay it back.

Institutional scholarship: Free money you don't have to pay back that a college offers you to attend that school for the coming year. Scholarships can be merit-based (awarded because of your accomplishments in academics, a sport, music, or another area) or need-based (to supplement your EFC).

Private scholarship: A scholarship you apply for from an outside organization.

Pell Grant: Need-based free money from the federal government.

Perkins Loan: An amount of money a college will allow you to borrow from the federal government at a lower interest rate than other federal loan types.

Stafford Loan: An amount of money a college will allow you to borrow from the federal government at an interest rate the government sets. These can be subsidized (no interest accrues—is added to the balance—while the student is in college) or unsubsidized (interest accrues while the student is in college).

Parent PLUS Loan: An amount of money a college will allow parents to borrow from the federal government—at an interest rate the government sets—for their son's or daughter's coming year of college.

Private loan: An amount of money parents or students can borrow from a financial institution, if they're credit-worthy, for the student's coming year of college. The financial institution sets the interest rate and credit unions are usually the best deal. Unlike federal loans, you have to make payments on private loans while the student is in college.

Learn more about WESTconsin Credit Union's Private Student Loan program.

Work study: An amount of money a college will pay a student for working at a qualifying job at that college. The student must find and apply for his or her own job.

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