If you’re like most students, financial aid plays a big part in deciding where to go to college. According to The College Board, undergraduate students received an average of $14,460 in financial aid in the 2015-2016 school year.
When you start getting your college acceptance letters, you’ll also receive financial aid award letters in the mail. These letters outline all the federal, institutional, and state aid available to you at each school you’re accepted to.
But because each financial aid award letter is different, they’re not always easy to read. It can be tough telling the difference between grants, scholarships, and loans. And since each school uses its own system, it can also be hard to compare one award letter with another.
To cut through the confusion, check out these five expert tips on interpreting your financial aid award letter.
1. You’ll get different types of financial aid
You might think financial aid refers to scholarships, but there are several types of aid that will show up in your award letter. It’s important to understand each type, since some might be free money while others might be loans that need to be repaid.
Most award letters contain the following components:
- Grants: This includes gift aid you don’t have to pay back, such as the Pell Grant and Federal Supplemental Educational Opportunity Grant (FSEOG).
- Scholarships: Another form of gift aid, often based on things like academics, extracurriculars, career plans, or other achievements or affiliations.
- Need-based loans: This type of federal aid is offered to low-income students. Direct Subsidized Loans, for example, don’t accrue interest while you’re in school. Qualifying students can get up to $3,500 their first year, $4,500 the second year, and $5,500 the third year and beyond in subsidized loans.
- Non-need-based loans: This could include Direct Unsubsidized Loans, which accrue interest while you’re in school. You can get up to $9,500 the first year, $10,500 the second year, and $12,500 the third year and beyond. Your letter might also include Parent PLUS Loans, which are available to your parents as long as they meet the credit requirements.
- Work-study: This program offers part-time employment for students with financial need. If you qualify for work-study, your award letter will indicate how much you can make each semester.
Note that your financial aid award letter from one school might look different from your award letter from another. One college might give you a lot of scholarship money, while another might only offer student loans.
Plus, one award letter might use different terminology than another, since colleges don’t follow any standard template. If you’re having trouble interpreting your award letter, call the school’s financial aid office for clarification.
2. Know the difference between gift aid and loans
As you just read, your financial aid package could contain a mix of grants, scholarships, subsidized loans, and unsubsidized loans. Grants and scholarships are considered gift aid because you don’t have to pay them back.
You do, however, have to pay back loans. Even though subsidized loans have better terms than unsubsidized ones, they will still cost you. Instead of thinking of loans as a gift, view them as a way to spread out the costs of college over time.
“Be aware that student loans might appear to reduce the total cost of attendance, but in reality, loans always need to be repaid with interest,” said Paula Craw, vice president of student success and outreach for the educational nonprofit ECMC.
“If you have trouble determining the difference between gift aid and loans, look for terms like ‘grant,’ ‘scholarship,’ and ‘fellowship’ — these are free,” she added. “Anything else is most likely a loan and needs to be repaid.”
Understanding this difference will help you avoid taking on too much student debt. Plus, it will allow you to compare award letters more easily. Consider the following example:
| School | Cost of attendance | Gift aid | Loans | Net cost of attendance |
| College A | $50,000 | $20,000 | $25,000 | $5,000 |
| College B | $20,000 | $10,000 | $5,000 | $5,000 |
If you only looked at the net cost of attendance, you’d think both these colleges cost the same. But you need to look closer at the details of your financial aid package — you’d need to take out a lot more debt to attend College A than College B.
When comparing award letters, don’t simply look at the net cost of attendance. Take a close look at the balance between gift aid and loans in your financial aid package to truly understand the long-term costs.
3. Calculate your own cost of attendance
Although your financial aid award letter will suggest your cost of attendance (COA), this estimate might not reflect your real situation.
“Schools may omit some indirect expenses when calculating the COA, but even when they do factor them in (things like textbooks, meal plans, transportation and health care), remember that they are only estimates and are not always close approximations of what your costs will be,” said Craw.
“The [cost of living] estimates in your award letter can be a good start, but do calculate your own budget for things like trips home, groceries, and rent if you will live off campus,” she added.
Maybe you’re attending college close to home, so your travel costs will be next to nothing. You could live at home or forego the dining hall plan in favor of grocery shopping. Or, you could work a part-time job to make some income.
Even though each award letter will give you an estimated cost of attendance, take the time to calculate your own expenses. By estimating the costs for your specific situation, you’ll have the most realistic sense of each college’s total price tag.
4. You don’t have to accept all the loans you’re offered
Depending on the information you provided in the FAFSA, a college might offer you need-based and non-need-based loans. But you don’t have to take out the loans in your financial aid package.
You might choose to take out just one of the loans, or you could reject them entirely. What you choose to do won’t affect your admission decision at all.
For any loans you decide to accept, make sure you understand what repayment will look like. Use a student loan calculator to estimate your monthly payments and the amount of interest that will accrue.
“Many award letters do not offer details about the interest rates and repayment options of these loans, even though those details significantly impact what students will owe down the road,” warned Craw. “If you need to take out loans to pay for college, make sure to take the time to learn what the total cost will be and borrow only what you absolutely need.”
If you can’t find this information on the award letter, call the financial aid office. You can also learn about the different types of loans on the Federal Student Aid website.
According to the Global Financial Literacy Excellence Center, more than 54 percent of borrowers took on student loans without knowing what their monthly payments would look like. Make sure you don’t make the same mistake.
5. Your letter might ‘front-load’ grants and scholarships
As you’re reading your award letter, be on the lookout for terms and conditions. Some awards are one-time prizes, while others renew year after year. Unfortunately, your financial aid package might start out high and decrease after your first year.
“Sometimes grants and scholarships presented in an aid letter are one-time offers that do not renew, so make sure you understand the terms and length of these types of aid,” said Craw. “This practice, known as ‘frontloading,’ is pretty common.”
In other words, colleges give you a lot of grants and scholarships to cover your first year. But since this gift aid doesn’t renew, you’ll end up paying a lot more as a sophomore and beyond.
“Since college is a multi-year financial commitment, the non-renewing grants or scholarships can mean tens of thousands of dollars in extra tuition costs in subsequent years,” explained Craw. “If you’re offered an institutional grant or scholarship, make sure to ask if it will renew automatically.”
You can also ask if you can apply for the same award the following year. Learn about any annual requirements so your financial aid doesn’t dry up after freshman year.
Compare each financial aid award letter before choosing a college
Considering the cost of tuition and fees these days — $32,410 for one year at a private four-year school, according to The College Board — college is likely the biggest financial investment you’ve made to date.
Before choosing a school, make sure you understand the ins and outs of your award letter, including any assumptions about living costs or conditions that come with scholarships.
Furthermore, be cautious about taking out too many student loans. Make sure you understand what you’re getting into, so you don’t end up burdened by debt after graduation.
If your financial aid package falls short, you can always make an appeal to the financial aid office for more money.
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