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Understanding Financial Aid Award Letters 

Wednesday, April 30, 2008

As the cost of college continues to rise (tuition at George Washington is closing in on $40,000), the financial award letter can often be just as important as the college acceptance letter in determining where you plan on going to college. Understanding the financial aid award letter will help you and your parents make a well-informed decision about your college future.

We like to refer to the tuition rates you see published on a school's website or in college guidebooks as the "sticker price." As with cars, most people don't end up paying the "sticker price." Colleges offer "discounts" off the "sticker price" in the form of scholarships, grants, work-study, and loans. The financial aid award letter lays out these "discounts". It's not just the size of the "discounts", but the make-up of these "discounts" that's important.

Check out a sample financial aid award letter.

What you want to look for on your financial aid award letter

Financial Aid Letter Part #1: Cost of Attendance

First off, take a look at the make-up of the cost of attendance. Some colleges will break out the expenses into categories like tuition, room and board, travel, and personal expenses. Colleges may differ on what they include in the cost of attendance. You want to be confident you are comparing apples to apples throughout this process. Make sure you are clear on what has been factored into the cost of attendance and, more importantly, what has not been incorporated into the cost of attendance.

Financial Aid Letter Part #2: Expected Family Contribution

Secondly, you want to locate what the school is expecting you and your parents to contribute out of pocket based on the financial aid office's assessment of your and your parents' financial situations. Some schools will provide a single "Expected Family Contribution" while others may break this amount into a Student's Contribution and Parents' Contribution. This is the school basically saying "We looked at your finances, and we think you and your parents can afford to pay $___ toward college."

Financial Aid Letter Part #3: Financial Aid Offered - Amount and Mix

Now, we get to the real guts of the financial aid award letter where the school lays out what types of aid they are offering and how much of each type. This is where you really want to take a good hard look and make sure you understand what's going on. The mix of the financial aid is as important (if not more important) than the amount. Free money (that means scholarships and grants) is the best type of financial aid. Federal loans such as Perkins Loans and Subsidized Stafford Loans are better than private loans, but they still need to be repaid. It's also important to remember that you don't just get federal work-study money. You're going to have to get a job on campus and actually earn that money. The federal work-study amount on your letter is the maximum amount you can receive, not a guaranteed amount. So to recap, here are the financial aid types from best to worst:

  1. "Free Money"... that's scholarships and grants (renewable scholarships are better than one-time awards)
  2. Federal loans (Perkins, subsidized Stafford, unsubsidized Stafford)
  3. Private loans

Financial Aid Letter Part #4: Unmet Need

Okay, so now you understand how much financial aid the school is offering and what types of aid are included in your package. The next step is determining if there is any unmet need. You can determine the unmet need by taking the cost of attendance and subtracting the expected family contribution (what the school said you can afford to pay) and the financial aid package (what the school has offered you to meet your financial need).

In mathematical terms:
COA - (EFC + Financial Aid) = Unmet Need.

Typically the lower the unmet need, the better. However, as we said before, a school may be offering less aid and leaving you with more unmet need, but may actually still be a better deal if their financial aid package contains mostly "free money" and fewer loans.

Questions You Should Ask

How will my financial aid package change over time?

The package you receive your sophomore year may look different than the one you receive for freshman year. Find out whether scholarships are renewable or one-time awards. See if there are certain requirements for keeping scholarships (e.g., maintaining a 3.0 GPA).

How do outside scholarships affect my financial aid package?

If have done a great job searching for scholarships and have won a few awards, make sure you understand how these scholarships will impact your package. Some colleges will reduce the loan component to offset these outside scholarships, while others will unfortunately reduce the scholarship / grant component of your financial aid package. Colleges will usually spell out this information in their Outside Scholarship Policy.

Some Help Comparing Financial Aid Packages

So now you know what to look out for when comparing financial aid packages, and all you need is a tool to help you compare them. Well, you are in luck. We've developed a Financial Aid Award Evaluator so you can view side-by-side comparisons of your financial aid award letters for up to 4 colleges.

We also offer a tool to help you compare student loans. Our Student Loan Marketplace enables you to dig into the guts of a student loan and really understand how all the parts of a loan (interest rate, up-front fees, borrower benefits) come together to impact how much you actually have to pay.

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Comments

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