HOW TO UNDERSTAND A FINANCIAL AID AWARD

When a college offers you financial aid, it's important to understand exactly what they are offering you. Here's how to decipher your award and determine just how much it will actually reduce your college cost.

Once a college admits you—and crunches the numbers you provided on your financial aid applications—it will offer you a "financial aid package" (sometimes called an award). In this package are different types of financial aid intended to meet all or part of your financial need for one academic year. The size and makeup of a financial aid package is, for many students, a major factor in determining which college to choose.

The Award May Not Cover Everything

Many aid packages appear to cover all or most college expenses. But not all financial aid awards decrease what you will actually pay out-of-pocket. Before you accept any financial aid, make sure that you have reviewed each aid offer carefully and that you understand how it will—and will not—reduce your college costs. Here are some guidelines to follow.

READ THE AWARD LETTER CAREFULLY !!!

An "award letter" describing your aid package in detail usually arrives online or by mail soon after you are accepted. In fact, it may be part of your college admission notification. The letter will list the types and amounts of aid being offered to meet your financial need.

Aid may be a grant, a scholarship, a loan, or work-study. The amounts in the award letter may be estimates, but you can count on receiving aid fairly close to those estimates if you accept the aid promptly.

The letter may also offer aid that does not count toward meeting your financial need, such as an unsubsidized Stafford loan or a PLUS loan.

The award letter should also include:

• A breakdown of the college's cost of attendance (COA)
• Your Expected Family Contribution (EFC)
• The amount of your financial need the college is meeting
• The deadline for accepting the aid offered
• How and when the money will be disbursed
• The academic period the award covers
• The process for accepting or declining aid
• Any additional documentation needed
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The content of award letters, however, can vary dramatically from college to college. It may not contain all the information listed above. For example, some colleges omit the COA or do not show all its components. Award letters may use terminology and acronyms that you do not recognize. Before accepting any aid, be sure to ask the financial aid office for missing information and clarification of anything you don't understand.

Identify Aid That Reduces College Costs

Although your aid package may seem to cover most or all of your financial need, not all aid actually reduces your college cost.

Gift aid (scholarships and grants) does reduce your college cost. To identify gift aid, look for words like "scholarship," "grant," "discount," and "award" in your award letter. Sources for gift aid may be the federal government, the state, and the college itself. For example, Pell Grants are federal gift aid for lower-income families.

Self-help aid (loans and work-study) does not reduce your college cost. For example, the college may award you a federally subsidized Stafford loan, or loans provided by the state or the college. If you qualified for work-study, your award letter will list the maximum amount that you can earn from a work-study job during an academic period. You might have the option to convert all or a portion of your work-study aid to a loan, or vice versa.

Figure Your "Net Cost" to Attend

Let's say someone gave you a gift of $1,000 towards buying a $3,000 car. Your "net cost" (what you pay out of your own pocket) is $2,000. Let's say you decide to cover that $2,000 with a loan. Your net cost is still $2,000 even though you did not pay that amount up front.

Financing a college education works the same way. Gift aid reduces your cost dollar for dollar. Self-help aid simply makes it easier for you to pay for college out of your own pocket. To figure your net cost for one year of college, subtract your total gift aid from the college's full cost of attendance. The resulting number is the dollar amount you will have to cover, whether you use loans, income, or savings

If an award letter provides a "net cost" figure, look at it closely. It may treat loans and work-study as aid that reduces your net cost, when in fact these types of aid add to your net cost. Your actual net cost always includes the dollar amount of loans or work-study aid.

Compare Aid Packages

Comparing aid packages from different colleges can be tricky because there is no standard approach to award letters. Here are some tips to ensure you are comparing apples to apples.

Be sure the COA contains the same elements for each college. The major components of a college's cost of attendance are tuition and fees, room and board, books and supplies, local transportation, and personal expenses. If the college does not show the components of its COA or does not show all components, ask the financial aid office for a full COA breakdown.

Separately add up all gift aid and self-help aid for each college. For each award letter, identify every offer of gift aid and self-help aid and their amounts. Then total up all gift aid and all self-help aid.

Run the numbers for each college. Once you know each school's full COA and the total amount of gift and self-help aid, you can compare the net cost of each college. Simply subtract the total gift aid from each college's cost of attendance. To understand how much debt and work commitment you might take on, compare the total self-help aid offered by each college (plus any other loans you might get to cover your unmet need or your EFC). Ultimately, you may not choose the college with the lowest net cost or the college that will put you in the least amount of debt, but the information can be invaluable when making your final college decision.

Before You Accept

Check the loan terms and conditions. Make sure that you know the interest rate, fees, how many years you have to pay off the loan, whether the loan is a student or parent obligation, and whether the interest is subsidized or unsubsidized. Make sure that you or your family can afford to make the payments.

Find out what happens after the first year. Usually, your aid award is good for only one year. Find out whether the college typically offers less gift aid and more loan aid after the freshman year. Find out if your scholarships are renewable for subsequent years and what the requirements are for renewal.

Identify any strings attached. Many scholarships and grants require students to maintain a certain GPA and take a specific number of course credits to remain eligible for the aid. Don't wait until your scholarship or grant has been cancelled to learn about these requirements.

Find out the college's policy on outside scholarships. Colleges require you to report any outside scholarships you won, which may affect your financial aid package. Some colleges apply the scholarship to any unmet need, some will reduce your loans, and others will reduce your gift aid. If the total amount of your aid plus any outside scholarships is more than the college's COA, you may be required to pay the extra amount back to the college.

Understand how you will receive the financial aid. Colleges normally deduct your financial aid from your college bill. The school usually will give any excess funds to you by check or electronic transfer. You may have the option of applying the excess funds to your next college term.

Accepting and Declining Aid

You don't have to accept every offer of aid. For example, you may decide to accept a subsidized loan, but not an unsubsidized loan. If you change your mind later, the rejected aid will usually not be reinstated for the same academic year. Nor will the college increase other aid to make up for the aid you rejected. Your award letter should explain these consequences. Accept or decline each aid offer as soon as you are comfortable and certainly before the acceptance deadline.

Taking Care of Your EFC and Unmet Need

If your total award does not meet your full financial need, or you need help covering your EFC, you have options. You may be able to take out a private education loan. Your parents may qualify for a PLUS loan. You can ask the college about staggered payment plans. You can also review your situation with the financial aid office. If your financial circumstances have changed since you filed your FAFSA, the office may be able to adjust your package.
Some financial aid packages offer welcome relief from daunting college expenses. Others may be disappointing. Weighing your hopes and dreams against the actual cost of a college education is a sobering moment. But the more savvy you are about financial aid, the more able you will be to make a solid, informed decision about where to spend your college years.