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Here's how to read your college financial aid offer

Every year, millions of college students and their families rely on financial aid to make paying for a college education a reality.

With many families facing extra cash crunches because of the economic fallout from the coronavirus pandemic, financial aid is even more important than ever. Unfortunately, the financial aid offer letters that colleges send out aren’t always easy to understand.

“There’s no standard format," said Ashley Boucher, a Sallie Mae spokesperson. "The terms used to describe the aid a student is receiving can vary from school to school."

The U.S. Department of Education offers an annotated sample financial aid award letter to give you an idea of what each portion of your award letter means. To compare offers between schools, you can use a worksheet like this one from Sallie Mae to plug in the numbers.

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Remember that the offer you get isn’t set in stone. If your financial situation has changed since you filled out the Free Application for Federal Student Aid Form (FAFSA), or you have a better offer from a different school, let the college know.

You’ll also have to file a new FAFSA every year to receive a new financial aid offer.

Key terms

Two of the most important pieces of your financial aid offer are the cost of attendance and expected family contribution. They both clue you into how your financial aid was decided and what you’ll really pay for college for the first year.

Cost of attendance: This is the estimate of what families can expect to pay for one year of school, including tuition, fees, room and board, books, supplies, and even transportation.

Expected family contribution: This is the number that the school uses to decide how much financial aid a student is eligible to receive.

You can use the cost of attendance to get an idea of how much you will pay for four (or more) years of schooling. Keep in mind that college tuition costs typically go up by about 8% every year.

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Types of financial aid

Your financial aid offer will usually be a mix of several types of aid. The four most common ones are:

  • Grants: These are often offered from the federal or state government, your college or a nonprofit organization. Many grants are awarded based on financial need and in most cases don’t need to be repaid.

  • Scholarships: These are typically offered by nonprofit and private organizations and schools. Scholarships can both be need-based (depending on your financial status) or merit-based (based on a skill or academics). In most situations, you won’t have to repay them.

  • Federal or private loans: Federal loans are fixed-rate, government-backed loans, while private student loans are typically offered through banks or online lenders. They need to be repaid with interest.

  • Work-study or similar programs: These are school-based job programs that allow students to earn money to pay for incidentals like books and activity fees.

“The financial aid offer is just the beginning of a conversation with your school," Boucher said. "You can negotiate. You might be surprised by how willing a college or university is to work with you.”

Spanish female student working at computer at university
Photo: Getty Images (DMEPhotography via Getty Images)

Free money and loans

Many people are surprised to learn that not all financial aid is free. Some of it comes in the way of loans that, if accepted, have to be paid back with interest.

The free money portion is the grants and scholarships, although even those sometimes have contingencies that are important to know. For example, you might have to keep up a certain GPA or the grant or scholarship might not be applicable for all four years.

“You don’t want to make a decision on a school based on a grant you think is for all four years, but maybe is only for one,” said Christine Roberts, head of student lending for Citizens Bank.

The loans, meanwhile, will usually be listed as subsidized and unsubsidized Federal Direct Loans (for undergrad students) and Direct PLUS loans (for graduate students or the parents of students). These loans are backed by the federal government, but the school decides how much you can borrow. Your letter also might include an estimate of the costs of a private student loan from a bank or other lender.

Photo: Getty Images
Photo: Getty Images (Ariel Skelley via Getty Images)

Here is a look at each type of federal loan:

  • Federal Direct Subsidized Loans: Loans that can be taken out by students with financial need. Because they are subsidized, the government pays the interest on the loan while you’re in school and for six months after you graduate.

  • Federal Direct Unsubsidized Loans: Similar to Subsidized Direct Loans, except they are not based on financial need and you have to pay interest on them from the start. If you don’t pay the interest while you’re in school, it accrues and gets added to the principal of your loan.

  • Direct PLUS Loans: These loans are for graduate students or the parents of college students. They aren’t based on financial need, but a credit check is required. The maximum amount that can be borrowed is the cost of attendance. It’s worth comparing these loans against the cost of a loan from a private lender, especially if you have good credit and a steady income.

You don’t have to accept every piece of financial aid that’s offered to you, so consider what works best for your situation, Boucher said.

“Sometimes the bigger offer isn’t necessarily the best offer,” she added. “That’s especially true if one is mostly loans while another is mainly scholarships or grants.”

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