How to Read Your Financial Aid Award Letter

By Elaine Rubin March 3, 2020

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Tis the season. Colleges are sending out their acceptance letters, and financial aid offices are providing their financial aid award letters to the incoming class. A financial aid award letter will explain how much, and what types of financial aid your school has offered you. Your school may present this to you as a financial aid offer, financial aid package, or financial aid letter.

But here’s the thing about financial aid letters: no two are the same. As you read through each letter, you will probably find just as many differences as you do similarities. Your choice of college can have a big financial impact on your life, and you can’t make an informed decision if you don’t understand the financial aid offer letter. So, what does it all mean, and how do you compare letters when they look so different?

What is a financial aid package letter?

A financial aid package is the total amount of monetary assistance a school is offering you. It may include aid from a variety of sources, so take some time to review the financial aid basics before you start analyzing.

When it comes time to compare, you may be shocked to see that each letter may present information in different formats and include different information. Some may have your (school determined) cost of attendance clearly identified, while others may not. And terminology may differ from school to school, even if they are referring to the same types of aid.

It can seem like comparing apples to oranges, but don’t get overwhelmed. Start by reviewing each letter and identifying the pieces you may understand, such as federal grants, federal loans, or state financial aid. If you’re still struggling to get a clear picture of what aid you are being offered, set up an appointment to talk to the financial aid office. Give yourself time to understand the financial side of your education before making any commitments.

How was my financial aid package determined?

If you applied for federal financial aid by completing the Free Application for Federal Student Aid (FAFSA^®), the U.S. Department of Education calculated your Expected Family Contribution (EFC). Although it’s often thought to be the amount your family should be able to contribute, it’s not the amount your family is expected to pay. The EFC is only one consideration used by schools to determine how much aid you are eligible for (especially need-based aid).

Your school will take your EFC and subtract it from your school’s Cost of Attendance (COA) to determine your financial need. Once your financial need is determined, the school will identify the types and amounts of need-based aid you are eligible for.

COA – EFC = financial need*

*This is the maximum amount of need-based aid you would be eligible for from that particular school. Need-based aid may vary from school to school.

After your need-based aid is determined, your school will determine how much non-need-based aid you are eligible for, and attempt to provide you as much of the remaining amount as they can. To determine the maximum amount of non-need-based aid you are eligible for, your school will subtract the total amount of aid you’ve received from all sources (including your need-based aid, scholarships, and other grants) from your COA.

COA – all aid received = eligibility for non-need-based aid

What is the best way to compare my financial aid letters?

If you received your letter electronically, go old school and print it out. Gather all of your financial aid offer letters and lay them out on a table. For each one, go through these steps.

1. Identify the aid you won't need to repay (aka gift aid)

Grants and scholarships are the most common types of aid that you won't need to repay. The more aid you don't have to repay, the better!

Part of the challenge of identifying aid you won't need to repay could be caused by unclear labeling by the school. However, there are some common federal grants you can look for on your financial aid offers. 

• Federal Pell Grant (Pell Grant). This is a need-based grant available to undergraduate students who have yet to earn a bachelor’s degree. You may receive this grant based on your financial need, your school’s cost of attendance, and your enrollment status. If you are attending school in award year 2019-2020 (July 1, 2019, to June 30, 2020), the maximum you can receive is $6,195. For award year 2020-2021 (July 1, 2020, to June 30, 2021), the maximum you can receive is $6,345 per award year.
• Federal Supplemental Educational Opportunity Grant (FSEOG). This is a grant available to undergraduate students with exceptional need who have not earned a bachelor’s degree. If your school participates in this federal aid program, and you meet its eligibility criteria, you can receive between $100 to $4,000 a year.
• The Teacher Education Assistance for College and Higher Education (TEACH) Grant. This grant is available to undergraduate and graduate students who are enrolled in TEACH-grant-eligible programs, at TEACH-grant-participating schools. If you meet all the eligibility criteria of this grant, you may be eligible for up to $4,000* per year. (*Due to the Budget Control Act of 2011, any TEACH Grant that is first disbursed on or after Oct. 1, 2019, and before Oct. 1, 2020, will be reduced by 5.9 percent.)
• The Iraq and Afghanistan Service Grant. This grant is available to students who are not Pell-eligible because they have less financial need than is required by the Pell Grant (but meet all other criteria). This grant is available to students whose parent or guardian died as a result of military service in Iraq or Afghanistan after the events of 9/11. Students would be eligible for up to the full Pell Grant award. However, due to the Budget Control Act of 2011, any Iraq and Afghanistan Service Grant that is first disbursed on or after Oct. 1, 2019, and before Oct. 1, 2020, will be reduced by 5.9 percent.

2. Identify your loans and work-study (aka non-gift aid)

Loans will need to be repaid. Work-study will need to be earned. It will take some work on your part to either earn it, or repay it.

Identifying loans and grants can be challenging if your school doesn’t have a clear labeling system. Here are some common types to help you get started.

Federal Student Loans: There are a variety of loans made available through federal student aid.

• Direct Subsidized Loan – This is a need-based loan only made available to undergraduate students. The interest rate is fixed, and interest will be paid by the federal government while you are enrolled at least half-time, during your grace period and other periods of approved deferment. The annual loan limit is based on a student’s academic year (freshman, sophomore, etc.). The aggregate amount is based on the total amount, and how long you have received this type of loan.
• Direct Unsubsidized Loan – This is a non-need-based loan, and is available to undergraduate, graduate, and professional students. The interest rate is fixed, and unlike a Direct Subsidized Loan, the borrower is responsible for paying interest from the date the loan is disbursed (meaning any unpaid interest will accrue while you are enrolled). The annual and aggregate loan limits will be based on your academic year, as well as academic level.
• Direct Parent PLUS Loan – This is a non- need-based loan, available to the parents of undergraduate students for the student’s education. This loan requires a credit check and has a fixed interest rate, and a parent will be able to borrow up to the student’s COA, minus any financial aid your student receives.
• Direct Grad PLUS Loan – This is a non- need-based loan, available to graduate students attending a graduate or professional school. This loan requires a credit check. The loan has a fixed interest rate, and a student is able to borrow up to their COA, minus any financial aid your student receive.

Federal Work-Study: This is aid that you have to earn by working part-time, and is available to both undergraduate and graduate students demonstrating financial need. Employment opportunities are managed through your college, and jobs can be on or off campus. Federal work-study is managed through the college and is based on available funds at each school. It isn't uncommon to see a form of work-study be offered by your school. 

3. Calculate your net price.

The true cost of college is reflected in the net price—the difference between total COA and gift aid, i.e., grants and scholarships. You don’t factor in any federal or private student loans, or work-study, when calculating net price. That’s why it’s important to identify and separate your gift aid amounts from your non-gift aid amounts when comparing aid letters.

COA – Gift Aid = Net Price

The net price is the amount YOU need to come up with, whether that is through loans, work-study, or a payment plan. Net price is the amount you want to use when comparing financial aid offers from different institutions.

Note: some schools have their own formulas for determining net price, and they may not classify the types of aid in the same way. If you receive an financial aid letter that provides you with the net price, don’t hesitate to do your own calculation or call the school for clarification. This will help ensure you are comparing apples to apples.

Example:

4. Compare financial aid offer letters.

Once you have determined your net price, have an honest conversation with yourself and your family. Here are some questions to consider:

• What is a realistic amount I can afford? (Consider current out-of-pocket expenses as well as any student loans you may need to repay.)
• What is a reasonable amount of student loan debt for me and my family?
• What methods can I use to limit the amount of loans I will need?
• Does my school offer tuition payment plans so I can avoid borrowing?
• Could I work part-time (including during summer) to help with costs?
• Can I afford to pay this for another one to four years, or more? (Your financial aid letter is only for ONE academic year, and your program is likely longer than that.)

Tips for Comparing Financial Aid Letters

• Make sure you identify each type of aid offered.
• When you aren’t sure how to classify a type of aid, do some research or ask your financial aid advisor!
• If the school doesn’t list the cost of attendance, or it’s missing components, you can either look for your answered on the school's website or ask your financial aid advisor for the details.
• Don’t assume all schools calculate their net price the same way.

Remember, this financial aid letter is only for the first academic year at your school. You will have to do this every year you’re enrolled in college. If you borrow this year, you will likely need to borrow for future years. Take the time to compare letters; your future self with thank you!

There are a lot of considerations when it comes to choosing a college, and understanding your financial aid letters can help you make the best decision for your education and financial future. For more information, check out these financial aid letter examples, and our previous blog on tips to cover tuition.