How to Decode Financial Aid Award Letters

Financial aid award letters: you would think they’re a standard thing, but the way that schools communicate your aid package is all over the place. That’s a real problem. For most students, college is their first major financial responsibility, and it’s crucial that the details of aid awards are crystal clear. For example, your award letter might make it hard to tell the difference between loans that need to be paid back versus “gift aid” that you do not pay back.

The main items to look for in your financial aid award letter

We got our hands on 10 financial aid award letters from 10 different schools and compared them to see what kind of information they included. Because the letters varied so widely, we can say with confidence that your school’s letter probably doesn’t include all of these pieces of information. If it doesn’t, treat this as your decoder. You may have to fill in the blanks of your award letter where information is missing, however.

1. The full cost of attendance

Most award letters, 7 out of 10, did provide the full cost of attendance for the school year. This cost includes:


Tuition and fees
+Room and board
+Books and supplies
+Transportation
+Personal expenses
=Full cost of attendance (a)

This is the sticker price for the school, before any grants, scholarships, loans or work-study awards are discounted. For even more detail into what goes into the full cost of attendance (and how to lower it), don’t forget to College Scorecard.

2. Total gift aid: scholarships and grants

Gift aid, which includes grants and scholarships, is money that you do not have to pay back. Grants are usually need-based and can be awarded from the federal government (like the Pell Grant), by your state, or by the university. Scholarships can be need- or merit-based and come from your school or from an outside organization.

One of the biggest problems we saw among award letters was that gift aid was commonly bundled up with loans and work-study awards. In fact, only 3 of the 10 letters specifically pointed out the gift aid separately from the other parts of the award package!


Scholarships
+Grants
=Total Gift Aid (B)

3. Net cost: full cost (a) minus gift aid (b)

Once you know the total cost (a) and the total gift aid (b), you can easily see the net cost – how much you and your family are responsible for paying. 

Very few award letters lay this out clearly! Of the 10 that we studied, only 3 clearly pointed out the net cost to the student.


Full cost of attendance (a)
Total gift aid (b)
=Net cost (what you’re responsible for paying

4. Work-study offers

Many award letters include an offer for a work-study position, but that money is obviously earned by your working time, rather than being a gift. Work-study is the first piece of what you contribute to the net cost.

5. Federal loans available to you and your family

All 10 of the award letters included information about federal loans, displaying the subsidized and unsubsidized amounts clearly. Two of the letters also included helpful estimates for the monthly payment to pay the loans back over the standard 10-year repayment term. 

Decoding federal loans

– “Federal” means the loan is being offered by the U.S. government.
– “Subsidized” means you’ll end up paying less interest in the long run, because the government is picking up the interest while you’re in school.
– “Unsubsidized” means you are paying the full cost.
– “PLUS” loans are loans that your parents take out and pay back.

None of the letters we analyzed included PLUS loans, but we know that letters can include that information as well.

Importantly, you do not have to accept the full amount of loans offered to you. If you have access to other sources of money, take out only the loans that you absolutely need.

6. Expected family contribution (EFC)

When you filled out your FAFSA, they calculated how much your parents could afford to contribute to your college costs per year. You may have already seen this number in the FAFSA process. Some schools list your EFC in your award letter; 4 of the 10 letters we reviewed did include EFC somewhere.

However, just because a FAFSA determined that your family could contribute $XYZ to your college costs, that doesn’t mean your parents can or will be paying that amount. This is a point of reference that is used to calculate your financial aid, not a final bill.

7. Funding gap: how much you need to contribute after gift aid and loans

Seems like the funding gap is the whole point of the award letter, understanding how much you and your family are responsible for paying beyond the funds given to you in gift aid or federal loans. Yet only 1 out of 10 letters we saw actually included that information!

If your letter did not clearly point out the amount you’ll need after all these pieces are subtracted, do it yourself. Here’s the formula:


Full cost of attendance (a)
Gift ai (b)
Earnings from work-study (d)
Total that you’ll borrow from federal loans (e)
=Funding gap


Tips to avoid common mistakes when reading your award letter

GIven the range of financial aid award letters, we have to point out a few patterns we noticed that can lead to confused students. Here are three tips to help you decode your financial aid award letter.

Beware the jumbled-up gift aid, loans, work study

First, put your loans in a totally different mental category than the gift aid. Gift aid lowers the cost you pay, period, while with a loan, it’s a matter of when you’ll pay (and of course, how much).

We were a bit shocked at how frequently colleges would lump together all the very different pieces of the award. On the other hand, a small minority of award letters did an excellent job of clearly spelling out each component.

Don’t forget you have to opt in (or out) of your loans

Students often don’t realize that the loans are optional. What’s listed is an offer – you have to accept it, or you can choose to accept a lower loan amount, if you don’t need the full offer. Often, if you don’t opt out, the loan amount is accepted by default.

Similarly, the relative value of PLUS loans might be confusing. To remind you, a PLUS loan is a loan that your parents take out and have to pay back. But while your federal subsidized and unsubsidized loans are always a better interest rate than private loans, that isn’t always true for PLUS loans. Many families could be better off shopping around for private loans rather than accepting the PLUS loans.

Clearly identify your funding gap

The biggest mistake is not seeing the funding gap, when you look at your award letter. Since most letters we saw did not clearly identify the funding gap, you’ll probably have to do that yourself. Use the sections of this article and our checklist for paying for college to decode your own award letter and see what the real financial picture is for your school year.

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