How to understand that confusing financial aid letter

College freshmen-to-be are getting their financial aid letters in the mail right about now. For students and their families, deciphering these notices can be the first — and often most frustrating — step toward comparing the costs of different schools.

Financial award letters are meant to spell out exactly how much a year of study will cost, after taking into account all the different forms of financial aid a student has qualified for.

It sounds simple, but it isn’t always. As it stands, there is no one-size-fits-all financial aid award letter, which can make it tricky to compare more than one school’s cost of attendance to another. The government recently set up a college cost comparison tool to help, but even so, it’s not much help if families have to translate their student award letter into plain English first.

To help, here’s a quick guide to understanding the most important elements of a financial aid award letter:

What they say it costs...and what it actually costs

Cost of Attendance (COA): This is the total sticker price, including tuition, fees, books and supplies, room and board and transportation expenses. Unfortunately, not all schools spell out total COA, and even those that do may not account for each component (for example, they may leave out the cost of books, room and board or transportation). You can find your school’s total COA on your own by visiting http://nces.ed.gov/collegenavigator/. COA is likely the biggest number on your award letter, but don’t let it scare you off just yet —  it doesn’t factor in financial aid, which can significantly reduce the overall price.

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Net cost of attendance: Here’s the real number you want to know — net tuition is how much families are expected to pay after taking grants, loans and other student aid into account. Not all colleges include the net cost of college on award letters, but that is slowly changing. About 2,900 schools have adopted the government’s easy-to-read financial aid award letter, which lists net tuition front and center. You can still figure out net tuition by adding up all of your grants and scholarships and subtracting them from the total cost of attendance. From there, it’s up to you how to decide to cover your net tuition: Will you lean on federal loans, join the school’s work-study program (if they have one), or take on private loans to fill the gap?

Money that’s free

Grants: The best thing about grants is that they don’t have to be paid back. It’s free money that’s yours so long as you put it toward your total cost of attendance. The amount of grants you qualify for depends on your family’s financial need, which was determined when you filled out your Free Application for Federal Student Aid (FAFSA).

Scholarships: Like grants, scholarships are free money that does not need to be repaid. Your school will notify you on your award letter of any scholarships you’ve qualified for. You’re required to tell your school’s financial aid office upfront if you’ve earned any outside scholarship dollars, so these can be accounted for as well.

Money you have to work for

Federal student loans:  Student loans may be bundled together with grants and scholarships under the “financial aid” banner, but don’t be mistaken. Loans must be repaid eventually, beginning six months after your graduation date. It’s important to look at student loans separately from other types of financial aid, because even though loans appear to lower your cost of attendance, you’re still obligated to pay them back.

(Unsubsidized loans vs. subsidized loans: Depending on your year in school, you can take out $5,500 to $12,500 in Direct Subsidized Loans and Direct Unsubsidized loans. The biggest difference between the two is that with subsidized loans, the government agrees to cover all your interest payments while you’re enrolled at least part-time in college and for the first six months after you graduate. Your eligibility for subsidized loans is determined after you complete the FAFSA.

Work-study: If you indicated your interest in the federal work-study program when you filled out your FAFSA, you’ll find out if you qualified on your financial aid award letter. Work-study eligibility depends on your family’s income and household size. Work-study programs offer opportunities for students to earn money by working on or off campus (for example, all the students working in your campus dining hall are probably participating in work-study). You’re paid at least once a month, but you can only earn up to a certain amount per year of school (you have to reapply when you fill out your FAFSA each year), which will be included in your award letter. The maximum amount depends on how much money your school sets aside for work-study participants. Unfortunately, many states have scaled back work-study funding since the financial downturn.  

Don’t stop at the award letter

If you’re comparing different schools to see which offers the best deal, be sure to take graduation rates and student loan default rates (that’s how many students struggle to repay their loans) into consideration as well. Some schools are transparent about this and include it right there on your student award letter. Others don’t make it as easy. A simple way to find out for yourself is to run the school’s name through the The Consumer Financial Protection Bureau college cost comparison tool.

And if you wind up leaning on federal student loans to fill in tuition gaps, then know what you’re getting yourself into: You can calculate your monthly loan payments using this free online tool at Studentloans.gov.

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