10 Rules For Decoding College Financial Aid Award Letters

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If you’re a high school student whose family income doesn’t qualify for the 1% club, there’s a very good chance that the most important day of your college application experience won’t be the day you turn in all of your applications or the day you get accepted to your first school. No, if you’re part of the 99%, the crucial day in this drawn out process will when you receive your last “student aid award” letter, allowing you finally to compare the true cost of attending the (hopefully) many schools that were smart enough to accept you.

According to student loan servicer Sallie Mae, nearly two-thirds of families (65%) used grants and scholarships to pay for college in 2013, up from 61% in 2012 and up from only half of families five years ago. What’s more, 49% of parents say they’re not regularly setting aside money to college savings, and 70% of those parents say the reason they’re not saving is because they simply can’t afford to. In other words: more and more families are counting on grants and scholarships (including tuition discounts from the school itself) to pay for college.

This, in turn, means the “financial aid award” letters that usually arrive within a few weeks of college acceptances could well determine where you spend the next four years.  Unfortunately, an aid award isn’t as easy to decipher as an acceptance or rejection letter.

“Parents should not need a PhD in economics to read financial aid award letters,” says Mark Kantrowitz, a student aid expert and senior vice president and publisher at Edvisors.com. “But until Congress decides to make the college shopping sheet mandatory, they’re going to need help.”

The college shopping sheet Kantrowitz praises was dreamed up by the Consumer Financial Protection Bureau and the Department of Education in 2011 and has been adopted by over 2,000 schools across the country. It breaks down grants, loans and other financing and gives a financial snapshot of the school offering the aid, including its graduation rate and its students’ loan default rate as compared to the national average. If every college were to adopt this sheet, it would be a lot easier for parents and students to understand and compare financial aid offers across schools, and then choose the best one.

That’s the theory. Problem is, the 2,000 schools who claim to have “adopted” the sheet (the list of them is here) represent just 44% of the nearly 4,500 degree-granting post-secondary institutions in the U.S. and 40% of the adopters only offer the shopping sheet to students who are military veterans. (The Consumer Financial Protection Bureau does have a very handy online tool that mimics the college shopping sheet and even compares offers from different schools, but unless you fully understand the contents of your aid letter, there’s a chance you’ll misinterpret the data.)

So, until every school starts to give a uniform financial aid notification letter to every student, or until you get that PhD in economics, listed below and within the slideshow are the ten most important things you need to know about decoding financial aid award letters:

That number next to the word “financial aid award”? It’s not all a gift.  This is the single biggest point of confusion, financial aid experts say. There may be a line at the bottom of your letter that reads, “this is your award amount,” and the number next to that phrase could look like a lot of dollars. However, you have to look at the lines above the “total aid award” number to figure out what went into calculating that total – and chances are, there are some loans mixed in. Since loans need to be paid back with interest, these are hardly a “gift.”

What’s worse, Mark Kantrowitz says, you may not be able to quickly tell which items are grants and which are loans. “There’s no interest rate, no monthly payment listed, and they may not use the word loan. They set up a character limit for the name of the award and they use lots of abbreviations. Sometimes they’ll say L or LN instead of using the full word for loan,” he says. So, for instance, you may see “Fed Staff L,” and there may be a “sub” or “unsub” afterwards. This stands for “federal Stafford loan,” a loan that comes from the government and whose current interest rate is 3.9%. “Sub” stands for subsidized, which means the interest does not accrue while you’re in school; “unsub” stands for unsubsidized, which means the interest does accrue while you’re in school so the amount you owe upon graduation will be larger than the amount you borrowed (unless you pay down the interest while you’re in school).

Stafford loans are loans that go in the student’s name, but parents need to be careful to scan the award letter for the addition of loans that will be in their names, too. Troy Onink, CEO of college planning service Stratagee.com (and a FORBES contributor), says that some schools will even include a Parent Plus loan into the “award” mix. Though this item is just a suggestion -- you’re not required to take out a Parent Plus loan, whose interest rate was 6.41% this past academic year and whose 2014-2015 interest rate has not been set yet –some schools include a parental loan to inflate the “award” and make it look better than it is.

“Parents should also be aware that if they borrow this year and the next and the next that their loan payments will increase each year as debt accumulates, and they may not be able to handle the increase in monthly loan payments, especially if they have more children enrolling in college in subsequent years,” he adds.

For those who need a visual example of this mixing practice, take a look at the first page of this sample financial aid award letter that Collegeboard created: you’ll see that the total awards line makes it look like you’ve been awarded $39,000 for a full academic year at the sample university. But if you look at the components of the award, the sample school has counted a federal Perkins Loan, a Federal Subsidized Stafford, a Federal Unsubsidized Stafford and money from a work-study job (more on that in a bit) Bottom line: $30,500 represents the school’s discount (called “college grant” and “college scholarship” here), $2,000 you’re expected to earn and another $6,500 you’ll have to pay back.

This letter from the University of Portland, on the other hand, is much clearer about how your aid package is constructed: they’ve broken out what the “gift aid” is and have a separate category for “self-help aid.” While the phrase “self-help aid” is a bit flowery – “money YOU’RE responsible for” might be more appropriate, if casual – the breakdown on this sheet does a good job of showing that you would get $20,100 in free money for the year and need to supply $27,360 from your borrowing, your parents contributions or borrowing, and some work-study.

The net price is more important than the overall cost of attendance. Sure, the total cost of attending a school might look high, but when you factor in scholarships and grants, Pricey University might actually turn into the College of Affordability.

While the cost of attending a school is the sum of tuition, housing, meals, books, travel and other miscellaneous fees (Princeton, for instance, bills you for activities fees, class dues and a one-time transcript fee), that’s not the number you should dwell on. The best question to ask yourself, says Kal Chany, author of “Paying For College Without Going Broke,” is what is the number left over after you subtract all your grants and scholarships from the “cost of attendance” sum. “That’s the nut you have to come up with, whether you borrow, pay from savings, etc,” Chany says. As for why it’s bad to compare packages on a loan-by-loan or grant-by-grant basis, Chany says this: “it’s great if you can get a subsidized loan, but if you get a $3,500 subsidized loan at one school versus another school where you don’t get that loan but you get a $3,500 in grant, you’re better off taking more grant money.”

The amount of money you receive in grants could start to decrease after freshman year. Financial planners often talk about how much you should borrow over four years of undergrad (“don’t borrow more than your first year starting salary,” goes the party line), but if you’re a high school senior, the best way to guess at that number is to multiply the difference between the net price and what you can afford to pay by four. Right? Not so fast, says Kantrowitz. Some schools practice what he calls “the frontloading of grants,” wherein the college includes more grants to a student during freshman year and then slowly dials back the amount of free money it’s giving to that student in subsequent years of school. This could happen, in part, because Stafford loan limits are lower for freshmen and sophomores, or if you view the school in a benevolent light, to minimize the amount of debt a student takes on at the start in case he or she drops out after freshman year. Or, of course, it could just be to entice a student to a school with a seemingly low net price – one that will not look so affordable by the time that student is a senior.

“You need to find out if the college practices the frontloading of grants. What is the real cost of this college over four years not just one year?” Kantrowitz says. “There are a couple ways to find out. One: just ask. ‘Do you practice the frontloading of grants?’ Some colleges won’t give straight answer, he cautions, but notes that if you ask a half dozen upper classmen how their junior and senior year grants compared to their freshman year grants, it should become clear, based on their answers, whether the school you’re considering does frontload the free money.

The last approach, he says, it to consult College Navigator, a free tool provided by the National Center for Education Statistics. In College Navigator, you can pull up the school you’re considering and see that school’s financial aid information. Within the financial aid category, there are two sections: typical financial aid for beginning undergraduate students and financial aid for all undergraduates. If the average grant in the “beginning” students is significantly higher than the average grant size for all undergraduates, it’s a sign that school frontloads its grants.

Keep in mind too that even if a college’s grant or discount stays the same each year while the college’s tuition and other costs rise, you will in effect be forced to borrow more (or your parents will have to pay more) in the later years.

Beware the strings on scholarships, Pinocchio. If the school is giving you merit-based scholarship or grant, it’s important to read the fine print and see exactly what strings are attached. “What’s it based on?” Chany asks. “If the GPA is very high, it could just be a bait and switch, and you may not get it after freshman year because the GPA is so high and the school knows not all kids will have that.”

Rohit Chopra, student loan ombudsman and assistant director of the Consumer Financial Protection Bureau, adds that it’s not always clear to students that even if they maintain a required GPA, the school still has the right to reduce the scholarship amount in subsequent years. “It’s at the discretion of the school. There’s not always a consistent set of terms and conditions,” Chopra says, noting that one exception could be a public state school system, where the system has its own guidance about renewable scholarships. But because policies can differ from school to school, students “should inquire as to what they need to do to keep that scholarship each year. They don’t want to be surprised and get a higher student loan amount” at the end of four years, Chopra advises, adding that if you ask about this, schools should be able to provide an answer about the likelihood of a scholarship declining or disappearing altogether.

Your expected family contribution is subject to change – especially depending on whether you have siblings in college, too. Parents often think that having two kids in college at the same time is twice as expensive as having one, but that isn’t true. Both school aid and federal grants (but not unsubsidized loans) are based on expected family contribution (EFC), and if there are multiple siblings in college at the same time the EFC is divided by the number of college-aged kids. That’s how the Free Application for Federal Student Aid (FAFSA) formula for assessing your need works.  But if you’ve applied to one of a few hundred elite and pricey schools – including Ivies, Bowdoin, MIT, etc. – you’ve likely need to fill out the College Board’s CSS Profile in addition to FAFSA. Schools using that form and what’s known as the “institutional aid” formula typically expect a family to kick in 120% of the EFC if two siblings are in school at the same time -- or 60% of the EFC for each.

The EFC split can lead to big swings in aid as the number of siblings attending college rises and falls. For instance, Chany explains, if you have one child who is a college freshman and another child right behind her – say, a son who’s a high school senior, “You might be paying X-amount the first year, but the second year you might be paying Y, with Y being half of X because you have two in school.”  Conversely, if your older child is going to be a college senior next year, you might be  offered a generous grant for your younger child’s freshman year, only to see it disappears in his  sophomore year-- when the older sibling  has graduated and parents are expected to devote their entire EFC to the younger kid’s schooling.  To make sure you understand what might happen to an award, ask the college what formula it uses and whether any grants your child is being offered will adjust up or down as siblings enroll or graduate from college.

The expected student contribution assumes you’ll put summer earnings towards college costs -- but if you worked an unpaid internship, you could need to borrow the difference. While both the CSS Profile and FAFSA form ask about a student’s finances in addition to his or her parent’s, financial aid award letters coming from CSS Profile schools automatically include an expected student contribution of at least $1,800 -- and sometimes a lot more—whether the student has earnings and assets or not,  says Troy Onink. Even if a student doesn’t earn money in the summer (maybe he spent the time doing an unpaid internship or research), the family has to make up that amount somehow, through either parental contributions or more loans.

“In some cases, they (students) spend down savings. Other cases, like low income students, are stuck,” Mark Kantrowitz adds, noting that a student from a lower income family might be working just to put food on the family’s table and can’t use their summer money for school expenses. Also, Kantrowitz notes, “they might not be able to borrow the money because it’s harder for them to qualify (for an extra private loan). Often times,” he says, “the student has no way of getting that money.”

The number in that “work study” line? It’s not guaranteed income. Your work study money might be listed as a financial aid “award,” but just as a Stafford loan isn’t a gift, neither is this money. You have to find a job on campus and then work the hours. “There’s no guarantee that you’ll get one, or that the one that you’ll get is appealing,” says Kantrowitz. “You might be shoveling books in a library, as opposed to working with a professor on a research project.”

Onink, who has seen kids look at their “work study award” and then sit idly by, not looking for an on-campus job, says that work study jobs are first come first serve, and to get one you want you have to act fast. “You need to get on that as quickly as possible – call the university and say, ‘how do I get this job?’” he advises. “Sometimes you have to make the campus rounds and ask the different departments, ‘do you have an opening?’”

Don’t take the school at face value in regards to your book and travel expenses; what they say is the bottom line cost might be a lot less than your bottom line cost. A school may give you an estimate of what your expenses will be, but you shouldn’t take that estimate at face value. If they say books will cost $500 per semester and you’re in two chemistry classes where the textbooks cost $250 apiece, that’s your book budget right there—and presumably, you’re taking other classes. Likewise, if the school estimates your travel budget will be $1,000 per semester but you’re flying from L.A. to New Haven – and planning on going back for Thanksgiving  in the fall and spring break in the spring – the roundtrip totals of getting to and from school will likely tally more than $1,000.

On the flip side, the school’s estimates could be way more than what you’d actually spend. Maybe you’re an English major who was able to buy her all her 19th century lit novels on half.com and spend just $200 on books for the whole semester, or your parents can drive you to and from the Connecticut suburbs to New Haven just for the cost of a tank of gas. If you need loans to cover your expenses, taking the school at face value in this scenario would cost you an extra thousand bucks, at least.

“Budget before you borrow,” Kantrowitz says. “You don’t want to get that refund of the credit balance after they subtract tuition and then spend it all on entertainment, dining, eating out, specialty coffees and Jamba Juice.”

If you experienced an unusual financial circumstance, you can apply for professional judgment. College is just about the only big purchase that, despite what some may tell you, comes with virtually no negotiating power. You can haggle with a car salesman, bandy back and forth with the sellers of that home you desperately want, but when it comes to higher ed, you can’t easily say, “here, we’ll pay you in cash if you drop the price by 20%!” However, if your family has had an extraordinary financial circumstance – a high unreimbursed medical bill, the loss of a job for the primary wage earner, even tuition expenses for a private K-12 program for a sibling – you’re not only allowed but encouraged to let the school know.

“Make sure every single college knows about those circumstances, because that can make a difference in the aid package,” Kantrowitz says. “Provide documentation. Ask them for an adjustment. These are called professional judgment reviews. The school reviews the circumstances, if they believe the circumstance merits an adjustment, that adjustment will be driven by the financial impact [of the extraordinary circumstance] on the family.”

Just whatever you do, don’t call it negotiation. “There’s this myth that colleges will negotiate or that you can treat them like a car dealership. You can’t,” Kantrowitz says, resolutely, adding that unless you have something the school wants, like money, or you’re really strong academically compared to typical students at the school, you’ll probably not going to get a more generous financial aid package. At second and third-tier schools that offer merit scholarships, you can apply for one of those, but it won’t be based on financial need. “There are colleges that say ‘if you got a better offer from someone else, send it and we’ll take a look.’ But in most cases, they’re looking for information that was provided to one college and not to them. Most negotiation is professional judgment in disguise,” Kantrowitz explains.

So if you get wildly different net prices (that is, a significant difference in grants and scholarships) from two schools with a similar cost of attendance, it could be a sign that one school has more information about your financial situation than the other – and professional judgment could be in order.

Outside scholarships won’t automatically reduce your net price (what you owe). The natural reaction to a large net cost is, “let’s see if we can get some outside scholarships to cover this!” So you go on Fastweb.com or Cappex.com to see what random scholarships you qualify for, and try to nab as many as you can get your hands on. This is another thing that sounds good in theory, but is trickier in practice, because some schools treat outside scholarships as a reason to reduce the grants and scholarships they are giving to you.

“You need to find out what the college’s outside scholarship policy is,” Kantrowitz says. “If the scholarships reduce your loans, you are reducing the net price. You’re getting a net financial gain. But another school might reduce the grants, so there’s no difference in net price. That can mean a difference in two schools that look similar.”

The CFPB’s Chopra, however, cautions parents and students not to allow worries about scholarships reducing other grant money to keep them from pursuing outside scholarship.  “I sometimes feel like a lot of media outlets concentrate on this issue too much. We shouldn’t do anything to discourage people from applying for scholarships,” he says. “A scholarship is money that doesn’t need to be paid back. Often it will lead to fewer loans you need to take out.” Just make sure you know what rules each school is playing by so you can truly compare costs.

Maggie McGrath is a staff writer at Forbes who is responsible for covering - and helping to oversee our coverage of - the food and drink industry. She edits the 30 Under 30 Food/Drink list, and helps program the Under 30 Summit and the AgTech Summit. She's worked at Forbes s...