How to read your financial aid award letter

Reading financial aid award letters can be confusing if you're not sure what to look for. There are three important tasks you must accomplish.

• Determine what financial aid you've received.
• Determine what financial aid is scholarship or grant money and what financial aid is loan money that must be repaid.
• Determine if there's still unmet need that you must cover out of pocket or with alternative student loans or other sources of funding.

These three tasks sound relatively straightforward, but there's a catch - virtually every college writes its own award letters, and every award letter has a different format and use of language. Some schools call loans financial aid, while others call them self-help, and still others call them by their individual loan types.

Let's take a look at a few award letters to start decoding them.

MIT:

In the MIT letter shown above, MIT sets out the student and parent contributions at the top before showing scholarships and loans. In this example, MIT bundles work study, outside scholarships, and student loans into the group category "Self Help". Take a closer look, and here's the breakout of the information we're looking for:

• Aid received: $27,000
• Loan aid received: $5,250
• Out of pocket: $21,500

College of the Canyons:

College of the Canyons shows the family contribution and then breaks out the various types of financial aid available.

• Aid received: $7,460
• Loan aid received: $3,500
• Out of pocket: $2,284

University of Florida:

The University of Florida follows MIT's format us breaking out the student and parent contributions separately. Unlike MIT, individual loans are detailed alongside grants and work-study.

• Aid received: $14,675
• Loan aid received: $3,593
• Out of pocket: $710

Radford:

Radford University's sample award letter is more difficult to read, as it doesn't break out the out of pocket costs, instead listing tuition and financial aid awarded. To determine your out of pocket cost, you'll need to subtract the tuition listed from the aid awarded. Radford's also differs from the others in that right on the award letter, you can accept the package as provided, or decline certain provisions. For example, you could decline just the loans and accept the grants; you'd then need to add the loan amount to the total amount you would need to pay out of pocket.

• Aid received: $12,002
• Loan aid received: $2,625
• Out of pocket: $1,826

Once you've extracted the three key pieces of information from your award letter, no matter what school it's from, you can start to make decisions about which award package suits you best. A few things to think about:

• Which award package has the lowest out of pocket cost? (UFL, in the examples above)
• Which award package has the smallest amount in loans? (Radford, in the examples above)
• Which award package corresponds to the choice or choices of schools you want to attend?

It may be the case that a second choice school offers an award package that is far more generous than a first choice school.

Which is the least expensive school?

If you want to get really sophisticated, you can compute whether the amount you'll pay in interest on a student loan outweighs the out of pocket costs. For example, in the letters shown above, UFL offers an out of pocket cost of $710 but $3,593 in loans. That $3,593 will turn into $4,627 over a 10 year period in loan repayment, with $1,034 in interest paid. Radford above has $1,826 out of pocket but $2,625 in loans, which will turn into $3,124 over a 10 year period in loan repayment, with $499 in interest paid.

• Total cost of UFL per year: $5,337
• Total cost of Radford per year: $4,950

Even though at a first glance UFL appears to be the cheaper school because of the lower out of pocket cost, it ends up being more expensive after you factor interest paid on loans.

Finally, while money isn't everything, it's certainly a major consideration, especially if it means potentially borrowing beyond your ability to repay at graduation, an outcome we encourage everyone to avoid. Borrow minimally, borrow responsibly, and do the math before you sign on the dotted line.