MONEY
03/16/2018 05:46 am ET

8 Things You Need To Know About Those College Financial Aid Letters

The terms aren't as straightforward as they seem.
cogal via Getty Images

Between now and May 1 ― the deadline by which most students must commit to attending a college ― mailboxes and inboxes will be carefully monitored for the arrival of the all-important letter of financial aid.

Here are eight things you need to know about the contents of that letter. While it may seem straightforward, there is much more than meets the eye. 

1. Financial aid is an umbrella term that includes both grants (money you don’t have to repay) and loans (money you do).

Grants and scholarships are the brass ring of financial aid packages. If you get them, you’ve won the college lottery in terms of paying for higher education. They are free money, unlike loans. Loans must be paid back. 

So temper that “Yay, I qualified for financial aid” response to first see what kind of aid it really is.

2. Merit aid is a gift with some catches.

Merit aid is the ultimate “good job, Johnny.” It is awarded based on any number of talents and interests at which a student may have excelled. Good grades, high test scores, artistic success or star athletic performance, among other accomplishments, can all qualify you for a tidy merit aid award. Merit aid is what colleges use to lure people to attend. They lower the price as a way of showing you love and the aid is based only on your accomplishments ― whether you or your family need the money or not. A merit aid scholarship comes from the college and doesn’t need to be repaid.

But still, think through your merit aid offer before you run to accept it. A $20,000-a-year merit scholarship from a school that costs $45,000 will obviously make college much more affordable than receiving the same award from a school priced at $65,000.

Plus, merit aid has a few hitches: Make sure the package is automatically renewed each year as long as you remain a student in good standing. A one-year scholarship is nice and all, but then what happens when you’re a sophomore? Ask if your merit aid is conditioned on anything else. Better to be safe than sorry.

In the same vein, what happens to your merit aid scholarship if you don’t graduate in four years? Many students in public colleges are taking six years to get all their classes in and graduate. If that happens, will you be expected to pay the full costs for attending those extra two years? Also ask if your merit aid will travel with you if you spend a semester abroad. There are some programs for which it won’t.

Some colleges dole out more merit aid to students than others. Here is a list of the ones who distribute merit aid to the most students. Remember though, this just means the schools on this list are dividing their pie into more slices ― thinner slices. So depending on how much aid you hope to get, these colleges may or may not be more generous to you.

3. Need-based aid isn’t a walk in the park, either.

Colleges like to boast about their diversity, including economic diversity. And need-based aid is a shot at resolving the obvious conundrum of how kids who can’t afford to go to college can actually get there.

But counting on need-based aid is tricky. It requires that you understand these three concepts: What is the cost of attendance, or COA? What is the expected family contribution, or EFC? And what does the government determine is your financial need?

Your COA is the number you get when you add up tuition, room and board, books and other expenses. 

Your EFC is calculated according to a formula established by law that considers your family’s taxed and untaxed income, assets, and benefits such as unemployment or Social Security. Also considered is the size of your family and the number of people in it who will be attending college at the same time. The EFC is not the amount of money you will have to pay out of pocket, nor is it the amount of federal student aid you will get. It is the amount your college will use to figure out how much financial aid you are eligible to get. Even if you think you need more need-based aid, you won’t get beyond what your EFC suggests.

In other words, if your COA is $25,000 and your EFC is $20,000, your financial need is $5,000 and you aren’t eligible for more than $5,000 in need-based aid. 

4. You need to determine (on your own) which college is being the most generous.

Use the net price ― not the net cost ― to compare how generous each school is being with you. Here’s how you do that: Find the total cost of attendance for each college or university that you want to compare. Some financial award letters don’t include everything when they tally up your COA ― but you should, and you should make it as accurate as possible. For example, a school may add $4,000 for a student health plan that you can waive once you prove you already carry insurance. They may also add in a pricier meal plan than you intend to use, or assume you are going to fly home more or less than you plan on doing. In other cases, they miscalculate personal items ― like $2,000 for textbooks which may be bought used or rented for far less.

Be honest and be consistent. What will it actually cost you to attend each of the schools you are considering?

Next, add up all of the gift aid ― the money that you don’t repay. This does not include loans! Now subtract the total of the gift aid from the total COA. That is your net price.

If the net price of your top two colleges differs by $1,000 or less, you can probably ignore it. That may be relative peanuts in the scheme of things. But if the net price differs by more than $5,000, you may want to look hard at the less expensive school and avoid having to take even more loans. The lower the net price, the less you will need to borrow.

5. Your college may be front-loading.

About half of all colleges give students a more generous mix of grants and scholarships during their first year than during their sophomore, junior and senior years. Accordingly, the net price during the freshman year may be much lower than the net price in subsequent years.

Call it bait-and-switch. Call it unfair. College advisement counselors call it front-loading. 

The simplest way to find out if a college practices front-loading of grants is to ask for a copy of its outside scholarship policy. You can also find financial aid data for the college on the U.S. Department of Education’s College Navigator website. Evisors.com suggests comparing the percentage of full-time freshmen who get grant or scholarship aid against those who do in higher grades. If the figures differ significantly, the site says, it is a sign that the college practices front-loading of grants.

6. Check if your private scholarships will be used to reduce the amount of loans you need ― or something else.

This is the “say what?” moment that catches a lot of people by surprise.

It goes down like this: You dutifully applied for and received a private scholarship from the local Optimists Club for $2,000. Good on you! But the scholarship also reduces what the college determined was your demonstrated financial need. The college will accordingly reduce your financial aid package and how they do that really, really matters. Some colleges will use the private scholarship to replace loans and/or student employment, thereby reducing the net price ― a good thing. Others will reduce their grants or scholarships, yielding no net financial gain to the student.

Cry foul! And watch out in the financial aid letter how your private scholarships will be handled. 

7. What a school really means when it says it will meet your “full financial need.”

Some colleges and universities will promise to make sure that every nickel of an accepted student’s financial need will be met. We love the way that sounds. But the devil lives in the details. It doesn’t mean that they are going to adjust your financial aid package with more free money in scholarships and merit aid. Not hardly. What they are saying is that they will include federal student loans so that your full financial need is covered. Don’t forget that you and your family will still have to cough up the expected family contribution and may need to borrow more money to pay for the EFC share of college costs.

While it may sound great that the college just committed to make sure you will get to attend school there, they just turned into your loan broker at the same time. That’s all.

8. Don’t count too much on sports scholarship money.

Being a great soccer player may have helped get you in the door of your top college choice, but that may be where the buck stops ― so to speak.

The average athletic scholarship is about $11,000 and if you take football, basketball and women’s volleyball out of the equation, it drops even lower, according to NCAA statistics

Want more bad news? Only about 2 percent of high school athletes win sports scholarships every year at NCAA colleges ― and only in Divisions I and II, as Division III schools do not offer athletics scholarships. For the approximate 1 million boys who play high school football, there are fewer than 20,000 football scholarships available. Nearly 603,000 girls are on high school track and field teams, and they’re competing for around 4,500 scholarships.

If you’re of the lucky few awarded an athletic scholarship, you should know it must be renewed each year by the coach, so the pressure to stay in his good graces will be real.

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