Parents may be vexed on how to figure out exactly how much their son or daughter is getting in a financial aid package, and with good reason. Financial aid award letters are extremely confusing, making it difficult to understand how much the college will really cost.

Study: Financial Aid Award Letters Are Confusing

40% of college financial aid letters have mistakes, omissions and errors, according to a recent study by New America and uAspire. Among the study’s findings, key areas like loans, cost of financial aid and transparency were particularly problematic.

  • Confusing terminology. The study tracked 455 colleges that offered unsubsidized student loans, and found 136 unique terms for those loans, including 24 colleges that did not include the word “loan.”
  • Cost confusion. The study also tracked 515 college financial aid letters, finding that more than a third failed to include any cost information with which to compare to the financial aid offered.
  • Lack of estimated aid information. 70% of college financial aid letters bundled all student financial aid together and provided no information on how grants and scholarships, loans and work-study might differ.
  • Weak and confusing calculations. Just 40% of financial aid forms calculated what students would need to pay, and those 194 institutions had 23 different ways of calculating remaining costs. Many did not include a net price figure.

Making Sense of College Financial Aid Letters

Public policy proponents have been calling for standardization of award letters for over a decade, working tandem with both Democrats and Republicans on draft legislation for a mandatory standard, and significant progress has been made.

Even so, it’s largely up to parents and students to educate themselves on financial aid letters, especially in understanding how the net price compares with all family financial resources, including savings and loans.

The good news is that cracking the code to decipher even the most complex financial aid letter is doable, if you apply the right strategies. These five tips, best taken in chronological order, can help you better understand college financial aid letters, and optimize your financial aid experience, in the process:

Know what to look for – and what matters – in a financial aid award letter. Your financial aid award letter is a line-by-line statement detailing the financial assistance offered by the college or university that sent the letter. That assistance is based on the data you’ve provided in your family’s FAFSA application. Key elements include:

  • The total cost to attend the college or university.
  • Any grants, scholarships, fellowships, work-study and loans offered.
  • Your family’s expected family contribution or EFC.

The actual amount of money needed by the family to cover remaining college costs, after any financial assistance has included, may exceed the EFC. Financial aid is based on demonstrated financial need, which is the difference between total college costs and the EFC. Many colleges do not meet full demonstrated financial need, leaving the family with a gap of unmet need in addition to the EFC. Even when a college meets full need, they may include loans in the financial aid package, not just gift aid. Loans must be repaid, usually with interest.

Note that financial aid packages can and do change from year to year. College costs also increase annually. Colleges often “front-load” financial aid packages, giving more grants in the student’s freshman year than in subsequent years. So, pay close attention each year to what the aid letter offers.

You can learn whether a college’s grants become less generous after the freshman year by using the U.S. Department of Education’s College Navigator tool. Search for the college and click on the “Financial Aid” tab. Compare the “Grant or scholarship aid” figures for freshmen (full-time beginning undergraduate students) with all undergraduate students. If the percentage receiving grants or the average grant amount decreases significantly, it may be a sign that the college practices front-loading of grants.

Know the difference between free money, earned money and borrowed money. Your financial aid letter should list any financial assistance the student is eligible to receive. It’s up to you, however, to break the data and definitions down so you know your own financial obligations.

  • Free cash, sometimes called gift aid, is money given via scholarships, grants and fellowships. Gift aid does not need to be earned through work or repaid like student loans.
  • Earned money is any cash the student can make in a work-study or part-time job on or near campus.
  • Borrowed cash is student loan money that is required to be paid back with interest (look for the terms “Federal Direct Stafford Loan” or “Federal Direct PLUS Loan” in the award letter.)

Know the cost of attendance and the net price. Your student’s total cost of attendance is very much like the sticker price on a new vehicle on a dealer lot. That price includes everything – tuition, room (housing) and board (meal plans), textbooks, supplies and equipment, and fees and charges related to student services, like heath care or campus transportation.

The net price is different. The net price is the amount you actually pay, after subtracting the grants and scholarships from the cost of attendance. It is the discounted sticker price, the real bottom line cost of the college that you will have to pay from savings, income and loans. The U.S. Department of Education offers a helpful, line by line guide to breaking down college total costs and the net price.

Compare colleges based on the net price, not the sticker price.

Academic eligibility is key. If the student is fortunate enough to earn a scholarship or grant, don’t take the offer for granted.

Often, the free financial aid is dependent on the student meeting specific academic benchmarks (like a 3.8 grade point average), and the offer may only be good for one year – and not for all four years on campus. Federal student aid requires at least a 2.0 GPA. Read the letter closely to get the facts.

Follow up. If, for any reason, you’re confused and have question regarding the letter, don’t hesitate to follow up and call the college’s financial aid office for clarification. Some financial aid award letters use cryptic acronyms and do not label each award as to whether it is a grant or loan. It is especially important to call the financial aid office if you’re unsure what the family financial obligation is, and want to appeal for more financial assistance.

Read the Award Letter Carefully

Student and parents may expect college financial aid letters to be clear and concise on the topic of student financial aid. Often, they’re anything but clear and concise.

It’s up to you to make sure you understand what’s being offered – and what’s not – in a financial aid award letter, so there are no unpleasant financial surprises popping up after the student is already on campus.