After you submit your application for financial aid, you will receive a financial aid award letter from the college(s) to which you applied, typically in early to mid-April. This letter spells out the details of your financial aid package.

A financial aid package is a collection of different types of financial aid from multiple sources. It is intended to help you fill the gap between your ability to pay (your expected family contribution or EFC) and college costs (the cost of attendance or COA). It is based on your financial need, the difference between COA and EFC.

After you receive the award letter, you may be asked to return a signed copy of the letter in which you accept or reject each source of financial aid. The college will not increase other aid to compensate if you reject part of the financial aid package, such as loans. (FinAid recommends accepting the Perkins and Subsidized Stafford Loans, as these are very low cost loans based on financial need. The government pays the interest on both loans while the student is enrolled in college at on an least half-time basis.)

Problems with Award Letters

There is no standard format for award letters, making them difficult to interpret and to compare and contrast. Some common problems include:

• Differences in definitions of cost of attendance. Some colleges don't even include the cost of attendance on the award letter. Others include just tuition and fees, but omit room and board. Others include room and board in addition to tuition and fees, but don't include other costs, such as books and supplies, transportation and personal expenses. Some spell out all the major components, while others just report a single total figure.

  Even when the award letter includes all the costs, there may be significant differences in individual cost components. For example, transportation costs may vary depending on whether the college is close to home or halfway across the country. Colleges may also underestimate certain costs, such as textbook costs, in order to make their financial aid offer appear to be more generous.

• Difficulty identifying award components. Sometimes award letters use cryptic acronyms to identify components of the financial aid package, without spelling out which are loans, which are grants, and which are work-study. When loans are included, the colleges rarely highlight the terms of the loans (interest rates, fees, years to repay, in-school deferment, subsidized vs unsubsidized interest) on the award letter. Some loans may appear to be need-based loans awarded by the college, but a really co-branded private student loans.

• Front-loading of grants. Some colleges will include more grants in the award letters sent to freshmen, with the balance between loans and grants shifting toward loans in later years. This is partly because the Stafford Loan limits are lower for freshmen and sophomores, and partly because of a desire to minimize the amount of debt of any student who drops out during the first year. But it can also make the first financial aid package appear more attractive to prospective students. So ask the colleges whether you can expect to receive a similar amount of grants in subsequent years if your financial circumstances are similar.

• Gapping. Some colleges do not meet the full demonstrated financial need of all students, but instead leave a gap. This usually occurs at colleges with limited student aid budgets. The colleges that practice gapping do not highlight the gap and often try to mask it by including non-need-based aid as part of the financial aid package.

• Packaging of non-need-based aid. Certain loans, such as the unsubsidized Stafford loan, the PLUS loan and private student loans, are intended to help families pay for the family contribution. These loans are available to everybody, without regard to financial need. Colleges sometimes include these on the award letter, to ensure that families are aware of these borrowing options. But it makes it more difficult to compare award letters, when one college packages the PLUS loan and one does not. You are eligible for these loans at every school, even if they are not listed on the award letter.

• Listing specific lenders on the award letter. You are not required to use a lender recommended by the school. You can use any lender. It pays to shop around, as lenders offer a variety of loan discounts that can save you hundreds or thousands of dollars over the lifetime of the loan. See preferred lender lists for additional information.

If you win any outside scholarships, you have to tell the college about them. Unfortunately, federal regulations require the college to reduce your need-based aid package when you win an outside scholarship or other 'resource'. Colleges do, however, have some flexibility in how they reduce your financial aid package. Many will use the outside scholarship to first fill any gap, and then use half the funds to reduce loans and half to reduce grants. Ask the college for information about it's outside scholarship policy if this will affect you.

Evaluating an Award Letter

The first thing to do when you receive an award letter is to identify the major cost components at the school and the major components of the financial aid package. The cost figures should include tuition and fees, room and board, books and supplies, transportation and personal expenses. The financial aid package should include grants, work-study, and need-based loans. There may also be non-need-based loans. Total each category separately, so that you can compare the award letters from different colleges on an apples-to-apples basis.

Some educators suggest calculating the percentage gift aid (grants and work-study) in the financial aid package. FinAid does not agree with this advice, as such percentages are at best an imprecise gauge of the factors that matter most to the family, namely how much the college is going to cost. For example, one college may offer a greater percentage grants, but still cost the family more because the total cost of attendance is greater.

FinAid recommends looking at two figures that provide meaningful information about the cost of the college: net cost and out-of-pocket cost:

• Net cost is the difference between the cost of attendance and the financial aid package, once everything has been put on an apples-to-apples basis. The cost of attendance figures should include all the missing components. The financial aid package should not include any loans that aren't based on financial need. The net cost figure tells you how much money you will need to obtain from your own resources and non-need-based loans to pay the tuition bill. It is a measure of your cash flow requirements, and should roughly correspond to the expected family contribution (EFC). Since most colleges use the same EFC, the net cost should be similar across all the financial aid award letters. If there's a significant difference in net cost, it is often a sign that there may be unusual circumstances that were brought to the attention of one college but not the others. (See negotiation and professional judgment for more information.) Financial aid packages are based on financial need, and shouldn't vary much because the family's ability to pay is the same for all schools.

• Out-of-pocket cost is the difference between the cost of attendance and just the gift aid components of the financial aid package (grants and work-study). It excludes all loans from the financial aid package. Out-of-pocket cost is a measure of just how much the college is really going to cost you. It tells you how much money you will spend from savings (including section 529 college savings plans and prepaid tuition plans), current income (including tuition payment plans), and future income (including need-based and non-need-based student loans) in order to pay from college.

Resources for Students and Parents

There are several tools available to help you decode your financial aid award letter. FinAid offers two award letter comparison tools.

• The Simple Award Letter Comparison Tool compares the financial aid packages from three colleges, highlighting any significant differences. The tool also calculates the net cost and out-of-pocket cost figures defined above, and estimates the lifetime cost of any education loans.

• The Advanced Award Letter Comparison Tool is like the Simple Award Letter Comparison Tool, but includes non-financial criteria in addition to financial criteria for comparing colleges, letting you see the differences visually in a matrix format.

The FastWeb College Gold book about paying for college includes a chapter about decoding the financial aid award letters, with detailed analysis of two example letters.

The web site FinancialAidLetter.com provides examples of award letters and tools to help decode them. The site was launched by Kim Clark, a senior writer for US News & World Report.

See also Mark Kantrowitz, Standardize Financial Aid Award Letters, Inside Higher Ed, June 22, 2007.

See also recommendation #2 in Helping Families Finance College: Improved Student Loan Disclosures and Counseling, Consumers Union, July 2007.

Resources for Educators

The National Association of Student Financial Aid Administrators (NASFAA) published an Award Letter Evaluation Tool in 2001 to help colleges make their financial aid award letters more intelligible. A March 2005 article entitled Recommended Elements of Award Letters by Mark Kantrowitz in Emerging Issues in Higher Education, a publication of the Council on Law in Higher Education, also discusses best practices in the design of financial aid award letters.

Federal Legislation

The Higher Education Opportunity Act of 2008 (P.L. 110-315), which passed the House and Senate on July 31, 2008 includes a requirement for the US Department of Education to develop a model institution financial aid offer form. The text of the legislation is as follows:

SEC. 484. MODEL INSTITUTION FINANCIAL AID OFFER FORM.

(a) MODEL FORMAT. -- The Secretary of Education shall --
(1) not later than six months after the date of enactment of
the Higher Education Opportunity Act, convene a group of students,
families of students, secondary school guidance counselors,
representatives of institutions of higher education (including
financial aid administrators, registrars, and business
officers), and nonprofit consumer groups for the purpose of offering
recommendations for improvements that --
   (A) can be made to financial aid offer forms; and
   (B) include the information described in subsection (b);
(2) develop a model format for financial aid offer forms
based on the recommendations of the group; and
(3) not later than one year after the date of enactment of
the Higher Education Opportunity Act -- 
   (A) submit recommendations to the authorizing committees
       (as defined in section 103 of the Higher Education
       Act of 1965 (20 U.S.C. 1003); and
   (B) make the recommendations and model format
widely available.

(b) CONTENTS. -- The recommendations developed under subsection
(a) for model financial aid offer forms shall include, in a
consumer-friendly manner that is simple and understandable, the
following:
(1) Information on the student's cost of attendance, including
the following:
   (A) Tuition and fees.
   (B) Room and board costs.
   (C) Books and supplies.
   (D) Transportation.
(2) The amount of financial aid that the student does not
have to repay, such as scholarships, grants, and work-study assistance,
offered to the student for such year, and the conditions
of such financial aid.
(3) The types and amounts of loans under part B, D, or E
of title IV of the Higher Education Act of 1965 (20 U.S.C. 1071
et seq., 1087a et seq., 1087aa et seq.) for which the student is
eligible for such year, and the applicable terms and conditions
of such loans.
(4) The net amount that the student, or the student.s family
on behalf of the student, will have to pay for the student to attend
the institution for such year, equal to --
   (A) the cost of attendance for the student for such year;
       minus
   (B) the amount of financial aid described in paragraphs
       (2) and (3) that is offered in the financial aid offer
       form.
(5) Where a student or the student.s family can seek additional
information regarding the financial aid offered.
(6) Any other information the Secretary of Education determines
necessary so that students and parents can make informed
student loan borrowing decisions.