My student just got their financial aid award letter, what does this all really mean?

After you submit your Free Application for Federal Student Aid (FAFSA), you’ll receive a financial aid award letter from each school to which your student has been accepted. Your student's letters will outline how much the school will cost and what kind of financial aid package they'll receive for their first year. Financial aid award letters don’t look the same, but they contain the same general information.

Determine the cost of the institution

Look for the part of the letter that explains how much your student's direct costs and total Cost of Attendance (COA) is. Direct costs are charges you will be billed for: tuition, fees, room and your meal plan. Cost of Attendance (COA) includes direct costs plus estimated costs for things like books, travel and personal expenses.

Look for scholarships and grants

Scholarships and grants are gift aid that students don't have to pay back. These could be based on financial need, based on your FAFSA, or merit or talent-based. Your state may offer state grants and the federal government also awards the Pell Grant, which is based on your family's income.

Subtract total gift aid from the direct costs to figure out how much you owe the college after gift aid. This is considered your Net Cost.

How will I pay the remainder?

Maybe your student has been awarded additional outside scholarships that aren't listed on the financial aid letter. Subtract those from Net Cost, too.

If there's a remaining cost, this is your out of pocket balance due. Can your student or family make payments either on a monthly or semester payment plan? If you can’t cover it all with payments, you will likely have to take out a loan.

Self help aid—loan options and work-study

You could take out loans to cover the remaining cost. The amount your student can borrow from the federal government, which usually comes with a lower interest rate than private loans, should be stated in their financial aid award letter. There are three different types of federal loans you may see on your financial aid award letter.

A subsidized loan does not accrue interest while your student is in school, but an unsubsidized loan does. Parent PLUS loans are also from the federal government, but they carry a higher interest rate and it is you not your student who will be ultimately responsible for paying it back. Interest starts accruing right away, like an unsubsidized loan.

If the amount your student is allowed to borrow from federal loans and what your family can pay is enough to cover the cost, you are all set. But sometimes it isn't. If so, your student might have to take out a private loan from a bank. Those usually require a cosigner who has good credit, and may come with higher interest rates than the federal loans.

Keep in mind, you don't actually have to borrow the full loan amount allocated in your student's financial aid package. The amount listed for each loan is a maximum. Just let the financial aid office know if you want to decline or reduce the loans that were offered.

Can my student work on campus to pay toward their costs?

The financial aid award letter may include a federal or institutionally funded work-study award. This allows your student to work on campus to earn money to help pay their college costs. The amount of the work-study award is not a guarantee of funds, rather what your student is eligible to earn. Students are typically paid directly for the hours they work and the funds are not applied to their student account.

Compare aid packages

Comparing aid packages from different colleges can be tricky because there is no standard approach to award letters. Here are a few tips:

  • Be sure the costs listed contain the same elements for each college. The major components are tuition and fees, room, and meal plan. Make sure the same cost elements are list in each award letter you are reviewing.
  • Identify the gift aid and the self-help aid on each award letter. Then, for each college, separately total up all gift aid and all self-help aid.
  • Run the numbers for each college. Subtract the gift aid from the college's cost to see your net price. Ultimately, your student may not choose the college with the lowest net price or the college that will put them in the least amount of debt, but the information can be invaluable when making their final college decision.
  • Think long term about aid. While you are given financial aid information for one year, think about how much aid you'll get and what you will need to borrow over the four years you’ll be in school. Ask which scholarships and grants are renewable and what the requirements are to qualify each year. You may need to maintain a certain grade point average, for example. Even if the amount of the grant and the scholarship you get stays the same, keep in mind that the tuition could rise.

For easier comparisons, your family may want to use the College Board award comparison tool—it lays out the cost of attendance, financial aid, and final net price for institutions using information that should be available on the award letter.