Understanding Your Financial Aid Award Letter

Tax season also means it is time to renew your FAFSA (Free Application for Federal Student Aid), which determines the amount of financial assistance college-bound students can receive. To win an award for federal aid, you must complete this one-page application each year you or your child attends college. The FAFSA opens the door to financial assistance in the form of grants, scholarships, and loans. Everyone should complete the required form, even if you do not believe you will qualify for need-based aid.   
With public Universities averaging nearly $25,000 per year and private colleges costing upwards of $50,000 a year, the financial aid award letter could be the deciding factor on which school you or your child will ultimately attend.

The University’s Financial Aid Award letter

Your award letter is nearly as important as an acceptance letter because it lays out your options on paying for school in the upcoming year. While in-state public universities typically have the lowest tuition rates, private schools may offer a better financial aid package. There are times when a more expensive school, costs less, due to the aid package available.

Schools do not use a standard award letter, however, each will include the same key elements. You must consider the total amount of aid offered, total out of pocket costs, along with separating free versus borrowed funds. Each award letter is good for the upcoming school year and, it is important to remember, the award can change dramatically from year to year.

Completing the FAFSA early in the year will typically lead to a higher financial award because schools offer most assistance on a first come first serve basis. Those waiting until the summer could wind up with more loans and fewer grants and scholarships.

You can complete the FAFSA as soon as you file taxes, and some tax programs will file it for you. It is possible to complete the form before filing taxes with income estimates which you update after securing your final numbers. For families waiting until the April tax deadline, this could be the best strategy.

Determining Eligibility

Some schools have an additional financial aid application you must complete which supplements the federal form. To qualify for any federal assistance, you must complete the official FASFA form, and many schools will not offer an award letter without it.  Most financial aid award letters include the following information to determine eligibility based on responses to the FAFSA form.

•    The Cost of Attendance (COA). The University calculates the COA to include 100% of the estimated cost of attending the school. The number sets an upward limit to the amount of assistance you can receive in any given year, and the total aid package cannot exceed the COA for the school.

•    Household Income uses the Adjusted Gross Income from the tax return to determine the student’s household. Independent students only consider the student’s income, where a student dependent on a parent’s income will use both parents and the student’s earnings to establish income. In divorced households, the FASFA only considers the custodial parent’s income which could include earnings from a step-parent. Some schools require information from both custodial and non-custodial parents before establishing private aid.

•    Family size considers the number of family members in the student’s household based on tax data. Family size only considers the custodial parent’s household size, in the event of a divorce.

•    The number of students in college could include multiple children or even parents who attend school.

•    The interest of study, The Major. The field of study impacts degree specific grants and scholarships available to students.

•    Athletic and Academic performance can result in additional free money without requiring financial need. Some scholarships require thresholds for academic performance to continue receiving the assistance for multiple years.

•    Family background considers ethnicity, minority groups as well as first generation college students.

•    Outside scholarships and grants. You can apply for grants and scholarships independent of the school’s financial aid offer. Any outside aid adds to the amount you receive and cannot exceed the COA for the school. Outside scholarships can reduce or eliminate the need student loans.

Understanding the Financial Aid Award Letter

Each award letter includes the following four elements:

1)    The cost of attendance (COA) which changes across colleges. The number will include tuition and fees, estimated cost for books, room, and board based on on-campus living, and estimated living expenses.

2)    Total aid receiving which include available grants, scholarships, work-study, and student loans. Work study typically provides an on-campus job and reduces total aid for living expenses rather than tuition and fees. You must pay back student loans upon leaving school, even if you do not graduate. Loans will either be subsidized or unsubsidized, which determines whether interest accrues while in school or only during repayment.

3)    Expected Family Contribution (EFC) states the amount the family must pay out of pocket for the student’s education. The FAFSA establishes the EFC based on income, savings, the number of children in school and total household size. Funds held in the child’s name require a higher contribution level than funds in a parent’s name.

To cover the EFC, you can withdraw funds from an account dedicated to college costs like a 529, from savings, or borrowed from a home equity line of credit. Some schools allow monthly payments and other families rely on parent plus loans to cover additional costs. Each year the EFC changes based on information provided on the FAFSA.

4)    The Gap is an amount left after free aid, qualified student loans, and the EFC. You can often adjust living expenses, work part time, or apply for additional scholarships to eliminate the gap.

Financial aid choices made each year have a long-term impact on finances. Student loan debt limits funds after school completion. With repayment schedules extending to 25 years, it could take decades to ultimately pay for school when you heavily rely on the loan portion of financial aid.

The total cost of a four-year degree to an in-state school average just under $100,000. When students take up to six years to complete their schooling, the amount can rise to $150,000, in total costs, for a bachelor’s degree. Attending a private school can double that number, making the financial aid package a critical step in the college decision process.