Part 1 of an in-depth 3-part series. Read Part 2 and Part 3.
Opening your financial aid award letter can be one of the most nerve-racking moments in the entire college application process. Over the last few months, your child has diligently researched a number of prospective schools based on academic eligibility, extracurricular offerings and, of course, where they rank among competing institutions based on your child’s intended major. They’ve invested hundreds of hours in preparing for entrance examinations, college research, and crafting that ever-important personal statement. Now, in as little time as it takes to tear open an envelope, they are about to uncover the results of all their efforts.
Unfortunately, what is actually being offered to you is not necessarily obvious at first glance due, in part, to a lack of standardization in the formatting of how the letters are drafted along with confusing terminology. As if the pressure of choosing the “right” college weren’t enough, you will typically have only a few short weeks to compare and contrast your offers before making a final decision by May 1, known as National Candidates Reply Date.
You can practically hear the clock ticking in your head. Tick-tock, tick-tock.
But don’t let the time pressure overwhelm you. By learning how to interpret your child’s financial aid award letters now, you’ll be better prepared to make the tough decision when the moment arrives. Don’t let yourself fall victim to the confusing award letter, one of the six financial aid traps every parent should avoid.
THE TWO TYPES OF AID
All the items listed on your child’s award letter can be broken down into two categories: Gift Aid (free money) and Student Loans.
Here in part one of this three-part series I’ll focus on all the possible sources for gift aid, which you can use to your advantage to reduce the overall net cost of college. Part two will cover the various options available to you and your child to take out student loans along with their benefits and drawbacks. Finally, part three will uncover the most common deception tactics found in financial aid award letters designed for the sole purpose of manipulating you and your child’s decision to attend their school.
It’s important to note that you always have the choice to either accept or reject any of the offered aid, although knowing the benefits and limitations of each will help in making an informed decision. If after reading this article you have any additional unanswered questions, it’s always a good idea to either call the university’s financial aid office directly or to consult with your trusted financial advisor.
FREE MONEY (GIFT AID)
Depending on the cost of the college’s attendance, if your expected family contribution (EFC) is less than $50,000, your child may be eligible to receive gift aid in the form of free money from a variety of sources. They include Need-based University Grants, University Academic and Merit-based Scholarships, Federal Pell Grants, Federal Supplemental Educational Opportunity Grants (SEOG), and state grants. These are all sources of free money, meaning they do not have to be repaid upon graduation. I think it’s safe to assume that you’re not in the habit of refusing free money, so I would not advise you to start now.
Need-based University Grants
Need-based university grants make up the number one source of all financial aid money received. When applying to college, it’s important to understand how much financial aid each institution offers based on their records from previous years. The amount offered is determined directly by the university’s office of financial assistance based on your FASFA and College Scholarship Service (CSS) PROFILE results. Keep in mind that your child is likely to receive a greater amount of aid in university grants if they fall within the top 5-10% of applicants. If your child receives a generous amount of need-based university grants in their award letter, it’s important to watch out for front-loading, where students receive more aid during their first year than subsequent years of enrollment. In layman terms this is known as the classic “bait and switch.”
University Academic & Merit-based Scholarships
If your child demonstrates an aptitude for a given activity or sport, you’ve more than likely already identified the colleges that will cater to their strengths. Scholarships given for this purpose are known as merit scholarships. Most sought-after athletes receive this type of scholarship to help cover the cost of college to a certain degree. But you don’t have to be an all-star athlete to receive merit-based scholarships. Other talents such as music abilities, artistic accomplishments, and extracurricular activities may also be recognized with a merit-based scholarship.
Academic scholarships, on the other hand, are awarded solely based on your child’s achievements in the classroom, as determined by the weighted 5.0 GPA scale. If you’re looking to earn more aid in academic scholarships it’s best to apply to schools where your child will rank among the top 5-10% of all applicants as far as academics are concerned. Most schools publish their application stats for the previous year on their website in order to help you get a better feel for whether or not your child would be a good fit for that school. If your child succeeds in presenting themselves as the ideal candidate, then the school will be more likely to extend an attractive offer in the form of merit-based scholarships. These preferential packages are usually awarded by the admissions office or other campus offices, not the financial aid office.
While all academic scholarships are merit-based, not all merit scholarships are academic-based. For more information on how to apply for academic or merit scholarships, visit www.scholarships.com.
Federal Pell Grants and Federal SEOG (Supplemental Educational Opportunity Grant)
Federal Pell Grants are the most common form of federal aid and is reserved for students who demonstrate exceptional financial need. What constitutes as exceptional need, you may ask? Typically, this means that you will either have an EFC of $0 or a family adjusted gross income of less than $40,000 per year. As of the 2017-2018 award year, the maximum Pell grant is $5,920. The amount you will receive depends on your financial need (as determined by your EFC), the cost of attendance, your pending status as a full-time or part-time student, and plans to attend school for the full academic year or less. Approximately 5,400 institutions participate in the program, so it’s very likely that most of your prospective schools will offer this type of aid. Participating institutions either credit the Federal Pell Grant funds to the student’s school account, cut the student a check directly, or combine the two methods.
The federal SEOG is another type of federal grant awarded to undergraduate students with exceptional financial need and is administered directly by the financial aid office of each participating school. Students benefitting from this type of aid can receive anywhere from $100 to $4,000 per year. It’s important to submit your FASFA early, as each school sets its own deadline for campus-based funds. You can apply for federal funding by completing your FASFA as early as October 1st.
The allotted amount of money designated for the purpose of awarding student aid will vary from state to state. Visit your state’s government website to learn more about the type of aid they offer. Some states participate in the following programs:
National Guard Grant Program
Veteran Grant Program
Grant Program for Dependents of Police or Fire Officers
Grant Program for Dependents of Correctional Officers
Other states have introduced creative funding campaigns such as Illinois’ Higher Education License Plate (HELP) Program, which provides grants to students who attend Illinois colleges for which the special collegiate license plates are available. Part of the proceeds from the sale of these special school license plates are used to provide grants for undergraduate students.
Filling the Gap
Now that we’ve gone over the different types of gift aid you may see listed on your child’s financial aid award letter, you may realize that there’s a significant gap between the total cost of college (including direct costs such as tuition and indirect costs like textbooks and transportation).
This gap represents the amount of money you will have to cover out of pocket, either by taking out federal or private student loans or by using your own resources in the form of savings, income, and 529 accounts.
The second part in this three-part series explores the many available options for student loans, which you can read here.