Choosing the right college is one of the most difficult decisions a young adult will make. There are various factors to consider and a ton of information to sift through.
The decision only gets harder when you throw financial aid into the mix. Different offers can make your choice more complicated, so you need to understand how to read and compare one college financial aid offer against the others you may receive.
What is a financial aid offer letter?
Once you have completed your FAFSA, the schools you applied to will evaluate your eligibility to receive financial assistance. After that, you will get a financial aid offer letter. It usually comes along with an acceptance offer from the colleges and universities you applied to.
The letter outlines the total price of college attendance and various sources of funding you could access to pay for it. Those sources include things like scholarships, grants, work-study, and student loan awards and offers.
Read these letters carefully. It’s often hard to distinguish the difference between funds from scholarships or grants that don’t need to be repaid versus funds available through student loans, which you need to pay back.
Understand the price of college, then look at your cost
First, list the total price of each school. Then look at how much assistance each one offers — but more importantly, what forms of assistance they offer.
Focus on grants and scholarships over loans, since you don’t need to repay them. Everything else, like student loans, is an expense (even if it’s listed under financial aid). Loans can help you meet your need to pay for school now, but they don’t eliminate your costs. They just spread that cost over time, because you’ll need to repay them after you graduate.
To determine how much a college will actually cost you out of pocket, you need to subtract the amount of scholarships and grants from the total price. The remaining number is the cost you need to cover through various other means.
If school A’s price is $40,000 per year and the college offers you a $10,000 grant and $30,000 in loans, your entire need will be covered. But this is a loan-heavy offer that doesn’t do much to reduce the actual cost.
If school B’s price is $50,000 a year and they offer you $25,000 in grants and scholarships, $15,000 in loans, and $5,000 in a work study program, you’ll be responsible for coming up with $5,000 on your own each year and paying back $15,000 in loans. You’ll have fewer loans than with school A, which reduces the overall price, even though school B’s cost is higher upfront.
In either example here, you may need to take out loans to meet your financial need. It’s critical that you understand specifically what to look for when comparing the loan options you’re offered.
Evaluating loan offers in financial aid letters
You want to look at the length of the loan (most offer a 10-year repayment plan) and the interest rates of each.
The higher the interest rate, the more you’ll pay to borrow the money with the loan. You also want to check if it’s a fixed or variable rate loan. Interest on fixed rate loans won’t change (hence, fixed), but variable rates usually go up over time (even if they start out lower than a fixed-rate loan).
Look at whether the offer is for a federal student loan or a private one. Federal loans typically have better borrower benefits and more repayment options, but rates vary across federal and private loan programs, so find the option that works best for you.
Your financial aid is an offer, not a requirement
Remember, you don’t have to accept the letter as-is. You can turn down any source of funding and you don’t have to take out any loans. Taking on debt for college is common, but don’t forget that you must pay back loans. If it’s a small loan, ask yourself if you can earn this money some other way instead of taking on debt.
Take your time reading and weighing your financial award letters. Choosing a college is an important decision, and not one to make lightly. Make the right choice for you now — and for after graduation.