Understanding Financial Aid Awards to Choose Affordable Colleges & Minimize Student Debt

College admissions decisions are arriving and those students relishing in their success will soon need to figure out how to pay for their college education. The most important question is to understand how much student loan debit will be required to graduate.   

The good news: for the first time in the college admissions process, families are in the driver’s seat. Finally, they are the decision-makers and the best informed will consider affordability as a primary consideration. By May 1st, families will have received all the information they need from the colleges, including the financial aid award letters. Now comes the task of selecting the best financial, academic and social fit.

Understanding the components of a financial aid award letter will help many families begin the process of evaluating financial fit. Here’s a sample Financial Aid Award Letter:

This financial aid award letter looks terrific – more than $36,000 in financial aid. But is this school affordable? Maybe, yes. Maybe, no.

Here’s how to tell:

Begin by digging into the financial aid package. Look for the free money: grants and scholarships that do not have to be repaid, items 1-4 under Sources in the Letter above.  Grants are need-based awards often from the federal government, the state and/or the college to the most financially needy students.  Scholarships are often merit, not income, based awards offered for some exceptional talent or uniqueness that the student will contribute to the college community. Free money is great, but be sure to know the fine print: are these one-time awards? Are there any strings attached – is the student required to do something to maintain the award for the next three years?

Next, look carefully at the Federal Work-Study award above: it says “eligibility.” Federal Work-Study does not reduce the amount that has to be paid when the bill is due. It is an offer of a guaranteed job. In this case, for up to $1,000 per semester. The student will pay the full bill when it is due but will have the opportunity to earn $2,000 over two semesters. The student does not have to accept the Work-Study award. In fact, some can find a higher paying part-time job, one that does not have a capped amount of earnings or one offering direct experience in their field of interest.

Finally, understand the loans that were “awarded.” $5,500 is the maximum amount a first-year student can borrow from the federal government.  Second year students may borrow up to $6,500 and upperclassmen $7,500 per year.  For this student, the school packaged both a Subsidized Federal Direct Loan and an Unsubsidized Federal Direct Loan. While in school, the student will have the choice to either pay the monthly interest on the Unsubsidized Direct Loan or allow it to capitalize – that is, add the interest due each month to the amount initially borrowed. To minimize student loan debt, borrowers should try to pay the interest on Unsubsidized Direct Loans while in school. 

Subsidized Direct Loans are offered to students from lower-income families. The government pays the interest on the loans while the student is in school, so the amount borrowed does not increase while a student is studying. Students start paying interest and principal on these loans after graduation.

Finally, look carefully to find the “unmet need” – the amount owed after taking financial aid into account. This is the amount of tuition, room and board, and mandatory fees not covered by the financial aid package. Here, unmet need is labelled “Your estimated remaining cost” totaling $18,626.  After taking $5,500 of student loans and assuming $2,000 of Work-Study earnings, the student still needs to come up with over $18,000 for the unmet need. Other expenses such as books, travel expenses and pocket money to get through freshman year will also be incurred.  In this example, the total out-of-pocket cost to the family for freshman year is likely to exceed $20,000.  So, is this college affordable for the family?

Maybe. If the family has the means to raise approximately $20,000 from some combination of:

  • Savings
  • Current income from parents, applied perhaps to a Tuition Payment Plan
  • More loans such as the Federal Plus Loan or private credit loans

If the family does not have access to savings, current income or additional loans, this school is not affordable.

The last part of the reality check: this is the financing picture for one year. It is highly likely that the family would have to have more than $80,000 of additional funding to get to graduation. This example shows how quickly college debt can become overwhelming.

Sometimes a student’s best option is to choose a lower-cost school, start at a community college and transfer, or take a gap year to earn more money to make a dream school affordable. Although these choices can be emotionally difficult, realistically considering affordability before sending a check to secure a spot in the freshman class could result in a family avoiding a lifetime of regret for borrowing excessively for college.