How to Compare College Financial Aid Award Letters to Avoid Buyer’s Remorse

By Joe Messinger, CFP®

February 10, 2023

8 min READ

The season of financial aid award letters is fast approaching (if it hasn’t already begun for your family!).

Families have already been through the college application process in the fall and may have started to see some college acceptance letters trickle in.

Now that you are starting to receive award letters, the real work begins — determining which college is the best financial fit for your student!

Know How to Decode Award Letters

As your family receives the financial aid award letters, the key is to know how to decode them.

You need to be aware of a couple of things in this process:

1. Look out for “front-loaded” financial aid award letters.
2. Are scholarships renewable?  If so, is it for 4 or 5 years?
3. Determine what is self-help vs. gift aid. What is money that you either have to work for or pay back later and what money is truly gift aid that you don’t have to pay back?
4. What is the net price of each school that your family is expected to pay out of pocket?
5. What is the total loan amount, and what will be the loan payment?
6. How will you strategically fund all 4 years of college down to the penny? (Don’t forget to factor in tuition increases.)

Front-Loaded Financial Aid Awards

So, what does a “front-loaded” financial aid award letter look like?

When you are looking through the details of a financial aid award letter, one of the things you want to look for when awarded a scholarship or a grant is whether it is renewable or not. Front-loading occurs when they give you a $2,000 or $3,000 scholarship but only for the freshman year.

When you are looking at the total cost, it may look lower but only for the first year. Frontloading is a tactic used by colleges and universities to make it appear that every year is going to have this discount applied. You need to be cautious and understand what all four years will look like.

What Is A Renewable Scholarship?

A renewable scholarship typically means students are going to have to meet certain criteria based on their GPA–often a 3.0 or a 3.2. Typically if they maintain the GPA requirement, the scholarship will remain in place.

With more and more students not graduating in four years from certain programs, you may also need to consider whether an award is renewable for four years or five years. If you are in a 5-year program and on average students in your major don’t get done in 4 years, make sure your aid award renews in the fifth year.

If you don’t graduate in four years and go on to the fifth year, and that $10,000 scholarship goes away, that money comes out of your pocket. Families need to be very careful to identify if a financial aid offer is renewable, and if so, for how long.

Self Help v. Gift Aid

When you are reading financial aid award letters, be careful to distinguish between self-help and gift aid. Self-help includes loans and work-study programs.

Loans

On the “self help” side of the equation, the first way that many schools will award aid is through the Federal Direct Stafford Loan Program. Subsidized Stafford loans are need-based, and you don’t pay interest while you are in school.

No interest accrues while you are a full-time undergraduate student. There is often a small origination fee to take out the loan. It is a need-based program based on the cost of attendance minus the Expected Family Contribution (EFC), and is the most common way financial aid is awarded.

The other type of Federal Direct Stafford Loan is not need-based. It is considered unsubsidized. The main difference is that unsubsidized loans are offered to everybody. You don’t have to qualify. Everybody is offered this loan as long as the school is linked up with the federal system, and you file your FAFSA.

Work Study

Another thing to be cautious of is if they include work-study on your financial aid award letter. If they put work-study in the offer, that money can help pay for college. Work-study money is considered financial aid, even though the student has to work to earn it. It is a need-based program, and it is considered a stipend. It is non-taxable, which can be a huge benefit for students looking to pay for college without racking up taxable income.

Although work studies can be a fit for some, you need to be careful before jumping in with both feet. There are several questions you should ask yourself:

1. Do you want your student working?
2. Is your student someone who will thrive with the responsibilities of college in addition to a work study program?
3. Will the funds be wholly applied to tuition? If so, how will living expenses be covered?

When they put work-study on the aid award letter, they will show a reduced amount due. Be careful because although you don’t have to pay today, you will have to work to earn it. Make sure you are looking at that carefully.

Parent Plus Loans

The last piece on self-help aid that may be offered is the Parent Plus loan, which is a federal loan program that we have seen a lot of families get into big trouble with. The Parent Plus loan is not a need-based program. Every parent will qualify for it.

Many schools will show that you can make up any gap between the cost and the aid with a Parent Plus loan. You can get a Parent Plus loan up to the entire cost of attendance at the university.

The problem with filling the gap with a Parent Plus loan is that, often, students don’t begin with the end in mind. In short, students and parents need to think about what the total loan balance will be at the end of their college career. Parents often find themselves with upwards of $100,000 in loan liability when their student graduates, putting them in a dangerous situation as they look ahead to retirement.

If you take that amount of student loan out, you’ve essentially got a new mortgage. So we’re very cautious about Parent Plus loans because of the way they show up on the aid award letter. Yes, money is available, but only take those dollars if it is really to fund a small gap.

What type of self-help aid should you look for?

Federal Stafford loans are some of the best loans you can get due to competitive interest rates and flexibility upon repayment. If you think you will need to cover a gap with loans, knowing the total amount to fund the education over all four years can allow you to plan how to use Stafford loans and your other resources equally over time to avoid a gap.

The main takeaway: avoid Parent Plus loans or private student loans by utilizing everything you can from the Stafford loan program each year first.

Navigating Student Loans (Or “Self Help” Aid)

By knowing the total student loan amount, you can project the total student loan payment on a 10-year standard repayment schedule. The loan providers are more than happy to have you stretch these payments out over 20 plus years because they make twice as much interest from you.

Compare each institution side by side, and project what the total loan amount you would take will be and what the monthly payment will be when your student graduates.

Knowing the monthly payment makes it real!  You can find good tools online to estimate a student loan payment. Sit down with your student to help them truly understand the cost of each college, and what they can expect to pay after they graduate.

Comparing Award Letters: Getting Down to Net Cost

When you compare eight award letters side by side, the key is really mapping it out for the full cost of education. In other words, what is the cost of attendance today, and what will be the cost in future years.

We know most schools are going to increase costs and tuition over those four years. If your tuition cost is one thing today, be aware most schools will raise that price anywhere from 1.8% (2022-2023 statistics for in-state tuition)-3.5+% (2022-2023 statistics for private universities) per year. Factoring in those annual increases when you are looking at the total cost is really important. Many schools are now touting tuition locks for all 4 years you attend, so factor that into your decision as well!

When looking at net cost, evaluate the total cost of the education. If you were to go shopping for a new car, you have a lot of options in every class.

For some, the added amenities of a luxury sedan like a Lexus or a Mercedes are well worth the 20 to 30 thousand dollar premium. But for others, a Honda or Toyota suits their needs just fine.

Let’s say school A will cost you $75,000 out of pocket. School B is going to cost us $125,000 out of pocket, or $50,000 more. We challenge people to think about whether the extra cost or premium is worth going to institution B. Is it worth $50,000 more? Is it worth that much more money to go to that institution for that degree in that major to potentially get XYZ job?

Sometimes, it absolutely is. But many times, if you are really looking at it in terms of added value, you may find it is not worth that premium. For example, if your goal is to teach elementary education, your salary will be exactly the same regardless of where you earned a degree.

If you have the resources and money is no issue, then choose the school you really think would be the best fit for you. But for most families, you need to figure out where the best value is, where you can get the best education for the lowest cost to give your child the best opportunity to have a successful career down the road.

Ask the college what job placement looks like, and what the average salaries are for the graduating class from your major so you can compare the value of one degree over another. Is it really worth paying more to a certain institution? Is it worth the premium?

Factoring in Graduate School

Don’t forget about graduate school when looking at the big picture. Many students are very talented, and you won’t want to rule out graduate school as a part of your equation. Will the field they want to get into require additional master’s or doctoral work?

You may not know for sure, but for a lot of kids that are extremely gifted, graduate school is highly likely. I bring that up because sometimes kids will get admitted into top institutions like MIT or Stanford, but because of the family’s finances, they would have to pay full price to go to those schools.

Other schools like Ohio State may give you a full ride, allowing you to not take on any debt, and put your resources towards graduate school. The graduate school in many majors is much more important than the undergraduate as long as you are going to a good institution that can lead you to get into a good graduate program.

Private Scholarships

We often get questions about whether or not private scholarships impact our financial aid. The short answer is “it depends”.

It depends on the institution.

In general, your merit scholarship from the college that the student has earned based on their merit will not be impacted by their private scholarships. On the flip side, if you are a need-based financial aid candidate and you are awarded private scholarships, many colleges and universities will reduce the amount of need-based financial aid that they award to you as much as dollar for dollar.

Focus on What’s Important (And What You Can Control)

Overall, it’s really about comparing your aid award letters side by side–apples to apples. Work toward getting your school selection decision down to a few key factors:

1. What scholarship money is being offered.
2. How much you can cover out of pocket versus in student loans.
3. How much aid is self-help versus gift aid.
4. What the cost of living looks like.
5. The total cost of attendance for four (or five) years.

The college years will no doubt be one of the most expensive periods of your life, and second only to your home, will probably be the largest purchase you (and your student) will ever make. Do your homework and know exactly what you are buying to ensure you don’t have buyer’s remorse on a $100,000 + purchase.

Need help?

You can easily run an apples-to-apples comparison of your student’s top schools with our free tool, the College Money Report™. Understand how much colleges think you can afford, whether or not you qualify for grants or scholarships, and what your out-of-pocket costs will be for each school on your student’s list. The report is free, and can be a great tool to kick off the college money conversation with your student!

Updated: February 2023