It can be maddeningly difficult to figure out, especially for high school seniors who have just a few weeks left to compare offers and decide where to enroll.
One of the most common trip-ups is not realizing a loan (money you have to borrow and pay back, with interest) is factored into your estimated cost. It's easy to be fooled. Award letters don't often make a distinction between loans and scholarships (money you don't have to pay back).
A college-bound senior recently received the letter below. It lumps together loans with a grant to get a "Total Estimated Financial Aid" figure, without pointing out that you'd have to pay back a majority of that aid (we did that for you).
Here's a quick guide.
1. Tuition and fees + room and board = ?
Hopefully it will be easy to find the part of the letter that explains how much the total cost is -- before taking any discounts like scholarships into consideration. Make sure it lists ALL costs including, tuition, room and board, any fees, and a meal plan. If it's unclear, call the financial aid office to ask.
2. Look for the words "scholarship" and "grant."
Your financial aid letter may be the first indication that you've been awarded a scholarship or grant from the college. These could be based on your financial need or merit-based, and determined by things like your high school GPA, SAT and ACT scores, or interest in a particular subject. You may also receive a Pell Grant from the federal government, which is based on your family's income.
3. Do you need to borrow money?
Maybe you've won additional scholarships that aren't listed on the financial aid letter. Subtract those from the amount you calculated in Step 2. If there's a remaining cost, this is what you or your parents may have to chip in -- or you might have to take out a loan.
The amount your family can pay is actually calculated by the college, based on information like their income which you submitted on the FAFSA form. This might be noted on your financial aid letter and called something like your "Estimated Financial Contribution" and is used to help determine how much need-based financial aid you received. But it's not exactly what your family must pay.
4. What's the difference between subsidized, unsubsidized and Parent PLUS loans?
You could take out loans to cover the remaining cost. The amount you can borrow from the federal government, which usually comes with a lower interest rate than private loans, should be stated in your letter. There are three different types of federal loans you could qualify for:
A subsidized loan does not accrue interest while you're still in school, but an unsubsidized loan does. Parent PLUS loans are also from the federal government, but they carry a higher interest rate and it's your parent who's ultimately responsible for paying it back. Interest starts accruing right away, like an unsubsidized loan.
But you don't actually have to borrow the full amount allocated in your financial aid package. The amount listed for each loan is a maximum set by the government.
Remember, in any case you'll still end up owing more than the loan amount you see listed after you graduate because of the interest.
5. Multiply by 4.
Keep in mind that this is just an estimate for one year of college and you'll likely be going for four years. Looking at the bigger, four-year cost may help you decide whether it's worth enrolling at a more expensive college.
And be sure to see if there's a note about whether your scholarships and grants are guaranteed for all four years -- or just call up the college's financial aid office and ask.