How to Compare Financial Aid Offers and What Different Types of Aid Mean

Congratulations! You've been accepted to colleges, and it's time to choose which offer you will accept. Weighing the financial aid packages is one important step in this process. But how can you compare the offers when they're all so different?

The first thing that you should know is that there are four different types of aid -- loans, scholarships, grants, and work-study -- and your offer likely includes a combination of two or more of these. You may then wonder which type of aid is best to pay for college. The simplest answer is to value scholarships and grants first, then work-study and government loans next, and private loans last.

But there are much more complex considerations to make than simply ordering aid by value. Consider the pros and cons of each of the types as discussed below:

Scholarships

Scholarships never require repayment, so they are good to have.  Most colleges will automatically consider you for merit and need-based scholarships.  You will earn the former through exemplary performance in high school or on your PSAT, SAT, or ACT.  Need based scholarships will be given based on the information you supplied in your FAFSA. You may also receive other scholarships through private organizations or through funds available to the college for things like diversity, athletics, or club membership.

But it's not always as easy as simply picking the university that offers the biggest scholarships.  Most will have requirements for maintaining the funds or may put limitations on how long you can continue to receive the scholarship.  Be conscious of these requirements which may take on any form such as maintaining a minimum GPA (sometimes as low as 2.0, sometimes as high as 3.5), staying in a certain major, or continuing to play a certain sport.  Some may even be so restrictive so as to require that you stay in a certain career for a given number of years, or else your scholarship will turn into a loan.

Always review the terms of renewal of your scholarship and remember that a smaller reward may be better than a larger, but very restrictive award.

Remember also that unlike a loan, scholarships can usually only be applied to the tuition expense itself.  Sometimes the terms of the scholarship will allow for you to use it to buy books, or more rarely to pay housing costs.  Failing to use a scholarship for its intended purpose can result in having to pay income taxes for the amount, or having the award canceled outright.

Despite these potential limitations, scholarships and grants are the preferred form of financial aid due to the fact that you never have to repay them.  Always review the terms of the scholarship and make a choice based not only the size of the award, but also on its restrictions.  Finally, remember that scholarships and grants are just one piece of the entire financial aid package, and that students will typically not be able to sustain their education on these free forms of aid alone.

Work-Study

A typical federal work study program will only cover a small amount of college tuition, but it is still well worth it. Unlike a simple part-time job, work study money does not count as income when your next yearly financial aid package is calculated. This means that you will not have to fear that your financial aid will be drastically cut proportionate to the amount of money you make.

Further, an on-campus work study job will help you start making connections with the university and its faculty and staff. Working within your area of interest could score you a full-time job at graduation.  You also gain valuable time-management skills and a great line on your resume.

10 hours of working a week is usually what you should cap yourself at, and might be the university cap as well.  Any more than 10 hours and you will likely find yourself overstretched and without sufficient time to focus on your academics.  Especially in your first year, it is hard to gauge how much work time you can handle, so start slow.

Federal Loans

After scholarships and grants, federal student loans are probably your next best option. The loans are dispersed based on the financial you report on your FAFSA.  There are four types of federal student loans:

  1. Perkins Loans are the best because they have the lowest interest rate (5%), and also have subsidized interest, which means interest does not start collecting on your loans until after you graduate.  There are also no fees associated with getting a Perkins Loan, and you have a significant grace period after you graduate before you must start repayment (9 months).  Perkins Loans are reserved for those with substantial financial need.
  2. Subsidized Stafford Loans are great as well, and have a slightly higher interest rate (6.8%).  Just like the Perkins Loan, this Stafford Loan is subsidized so that you don't accrue interest while you're a student.  Unfortunately, there are fees associated with the Stafford Loan, so you won't get the full amount of money that your loan is for.  And while you do have a grace period, it's not quite as long as the one of the Perkins Loan (6 months).  Subsidized Stafford Loans are also based on need, but the need does not have to be as extreme.
  3. Unsubsidized Stafford Loans have the same interest rate (6.8%) and other terms, but the interest starts collecting on the loans right away.  You do not necessarily have to pay the interest each month, but if you don't, it will be automatically be added to the amount of your loan and you'll have to pay interest on that extra amount as well.  Unsubsidized Stafford Loans are not based on need, and anyone can get them.
  4. PLUS loans are for parents of college students and require a credit check, unlike the previous three.  The interest is highest of all (8.5%), and repayment begins 60 days after the loan is fully disbursed.  PLUS loans are still usually better than private loans, however.

Applying for federal loans can often take longer than a private loan, but this extra time is worth it to get a much lower interest rate, and guaranteed deferment of payments until graduation.

Private Loans

Sometimes private loans are a necessary part of financing a college education if scholarships, work study, and the maximum amount of Perkins and Stafford Loans isn't sufficient.  In fact, the College Board reports that private loans make up 24% of the total education loans for the 2006-07 year.  You should be cautious in this area, however.

Some colleges will try to pressure students into taking out private loans, as Federal loans  may not be disbursed until after tuition is due.  Most universities understand this and will wait for Federal loan recipients to receive their money.  If your college demands payment immediately, ask them to wait until your Federal loans come.  If they refuse, you should probably consider attending another school.  Never be bullied into taking out private loans if you don't want to.

If parents decide to take out additional private loans, consider adding your child to the loan application so that it can help build his or her credit history. This also has the added benefit of putting more responsibility on your son or daughter.

In the end, while financial aid should play a role in your ultimate college decision, don't let the initial tuition price tag be a barrier. Sit down and make the proper comparisons between the financial aid packages offered by each college.  Standardizing everything prevents you from making apples-to-oranges comparisons and will let you understand exactly what each college is really offering.

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Discussion


Thank you for this article. Since it was published the Stafford Loan rates have dropped, as of this July they will be 5.6%. I agree that scholarships and grants are the best, then government loans, and private loans last. I would warn people to be careful as many private loans have interest rates that are as high or higher than credit card rates.

- James, 06/16/09 at 7:39 pm


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