How To Decode a Financial Aid Letter

It’s the college financial aid season.

Some parents are still struggling to complete their financial aid application, while others are just beginning to receive their financial aid packages in the mail.

Once you receive a financial aid award, the challenge is to decipher it. I’m going to help you master these financial aid letters by looking at the scholarships, grants and loans you’ll typically find inside one.

Today, I’m going to focus on the federal financial aid that you will typically find in a college financial aid packages. In my next post, I’ll cover other awards that the financial aid packages often include.

Federal Financial Aid Awards

Private and state colleges and universities build their financial aid packages by starting with federal aid. Parents hope they will receive federal financial aid, but for many families, the only federal aid they will receive is loans.

Here are the main sources of federal aid that you’ll find in a financial aid award letter:

Pell Grant. The biggest source of free federal cash is the Pell Grant. If your family makes less than $50,000 a year, it’s likely you will find a Pell Grant in your aid package. The maximum Pell Grant for the 2010-2011 school year will be $5,500.

Federal Work Study. Students who have federal work-study money in their financial aid package are eligible for a campus job. Work-study students earn at least the current federal minimum wage. The federal government pays 75% of the wages and the school the rest. Work-study jobs aren’t always a sure thing for every eligible student because there is a finite amount of money to support this program, which has become more popular during these hard economic times.

Perkins Loan. This is a great federal loan to find in a financial aid package. The interest rate on a Perkin’s loan is currently 5% and recipients can borrow up to $5,500 a year. Interest on this loan doesn’t begin accruing for the student until after college graduation. The school determines who qualifies for this loan and acts as the lender.

Stafford Loans. Schools will include Stafford Loans in financial aid packages and any students are eligible to borrow through the federal Stafford Loan program. Students are responsible for repaying these loans since they are in their names, but parents can repay the loans themselves.

There two kinds of Stafford Loans:

  • UnSubsidized Staffords. Current interest rate — 6.8%
  • Subsidized Staffords. Current interest rate 5.6% Beginning in July it will drop to 4.5%.

The subsidized Stafford is the best of the pair because the interest rate is lower and, unlike the other Stafford, the interest on the subsidized loan doesn’t begin accruing until after the child graduated.

PLUS Loan. This is the federal parent loan. The interest rate is a fixed 8.5%. If you own a home, using a home equity line of credit will probably be a cheaper way to go.

…If your loan package didn’t include any federal financial aid, you probably didn’t complete the Free Application for Federal Student Aid or FAFSA. I’d complete it  today!

Read More:

How Much College Loan Debt is Too Much?

PLUS Loans: How Much Should Parents Borrow?

7 Myths About Financial Aid

How To Avoid to Avoid 9 FAFSA Form Mistakes

Lynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller, and she also blogs for CBSMoneyWatch. Follow her on Twitter.

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