Personal Finance > College
Financial Aid: How to get what's coming to you
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4. Interpreting your award

by Sarah Max


  Financial aid: How to get what's coming to you  
1. Introduction

2. Who gets aid?

3. Cracking the aid formulas

4. Interpreting your award

5. Upgrade your aid

6. Smart saving strategies

Expect preliminary aid offers to arrive in your mailbox around the time your child receives an acceptance letter from the school. If you wind up getting aid offers from more than one school, you'll likely see differences. Aid packages vary not only in how much aid is offered, but how it is divided into grants and loans.

The best packages are made up by grants, which are categorized as need-based, merit-based, federal, state, and institutional. Grants are usually tax-free and don't have to be repaid. The largest federal grant programs, the Pell Grant and the federal Supplemental Educational Opportunity Grants, are based strictly on need and are generally non-negotiable. Pell Grants, which usually go to students from low-income families, offer a maximum of $3,300 annually. SEOP grants range from $100 to $4,000 a year. Grants that come directly from a school are often a mix of need-based and merit-based, which can be based on anything from academics to ethnicity to athletics.

The bulk of student aid -- about 60 percent-- comes in the form of subsidized and unsubsidized loans. The best of these will be subsidized loans, which typically carry low interest rates and which don't have to be repaid until several months after the student has graduated. With the federal Perkins Loan, students can borrow up to $4,000 a year for five years at a very low interest rate, usually 5 percent. The government puts a $20,000 annual cap on the loans, but it is up to a particular college to determine the size of a specific student's loan. The Stafford Loan also carries a relatively low interest rate, capped at 8.25 percent. Students may borrow up to maximums that rise the longer a student remains in school, from $2,625 in the first year to $5,500 in the senior year. Interest begins to accrue on these loans six months after a student graduates, at which time repayments begin.

Students who apply for aid are also eligible for unsubsidized Stafford loans. Interest on these loans begins to accrue immediately, although the borrower can defer the interest payment until he begins to repay the principal, typically after graduation.

In most cases, students who accept a federally subsidized loan will be required to participate in the federal Work-Study program, in which students are given on-campus jobs and expected to work between 10 and 15 hours a week.

Parents may also borrow. The Parent Loans for Undergraduate Students (PLUS) allow parents to borrow up to the total cost of four years of college, minus any financial aid received. The loan depends on your credit rating, although requirements are not as stringent as they are for a mortgage. The downside: repayment begins 60 days after you receive the loan, although you can stretch repayment over 10 years. The interest rate is tied to the short-term Treasury bill rate, with a maximum of 9 percent.

Keep in mind that you do not have to accept the entire package. You can decline a particular loan if you decide that you do not need it. However, you may not be able to decline a work-study job and still receive certain other loans.

Be sure to make your decision before the school's financial aid deadline. And don't forget to decline the offers made by other schools so that they can distribute the aid to other students.

Next: Upgrade your aid >>