How to Decipher Your College Financial Aid Letter

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Teen college letters mailbox
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It's college decision season, a time when students across the country watch their email with bated breath, waiting for the electronic harbinger that will inform them that (hopefully, thick) envelopes are on the way. But for most students, the misery of waiting for acceptance at the school of their dreams is only the first problem: The next, bigger one is finding a way to pay for it. And that's where things get really hairy.

These days, the average college student graduates with more than $26,500 in debt -- and, given current trends, that figure is likely to go up by a few thousand dollars before this fall's crop of new collegians collects their diplomas. To a great extent, that number will depend on the contents of another, less impressive piece of correspondence: the financial aid letter.

Unfortunately, the financial aid letter itself tends to be composed in the worst kind of bureaucratic English: borderline indecipherable, yet incredibly important, it will influence not only the next four years of your life, but the amount of money you need to make for the following 20. With that in mind, we've compiled this basic lexicon of college finance lingo to help you decipher the basic terms that your school is likely to use. Let's start with the easiest one.

Tuition: This is your college's basic charge, the price you pay to be a full-time student. Most schools start with the assumption that you will be taking at least 12 credits (or four classes) per semester, although 15 credits (five classes) is average. If you drop below 12 credits, you may qualify as a part-time student. With reduced class load, it will take longer for you to graduate; on the other hand, part-time students are sometimes allowed to live off campus, and often don't have to pay for some of the general student fees, both of which can reduce the cost of your education.

Room and Board: As you might guess, this covers most of your living expenses, including your dorm room, your meal plan and, in some cases, your laundry. Depending on your school's location, it may be less expensive to live off campus and cook your own meals. On the other hand, some colleges have campus residency requirements that force students to live in the dorms for a certain period of time. Some colleges also offer reduced room and board costs if you agree to live in an older or less well-appointed dorm. If you're interested in cutting costs, this may be worth considering.

Side note: You may have heard of the dreaded "freshman 15," the 15 pounds many students gain during their freshman year. One cause (for me, at least!) was my expensive meal plan, which covered 20 meals a week in the dining hall. In an attempt to get my money's worth, I ate far more than I normally would. The lesson? You're going to college, not hiking into the Outback. If you need more food, you can go out and buy it, so consider erring on the side of financial and caloric thrift by picking a lower-cost meal plan.

Books and Supplies: Depending on your major, your books and supply costs will vary wildly. You can often reduce costs by buying used textbooks, purchasing your textbooks through the internet, or sharing your books with someone else in the class. Then again, many universities are trying to fight these cost-cutting techniques by using proprietary textbooks that are updated regularly.

General Student Fees, Athletic Fees, Transportation Fees, Health Care Fees, and so on: Some schools itemize their fees, while others combine them into a single, general fee. Full-time students generally have to pay the full menu of fees, regardless of whether they use the bus services, athletic tickets or student health facilities that they help to fund. Part-time students sometimes get a break on this. If you're looking to pinch pennies, it's worth finding out what your school's policies are.

Total Cost/Average Total Cost: This is what your college or university estimates your total tuition cost for one year will be. As we've already seen, there may be some ways to bring that price down, but chances are that it's a fairly good reflection of what you'll be paying.

Expected Family Contribution: This is the amount of money that your college or university estimates that your family will be able to kick in. If you're wondering about EFC, but haven't gotten a letter yet, here's a calculator that may help you figure out how much a school is likely to expect.

Unfortunately, most EFC calculations don't take the debt your parents owe into account, which means that the estimated contribution for your family will probably be a lot higher than the actual amount that your parents can afford. If that's the case -- and if the school in question isn't willing to cut them some slack on the real number -- you should probably think about going to a less expensive institution.

Another Side Note: Some schools allow parents to make monthly payments, rather than requiring a lump sum payment. Depending on your family's financial situation, this could make paying for college a bit easier to deal with.

Scholarships and Grants (aka Gift Aid): This is money that you don't have to pay back. Colleges and universities offer a host of scholarships and grants. For that matter, so do many companies, community organizations and student groups. The Department of Education offers a useful roundup of search tools for finding money that's out there, but you might also consider stopping by the library, asking your local organizations, and talking to family members and friends.

Keep in mind that many scholarships need to be reapplied for every year, and many will decline in value from year to year. In other words, just because you've managed to scrounge up the money to pay for freshman year doesn't mean that you've got all four years covered.

Stafford Loans: These are federal loans, which means they generally have a lower interest rate than private loans. On the other hand, they still need to be paid back after you graduate, so you might want to think twice before taking them out. Subsidized Stafford loans are awarded based on need, and have a lower interest rate than unsubsidized Stafford loans. The rates change from year to year; in fact, President Obama's recent budget proposal would even change the way that the loan rates are calculated.
As a side note, the government covers the interest payments on your subsidized Stafford loans while you're in college and during certain other periods. On unsubsidized Stafford loans, the interest starts accruing when you take out the loan, and you're on the hook to pay all of it back.

Perkins Loans: The Perkins is a different need-based federal student loan, and has a fixed 5 percent interest rate. If your school participates in the Perkins program, you can borrow up to $5,500 a year, with a limit of $27,500 for your whole undergraduate career.

PLUS Loans: These are loans that the government makes directly to your parents to help pay for your education. Your parents will need to begin paying interest immediately.

Private Loans: Your school may suggest that you take out private loans to cover part of the cost of your education. Proceed with caution! The interest rate on a private loan will probably be higher than what you'll pay on your federal loans, and you will be making payments on those private loans at the same time as you're separately paying down your federal loans -- a financial burden that few recent college grads will be earning enough to comfortably shoulder.

Bruce Watson is DailyFinance's Savings editor. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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