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In the world of financial aid award letters, where no two letters may follow the same format, it’s not always as simple as just comparing total award amounts. If one school is awarding your child tens of thousands of dollars, all in college loans, and another school is offering a smaller award, but one that’s all scholarships, what at first glance looks like the most money may actually end up costing you more in the long run.

To help you sort through you children’s award letters to find the financial aid package that works best for you and your family, here’s a quick guide to understanding how a school determines your financial need, what your award letters are really saying, and the different types of financial aid awards you might see.

Knowing the Types of Financial Aid

Although there’s no such thing as a standardized award letter, the types of awards you’ll see on a financial aid letter will come from one of these standard groups:

• Scholarships and Grants
  Scholarships and grants are awards that won’t have to be repaid. Scholarship and grant programs may be funded by federal, state, municipal, or private sources — a school may also award institutional scholarships out of its own endowment — and the awards can be merit-based, need-based, or a combination of both.
  
  Federal grants include need-based awards like Pell Grants, SMART Grants, and Supplemental Educational Opportunity Grants; your child will have to have filed a FAFSA in order to qualify.
  
  Since scholarships and grants are essentially “free” money, encourage your children to apply for the competitive scholarships available from a number of private sources throughout the year. (To give them a place to start, send your kids a link to our article on finding free money for college, which has a list of places to search for scholarships online.)

• Federal Work-Study
  The Federal Work-Study Program provides funds to schools to award to students through part-time employment. Work-study jobs can be on- or off-campus and are required, by federal law, to pay students at least the minimum wage.
  
  Work-study aid is need-based, and, like scholarship and grant awards, doesn’t need to be repaid. However, work-study aid isn’t awarded as a lump sum at the beginning of the semester; your children will need to earn it throughout the year.

• Student Loans
  A school may award students federal loans, state loans, or institutional loans. Student loans may awarded both with and without regard to financial need. Some loans will involve an origination fee, a guarantee fee, or both, and all loan money will need to eventually be repaid with interest (although some graduates who go into public service may have some or all of their federal loans forgiven).
  
  Federal student loans include need-based Perkins loans and both need-based and non–need-based Stafford loans.

• Parent Loans
  Credit-based federal loans are available for qualifying parents of dependent undergraduates through the PLUS program. PLUS loans are available regardless of financial need and will cover up to 100 percent of a student’s cost of attendance.

Understanding the Lingo

The ultimate key to understanding your children’s financial aid award letters is knowing what all those numbers, terms, and alphabet soup really mean.

• Cost of Attendance (COA)
  Each financial aid award letter should have a breakdown of the school’s cost of attendance, or COA. Besides tuition, the COA includes an estimate of typical annual student expenses like room and board, books and materials, travel costs, and personal expenses.
  
  Keep in mind that the COA is just an estimate. If you anticipate higher-than-average travel costs, for example, your actual costs may be more than the COA listed on the letter.

• Expected Family Contribution (EFC)
  The EFC, the amount you and your child are expected to contribute toward the cost of her or his education, is calculated using the information you provided on the FAFSA (Free Application for Federal Student Aid). You and your child may be able to meet your EFC through parent loans, federal student loans, and private student loans.
  
  Each school may use its own formula for determining the EFC, so your EFC can vary from school to school and may not match the EFC listed on the Student Aid Report (SAR) your child received after filing the FAFSA.

• Financial Need
  Your children’s financial need, which schools use to determine the size and makeup of your financial aid package, will typically be calculated as the cost of attendance, less the school-determined EFC.
  
  Financial need may be met by a combination of the various kinds of financial aid, including scholarships, grants, work-study, and student loans. Over the last year, several schools have made a move to eliminate student loans from the financial aid packages for lower- and middle-income students, to reduce the debt burden on those with the most financial need.

• Financial Gap
  A financial gap is the difference between the amount of financial aid awarded by the school and your child’s financial need. Not all schools pledge to cover 100 percent of a student’s financial need with financial aid, so make sure you know what the financial aid policy is for each school your children are considering.