7 student financial aid booby traps to avoid

Financial aid packages

The college-application machine is humming along. You've applied and been accepted to some great schools, you filled out your Free Application for Federal Student Aid (FAFSA) and it went through without a hitch, and now you're just waiting for the financial aid offers to come rolling in. Before senioritis takes over, take some time out of planning senior ditch day, prom, and grad night bashes to scrutinize the financial aid award letters that start arriving this month. Before you start tearing into those envelopes, however, be aware of some potential student financial aid traps and learn how to escape them.

1. Expecting to pay the EFC—or not knowing what the EFC is

Escape: On the Student Aid Report (SAR) you receive from the U.S. Department of Education after filing your FAFSA, you'll see an EFC number. This is the "estimated family contribution," which is the amount you are expected to contribute to your own education on a yearly basis. You may be panicking or rejoicing over your EFC, but you may actually be paying more or less depending on the amount of aid available at the school you choose.

If you're panicking, hold off on that. Many schools have an appeals process where you may be able to explain special circumstances that don't allow you to come up with the EFC. If you're rejoicing, you might be in luck, but Mark Kantrowitz, publisher of Fastweb.com and FinAid.org, counsels students to be on the lookout for "gapping." This occurs when there's a gap between the EFC and the cost of attendance. The gap is basically your unmet need. Schools may try to downplay the gap in your award letter by including loans, underestimating the cost of attendance or increasing work-study to unreasonable amounts.

2. Not taking all costs of college into consideration

Escape: The award letter shows the cost of attendance at the school, but this amount differs from school to school. "Of course, [students] need to be careful to make sure the cost of attendance includes all of the costs, not just the direct costs like tuition, and that the figures are reasonable—especially the textbook allowance," said Kantrowitz. You also need to take your own personal situation into consideration. If you plan to live on campus and your parents don't live too far away, you may have travel expenses far less than what the school is forecasting. The budget allowance for books is generally only an average figure — some disciplines have much higher book charges.

3. Thinking the amount on this year's reward is the same you'll pay all four years

Escape: You need to fill out the FAFSA every year you are in college, and your financial aid will be based on the current year's FAFSA. Kantrowitz suggested students be on the lookout for "front loaded" awards. More grants are sometimes given to freshman, with the package relying more heavily on loans with each year. This is done to minimize the amount of debt if the student drops out after the first year, but it's also meant to make the school more desirable to the student.

4. Thinking the net cost shown in the award letter is the bottom line

Escape: The net cost shown on your award letter is not the amount you end up paying. Rather, it's the difference between the cost of attendance and the entire financial aid package. As Kantrowitz pointed out, "...the financial aid package includes loans, which must be repaid, usually with interest. The work-study awards are also not guaranteed, with many students complaining that they have difficulty finding a work-study job, or getting a job they like, or working the full number of hours awarded to them." The net cost tells you how much money you need to come up with yourself, whether it's from a work-study job, a regular job, loans, savings or money from relatives.

5. Thinking a loan is free money

Escape: Kantrowitz said it's important not to confuse loans with grants, although it may be hard to decipher the difference between the two. "I often hear from families who think they are getting a free ride, but when I look at the award letter I see a Parent PLUS loan for $10,000, $15,000 or even $20,000." Keep in mind you are not obligated to apply for or accept any loans, but if you decide to take any, only take the minimum amount you need for expenses directly related to school. Books, yes. Spring break trip, no.

6. Not determining your out-of-pocket costs

Escape: Some schools may provide out-of-pocket expense information, but you need to be able to determine this figure yourself. According to Kantrowitz, the out-of-pocket cost is the real amount of money the student and family must pay, earn or borrow in order to pay for college. It's the difference between gift aid, which doesn't have to be repaid, and the cost of attendance. "It's a better measure of the real cost of the college. You can think of it as a discounted sticker price," said Kantrowitz.

7. Not comparing award letters from different schools or choosing a school based on the financial aid award letter

Escape: Compare all financial aid award letters. Do this by determining the out-of-pocket cost for each school. "If the difference in out-of-pocket costs is less than $500, it shouldn't make a difference in college choice, as that's just noise," said Kantrowitz. "If the difference in out-of-pocket costs is higher, especially if it is more than $5,000, the costs should play an important role in college choice. The out-of-pocket cost correlates very strongly with debt at graduation."