College Decision Time: Sizing Up Financial Aid

Attention high school seniors: It's decision time. Most colleges and universities are expecting an answer by May 1 regarding whether or not you'll be attending in the fall.

But before you pick the school with the most prestige or the hippest location, you need to take a good hard look at the financial aid you're being offered. That won't be an easy task: Financial aid packages can range from a few pages to thick packets of information loaded with complicated terms. Not only that, but even if two schools are offering you close to the same dollar amount of aid, how they are giving it to you -- in the form of "free money" such as grants and scholarships or not-so-free money like loans -- could mean a difference of thousands of dollars.

In fact, a common mistake parents and students often make is to choose the university that’s offering them the most financial aid because they think it's the best deal, says Kalman Chany, president of New York-based Campus Consultants, which provides financial aid assistance.

To help you decide, here's SmartMoney.com's guide to comparing financial aid offers:

If you can't quite understand what it is you're being offered, you're not alone. Financial aid packages often arrive packed with acronyms and jargon that make it difficult to understand, says Edie Irons, spokeswoman for Project on Student Debt, an independent nonprofit research and policy organization based in Berkeley, Calif.

Call the university's financial aid office and ask them to explain any terms you don’t understand. Just make sure to call as soon as you get the offer so you have time to appeal for more money if necessary. As students start rejecting some admission offers, more money will open up (for a short period of time) that you could have a shot at, says Rod Bugarin, a financial aid and admissions counselor at New York-based IvyWise, an independent college-counseling company.

Make sure the financial aid package weighs the total cost of attending the college or university -- not just tuition and room and board. Many schools include the cost of books, supplies, transportation (for instance, the cost of roundtrip tickets between the student’s home and the school), meals and, in some cases, health insurance, says Irons. If you don’t see these costs in the financial aid package, contact the school’s financial aid office for those figures, she says.

Financial aid packages are made up of two types of aid: gift aid, which includes scholarships and grants, and self help, which includes student loans and work study.

Obviously, gift aid is more desirable since you don't have to pay it back, pay interest on it or work for it. When it comes to self-help aid, be wary of packages that offer to cover all of your college costs with federal student loans. While these loans come with a fairly low, fixed interest rate and don’t require any payments until after graduation, they can end up being costly. A subsidized Stafford loan for the 2009-10 academic year carries a rate of 5.6%. Should the student choose to defer the interest, it will be capitalized and tacked onto their loan balance upon graduation. Speak with the financial aid office to find out how much the loan will end up costing, what the monthly payments will be post-graduation, and how long it will probably take to pay the loan back.

Sometimes, colleges sneak private loans into their financial aid packages. To sniff them out just look for loans that aren't accompanied by the words “Stafford,” “Plus,” or “Perkins” but are described in vague terms like “university loan” or “student loan,” says Bugarin. Students should try to refrain from taking out these loans because they carry high, variable interest rates.

Students who don’t qualify for a federally-subsidized Stafford or a Perkins loan can still apply for an unsubsidized Stafford loan, which offers up to $5,500 to freshman students, regardless of their eligibility for financial aid. Also, parents may consider a Parent Loan for Undergraduate Students (PLUS), which covers all the costs of tuition and board, minus any financial aid money the student receives. With both loans, if the school is part of the direct lending program (meaning it receives loans from the federal government), you can apply through the college's financial aid office. If the school participates in the Federal Family Education Loan Program (FFELP), you’ll have to apply for the loans at a bank.

Once you've figured out the total cost to attend a school and just how much financial aid you’re getting (including any interest that you'll have to pay), it's time to calculate your out-of-pocket costs.

What you may find is that even though a private university offers a healthy chunk of financial aid, the total cost (including interest on any student loans) may make it a pricier proposition than another school (say, at a state university) offering less aid.