Government and colleges sometimes mislead incoming students by camouflaging student loans as free money. Here’s how it works. Once accepted to a college, future students typically receive acceptance letters which include “Financial Aid Award Letters“ that blur the lines between free money – such as grants, scholarships or work-study – and student loans.

Only one-third of 11,000 financial aid letters audited by the New America Foundation clearly distinguished debt from grants and scholarships that do not have to be repaid. A significant number didn’t even use the word “loan,” instead of characterizing debt as an “award.”

Making things even worse, these colleges and universities openly encourage incoming students to make the maximum use of these benefits and since they’re coming from the government.

Government Makes the Rules But Does Always Abide by Them

What’s most maddening about this situation is that consumer protections created by the federal government don’t always apply to the government when they lend money. Private lenders such as banks are required by Truth In Lending regulations to clearly disclose all loan details up-front such as fixed vs. variable interest rates and Annual Percentage Rates (APR).

These regulations are not adhered to by the US Department of Education (DOE). Now, to be fair the DOE and Consumer Financial Protection Bureau have developed online tools to help students understand and compare the costs of attendance and their post-graduate debt obligations. However, these tools are voluntary and hampered by a lack of consistency in how “aid” is disclosed in college award letters.

Protect Yourself by Staying Informed

Invest a Little Time to Save a Lot of Money Later

Get to know what’s a loan vs. free money. Invest the time required to meet with the financial aid office at your college before you start school. Ask for the details including loan amounts. Explore state-level grant programs before you meet with them so you can inquire specifically about them. The goal is to maximize grant awards or other funding sources (which do not include debt).

Know You’re Costs

A bare majority of respondents (only 52 percent) understand how much their first year of college even cost. One of the best ways to limit your student debt is to first understand exactly how much money you will need each year.

Know How Much You’re Borrowing

Only 38 percent of students who took out loans to attend college know how much they actually borrowed. Twenty-eight percent of first-year students didn’t even know they had student loans.